Ruled By Neo-Hooverists

What leaped out of last Friday's pathetic jobs report for a lot of people was the significant drop in employment for government workers, particularly at the state and local level:

The latest jobs numbers from the Labor Department are out. In the past, we’ve noted the protected status of government workers. While private sector payrolls were falling like a stone, government employment at every level was growing. In recent months it had been falling slightly, but still remained above its pre-recession levels.

No more. In September, state and local government payrolls fell below the levels of December 2007, when the recession began. The declines indicate the pain that state and local governments are feeling from severe budget shortfalls, despite the $787 billion stimulus package last winter.

There's a very good reason that the stimulus package failed to avert this drop in state and local government payrolls. During the stimulus debate, Presidents Ben Nelson and Susan Collins decided to drop $40 billion dollars in state-based aid that would have gone directly to saving these jobs. Presumably faced with no choice to clear the 60-vote cloture hurdle, Democrats and the Administration went along, and that state aid vanished. So unsurprisingly, as a result, state worker jobs have vanished right along with it. That translates to hundreds of thousands of jobs all over the country that would have meant hundreds of thousands more consumers with spending money, hundreds of thousands more people off the unemployment insurance rolls and contributing to state budgets rather than taking from them, hundreds of thousands more people providing help and aid to others who have trouble getting it due to scaled-back state workforces.

It was a terrible, terrible idea. Especially because the woes for state budgets are only beginning, and what aid did come with the stimulus will probably run out before state economies recover.

History suggests it could take six or more years for sales and income taxes — which make up roughly two-thirds of states' revenue — to return to pre-recession levels. That augurs deeper cuts to state jobs and services in order to maintain funding for core programs such as public schools and Medicaid.

What's different from the three previous recessions, which took states three to five years to recover from, is that employment and consumer spending aren't expected to bounce back as quickly.

To balance their budgets in the meantime, states are likely to further raise taxes on the money people earn and spend; increase college tuition; reduce funding for the arts and other cultural programs; and push costs into the future by delaying pay raises for employees and repairs of government buildings. Some states, including Massachusetts, Missouri and Arizona, already are making or considering fresh cuts just months after lawmakers agreed on new budgets.

I would say that $40 billion dollars in direct aid could have gone a long way right now and in the future. But instead, we are ruled by neo-Hooverists.

Obama's Approval Ratings And Jobs

John Judis has a compelling piece up arguing that the fortunes of Barack Obama relies entirely on the fortunes of the economy, and specifically the jobless rate. Judis shows a direct correlation between the approval ratings of past Presidents and the jobs number.

When Roosevelt took office in 1933, unemployment was almost 25 percent, but, during his first term, it fell steadily-- to less than 14 percent in November 1936. The economy, in other words, seemed to be healing. Gallup wasn't measuring presidential approval then, but FDR's rising popularity was evident in election results: Democrats picked up congressional seats in 1934 and 1936, despite already enjoying huge majorities; and, in 1936, Roosevelt won in a landslide, carrying the Electoral College by the largest margin ever.

The arc of Reagan's popularity illustrates the same phenomenon. In July 1981, when unemployment stood at 7.2 percent--what it had been at the end of Carter's presidency--only 28 percent of Gallup's respondents disapproved of Reagan. But, by January 1983, after unemployment had risen to 10.8 percent the previous month, Reagan's disapproval rating was a whopping 54 percent. In November 1982, even a crippled Democratic Party had been able to win seats in the House and Senate. During the same time, Reagan benefited politically from surviving an assassination attempt, got Congress to approve his signature tax and budget programs, and certainly didn't make egregious political errors. What mattered, finally, was the economy. And, as the economy turned around, so did the GOP's political prospects. By November 1984, unemployment had dropped back to 7.2 percent, and only 30 percent of respondents disapproved of Reagan. In that month's election, he claimed a landslide victory over Walter Mondale.

Today, we see that joblessness has risen under President Obama, and his approval ratings, while still decent, have softened (they've picked back up in recent weeks). The economy may be improving under various statistics, but until people are working again, Obama will not be credited for it. It's hard to argue with Judis' charts. With the exception of goodwill toward Bush 43 after September 11, approval ratings and job loss have followed the same trajectory in most recent years.

Judis offers some thoughts about Obama's options:

So what can Obama do? It's easy to say what would really help: rapid job growth, the revival of the housing market, transit systems that aren't breaking down, the reinstitution of after-school programs, crowded shopping malls and auto showrooms--the kind of things that go with a robust economic recovery. But the U.S. economy isn't going to morph overnight from its current woeful condition to a state of buoyant full employment. In a September 14 speech, Janet Yellen, president of the Federal Reserve Bank of San Francisco, warned of a "tepid" recovery that is "vulnerable to shocks" and an "unemployment rate [that] will remain elevated for a few more years."

What Obama and the Democrats have to hope for, then, is not a full recovery, but sufficient improvement in jobs, wages, and public services to convince voters that the economy is on the mend. That's what helped Roosevelt and Reagan keep their majorities--and, in Roosevelt's case, what lay the basis for nearly four decades of Democratic hegemony. With the Republicans in disarray and demographic trends favoring the Democrats, an uptick in the economy for which voters credit Obama could lay the basis for a new Democratic majority. But, to accomplish this, Obama must promote programs that visibly and immediately provide economic relief.

I think passing a health care bill will give some relief, but with most of the provisions delayed until 2013, this cannot be the end of it all - the political impact of health care may be long-term rather than short-term. Subsequent bills in the end of this year and 2010, job-creating bills, need to be put into effect. The stimulus package has a lot more room to run, with hundreds of billions left to be allocated. This should not only be managed well but expanded, even if it means more deficit spending in the short term.

Moreover, to avoid what marred Roosevelt's second term--the precipitous double-dip in the depression that occurred in 1937–1938--Obama should turn a deaf ear to those who are calling for fiscal responsibility. He should keep pouring money into jobs and into the pockets of people who will spend until the unemployment rate begins going down and wages begin going up. That may mean a second stimulus (despite the current hostility toward spending in Congress) would be worth pushing. He might also be wise to follow Reagan's example and get tough with foreign competitors who are using import barriers, export subsidies, and currency manipulation to inflict large trade deficits on the United States. And, whatever he does to try to mend the economy, Obama should never stop loudly trumpeting his efforts--so that he is able to reap the credit when improvements occur.

In the absence of efforts like this, I shudder to think what will happen, not only to the Democratic majority, which is a lesser concern, but to the landscape of the workplace. Millions and millions of jobs are unlikely to ever be replaced by private industry. And continued joblessness, along with option ARMs recasting, will lead to the higher foreclosure rates we keep seeing, leading to job losses in the construction sector, leading to more risk of foreclosures, leading to more job loss.

People are starting to believe more strongly in the stimulus as a job creation engine. But it's probably going to take more than that to get the kind of tangible recovery needed, not just for Obama and the Democrats, but for the fortunes of regular people.

The Schwarzenegger Plan For Indefinite Depression

Senate Democrats have sent a letter to Governor Schwarzenegger asking him to reconsider his veto of the renewable energy standard and subsequent executive order. The strongly worded letter has about as much currency as the eleventy billion-dollar bill, but it does explain why the Governor's hypocritical action is a bad deal for California.

Respectfully, an Executive Order does not have the force and effect of law. Additionally, such a proclamation will only cause confusion and uncertainty to California's energy markets, jeopardizing California's role as the world leader in renewable energy development and green jobs.

As you noted when you signed AB 32, the landmark "Global Warming Solutions Act of 2006," administrative actions are no substitute for a statute that is permanent and enforceable.

Directing the California Air Resources Board to implement an RPS program is a fundamentally flawed approach. The CARB is not an energy agency; it is an air quality regulatory agency. There are numerous provisions of law which impair the CARB's ability to implement a renewable portfolio standard. Assigning this new responsibility to the CARB will not result in new renewable energy being built soon--it will only lead to litigation, regulatory confusion, and delay.

In our view, it is essential to green businesses and the renewable energy investment community which bring jobs and capital into California, that California's 33% RPS be statutorily established and not subject to the whims of changing administrations.

There's only one reason that Schwarzenegger gave the CARB the ability to implement a renewable energy standard - so he can go on talk shows and crow that he's instituted an environmental achievement. Except, as is explained here, it won't. It will get tied up in court challenges and confusion, without a clear mandate for the standard or penalties thereto.

Schwarzenegger has responded to this by calling the Legislature's bill "protectionist," and saying that if we get water from the Colorado River, we should be able to get renewable energy from other states as well. The difference is that a commodity is not the same as a job. The twin goals of a renewable energy standard are to spur the usage of renewables as a means to lower greenhouse gas emissions, and to build a green-collar economy that will create millions of new jobs. Schwarzenegger would rather give those jobs away. And given the perilous state of the economy here in California, we simply cannot afford that.

Job losses in the public sector will prolong the economic pain in California through 2010 even as a recovery gets under way nationwide, two forecasters predict.

Jeff Michael, a forecaster at the University of the Pacific, said Tuesday that California's recession will be over before the end of the year. But the cutbacks in state and local government, along with the continuing fallout from the mortgage meltdown, will make 2010 feel like another year of recession, Michael said in UOP's latest quarterly forecast.

Similarly, the newest UCLA Anderson Forecast predicts a sluggish recovery because of the weak public sector. UCLA senior economist Jerry Nickelsburg is more optimistic than Michael about the housing market, and says California will outperform the U.S. economy starting in 2011.

Yet both economists say Californians can expect continued high unemployment for a couple more years or so. The unemployment rate is currently 11.9 percent in California and 11.8 percent in greater Sacramento.

And yet here is Arnold Schwarzenegger vetoing the only major bill that would produce any semblance of an economic recovery for California.

Financial Reform FAIL And A New Metric For Recessions

Simon Johnson had the same problem as I did with the President's speech on financial reform:

As a diagnosis of the problems that let us into financial crisis, it was his clearest and best effort so far. He didn’t say it was a rare accident for which no one is to blame; rather he placed the blame squarely on the structure, incentives, and actions of Wall Street.

But then he said: our regulatory reforms will fix that. This is hard to believe. And even the President seems to have his doubts, because he added a plea that – in the meantime – the financial sector should behave better [...]

Louis Brandeis, of course, would have seen things differently. The author of “Other People’s Money: And How The Bankers Use It,” was under no illusions concerning the underlying financial power structures and how they operated. He would have regarded an appeal to the better nature of bankers as somewhere between humorous and sad.

The only thing that will make a different is regulation. This is the lesson of the 1930s in the US – the regulations imposed at that time created a financial sector that did not impede growth after World War II; basic intermediation (connecting savers and borrowers) worked fine and destabilizing frenzies were avoided. During this period, the financial sector came up with venture capital, ATMs, and credit cards – arguably the three most important financial innovations of the past 100 years, and much more helpful of real innovation than anything you’ve seen since 1980.

As Johnson has repeatedly argued, we need to break up the biggest banks, end the revolving door between Wall Street and Washington and ensure that the executives taking the risks put their own fortunes at stake instead of gambling with our money. Sadly, none of these elements exist in the more modest reform proposals from the President, and even those are faltering in the face of institutional pressure.

As a result, we muddle through, resetting the clock to the pre-bailout days without having fundamentally fixed the system or prevented the possibility of a relapse. It's great that Ben Bernanke thinks the recession is over. But the 9.4 million people who have lost their jobs would disagree with him. Their personal depressions continue, and I would argue that this is a direct result of allowing the titans of Wall Street trillions in Treasury wealth while ordinary Americans suffer with a too-small stimulus and not much prospect for recovery.

Fifteen million Americans are locked in the nightmare of unemployment, nearly 10 percent of the work force. A third have been jobless for more than six months. Thirteen percent of Latinos and 15 percent of blacks are out of work. (Those are some of the official statistics. The reality is much worse.)

Consider this: Some 9.4 million new jobs would have to be created to get us back to the level of employment at the time that the recession began in December 2007. But last month, we lost 216,000 jobs. If the recession technically ends soon and we get to a point where some modest number of jobs are created — say, 100,000 or 150,000 a month — the politicians and the business commentators will celebrate like it’s New Year’s [...]

At some point the unemployment crisis in America will have to be confronted head-on. Poverty rates are increasing. Tax revenues are plunging. State and local governments are in a terrible fiscal bind. Unemployment benefits for many are running out. Families are doubling up, and the number of homeless children is rising.

It’s eerie to me how little attention this crisis is receiving. The poor seem to be completely out of the picture.

Joseph Stiglitz has a similar view in today's Guardian, arguing that the Administration through saving the financial system has perversely created banks that are not only too big to fail but too big to resolve, the way you would other entities which cannot meet their obligations. In a separate piece, he argues that the metric for evaluating recession - gross domestic product - now has almost no bearing on everyday lives, and ought to be scrapped in favor of something that truly reflects the outlook for ordinary people.

The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.

I remember Andy Stern coming up with the same idea in his book a few years ago. If we continue to use a metric based on the desires of elites, then they will please themselves with growth results even though the mass of people continue to suffer. Believe it or not, common statistics can actually change policy for the better. The problem lies in getting everybody to use it.

...Kevin Drum offers up real median income growth as a better metric. If that's the case, we've actually been in a depression for a decade.

Palace Sentries Dispatched To Guard The Drawbridge

The establishment in Sacramento has manned the barricades, battened down the hatches and gone on the offensive to prove their own worth. They sent their best man in the media, George Skelton, out to prove that no, despite your lying eyes, the California Legislature had a real banner year. After all, they managed to bring suffering to the lives of hundreds of thousands of state residents with consensus and bipartisan elan!

The current Legislature, regardless of Duvall and despite ideological polarization, has had a better year than it's getting credit for.

Its main accomplishment was keeping the state afloat amid a flood of red ink, created primarily by the toughest economic times since the Great Depression. OK, so it did use some bailing wire and chewing gum! The bills got paid, even if briefly with IOUs.

With great difficulty and pain -- at least for Democrats -- the Legislature and Gov. Arnold Schwarzenegger slashed programs by roughly $30 billion. They also struck a major blow against "auto-pilot" spending by permanently eliminating all automatic annual cost-of-living adjustments, except for K-12 schools. And they summoned enough courage to temporarily increase taxes by $12.5 billion.

In the end, they found a way to restore health insurance for 660,000 low-income kids.

The tax increases hit the more vulnerable elements of society disproportionately, of course. They actually found that way to restore children's health insurance by lowering industry taxes and increasing the co-pay and deductible burden on the low-income families themselves, while reducing the covered care. And anyone who adds cutting $30 billion in programs and eliminating COLA as an accomplishment is a bit of a social deviant. But there are probably no lengths to which Skelton will go to defend the palace walls from the rabble who think, based on the evidence, that the system is horribly broken.

Steve Maviglio wisely steers clear of the more horrific achievements of this year's Legislature, and offers a slightly more defensible outlook of the '09 Legislative session. Still, there's a lot unsaid:

Looking back, getting the measures on the May ballot was a significant early success that required 2/3 votes. And toward the end of the session, in addition to the renewable energy bill, Speaker Bass pushed through measures on childrens health and domestic violence that won broad bipartisan support. (The Speaker also got a standing ovation, and she appears to have strengthened her support in Caucus. Compare that to the ouster of the two Republican leaders).

Okay, so the grand water deal didn't get done. Big deal. Nothing like that has been done for a generation. Perhaps Senate President pro Tem Steinberg set the bar too high when he said he'd get it done. In any case, all parties agree that they got close and can pick up the pieces and get it finished in short order.

So for all those crying for major reforms, put it all into perspective. Sure, improvements could be made, and things could have been better, but this is not reason for drastic action. Far from it.

Of course, the renewable bill is veto bait, as are many of the other major bills pending the Governor's signature. And the domestic violence bill didn't pass the Senate, so, um, that doesn't count. The prison bill offered decent parole reforms but stopped well short of a real solution. Everyone keeps saying the water bill will happen but the two sides remain far apart, and the fact that they'll have to go into overtime to reconcile it kind of proves the point, no?

But Maviglio tips his hand with the line "this is not reason for drastic action." Of course he would say that. He's profited well from the status quo. Anything that messes with it could hurt him professionally, and what's more, could stop the endless blaming of outside factors to account for stunning failure.

There is no shame in stating that this was a failed legislative session. Just about everyone in California would agree with you, particularly the ones who are suffering the most from the destruction of social insurance caused by the most heartless cuts. Simply put, the Great Recession dominated legislative activity, and the conservative veto from various 2/3 requirements restricts the Legislature from fulfilling the expressed will of the people through their votes (NOTE: This does not only come into play with the budget; late last Friday Republicans blocked over 20 bills that required 2/3 votes for one reason or another, probably because they knew they could get away with it). That's not something to explain away, it's actually something to fight, every single day until the problem is rectified.

Skelton and Maviglio may want to tell themselves all is well, but the public knows better, and they're going to demand major structural change. Those who think that the Legislature can still be a force for good in the state can get aboard and provide the best ideas to break the supermajority gridlock and get the state moving again. Or they can defend their narrow interests. Their defense will fail, and it would be a shame not to see them on the right side of history.

Wasting An Opportunity

A poll on the economy has an interesting nugget about who the public blames for the nation's perilous state.

One year after Wall Street teetered on the brink of collapse, seven out of 10 Americans lack confidence the federal government has taken safeguards to prevent another financial industry meltdown, according to a new Associated Press-GfK poll.

Even more — 80 percent — rate the condition of the economy as poor and a majority worry about their own ability to make ends meet. The pessimistic outlook sets the stage for President Barack Obama as he attempts to portray the financial sector as increasingly confident and stable and presses Congress to act on new banking regulations [...]

Still, Obama generally avoided public blame for the recession or the condition of the banking sector.

Only one out of five surveyed said Obama bore responsibility for the recession; 54 percent blamed former President George W. Bush and 19 percent blamed former President Bill Clinton.

Financial institutions, however, bore the brunt of the criticism — 79 percent of those surveyed said banks and lenders that made risky loans deserve quite a bit of the blame. Sixty-eight percent held the federal government responsible for not adequately regulating banks and 65 percent blamed borrowers who could not afford to repay loans.

I love the blaming of the Clenis, presumably from the hardest-core teabaggers and conservative ideologues (yes, he ruined the country with all that peace and prosperity). But ultimately, the vast majority of Americans blame Bush. And in this respect, they are absolutely right and we have numbers to prove it.

On every major measurement, the Census Bureau report shows that the country lost ground during Bush's two terms. While Bush was in office, the median household income declined, poverty increased, childhood poverty increased even more, and the number of Americans without health insurance spiked. By contrast, the country's condition improved on each of those measures during Bill Clinton's two terms, often substantially.

The Census' final report card on Bush's record presents an intriguing backdrop to today's economic debate. Bush built his economic strategy around tax cuts, passing large reductions both in 2001 and 2003. Congressional Republicans are insisting that a similar agenda focused on tax cuts offers better prospects of reviving the economy than President Obama's combination of some tax cuts with heavy government spending. But the bleak economic results from Bush's two terms, tarnish, to put it mildly, the idea that tax cuts represent an economic silver bullet.

Yet, this majority consensus that George Bush's economic plan was an unmitigated disaster for the country has flourished despite a virtual code of silence from Democratic leaders since the President entered office. People had to come to this conclusion all by themselves, and a lot of them did. But an effective campaign, armed with the facts, would go a long way to setting the record straight.

This should be something that every American knows. And every Republican should be asked why they voted for all the things that Bush wanted than made that happen. But for for some reason, Bush has been disappeared, as if the directive to "look forward" means that we can't even hold the Republicans responsible for their own political failure. (We already know that can't be held accountable for their illegal behavior.) And the result of that is very likely to be that blame for the failures of the Bush years will be applied to the Democrats. It already is among the teabaggers.

"The Republican recession" has a nice ring to it and should have been the mantra for months now. It certainly should be the mantra of the 2010 mid-term. And all those facts and figures about the Bush years should be part of every Democrat's stump speech. People need to know this stuff, not just for political reasons but because they need to start understanding where these conservative policies lead. If the Democrats don't use the greatest example of conservative failure since Hoover to illustrate that, it's going to happen all over again.

It's probably too late to get the maximum mileage out of this kind of education campaign. That's a damn shame, because we have a President who seeks post-partisanship instead of helping himself by laying out what choices destroyed the economy and what choices can fix it. But that would take a Party with the courage of their own convictions.

The Poor, The Adrift, The Uninsured

We interrupt yesterday, today and tomorrow's media soccer scrum ("Does Ellen DeGeneres Think Michael Vick Should Agree With Joe Wilson About Health Care?") to bring you the consequences of a Gilded Age economy:

The U.S. Census Bureau has just announced that the poverty rate for 2008 was 13.2%. This means the number of people in poverty has increased by about 2.5 million, to 39.8 million. To give you some perspective, 2.5 million is more than the number of people who live in Detroit and San Francisco combined.

The Census data is just devastating, particularly when you take into account that the numbers come before the job loss in the first 8 months of this year. In addition to the uptick in the poverty rate, real median household income fell 3.6%, the biggest drop in 40 years. The richest tenth of one percent saw their incomes rise by 35% over the last 10 years while median incomes stayed flat. And the number of Americans lacking health insurance increased by about 700,000 to at least 46.3 million, which does not account for the under-insured. In fact, if it wasn't for government programs, this number would be far worse.

Things would have been worse but for one thing: continued expansion of government-provided health insurance coverage. Between 2007 and 2008, the proportion of Americans reporting any private coverage fell by 0.8 percentage points, from 67.5 percent to 66.7 percent. Meanwhile, the percentage reporting some form of government coverage rose by 1.2 points, from 27.8 percent to 29.0 percent [...]

First, the absolute number of uninsured has increased. Second, employer-based coverage is eroding. Third, adverse trends in private coverage are partly masked in the overall numbers by the rise in public coverage.

Fourth, improved insurance coverage among children--thanks largely to Medicaid and SCHIP--is more than offset by increases in the number and proportion of uninsured working-age adults. As shown in the final column, the number of uninsured adults increased by almost 9 million in nine years. Since working-age adults are much more likely to actually get sick, this is a significant economic and public health concern.

Yes, it's been government - eeevil, socialist government - which has had to step into the breach and take care of its citizenry amid a failing private market. And that includes your local fire department, increasingly becoming a primary care doctor for millions of Americans.

In 2008, fire departments around the country responded to 15.8 million medicals calls, a 213 percent increase over the 5 million medical runs record in 1980. The combining of cities’ fire and emergency medical services accounts for some of the increase.

But as the logs of a Washington, D.C., fire company show, the lack of health insurance by too many people—especially low-income families—has turned some local fire departments into mobile emergency rooms.

In one 24-hour period this summer, D.C.’s Engine Company No. 10 responded to more than two dozen emergency calls—two fires and the rest were medical emergencies. It is the same throughout the District. The Times reports the D.C. fire department responded to more medical emergency calls per capita than any other in the nation—and most come from poor neighborhoods [...] such calls tie up a community’s resources and cost communities more because so many calls for emergency medical care aren’t true medical emergencies. Also, the increasing reliance on first responders and on 911 also comes at a time when firefighters and paramedics all across the country are being laid off, as the nation’s economic woes place a strain on public budgets. The recession is shrinking our resources and reducing manpower while the demand for emergency medical care is skyrocketing.

Best health care system in the history of man.

This is bigger than just health care, though, and it's driving a lot of the anxiety out there. Recessions are disruptive events, but in previous years quick turnarounds would blunt the pain. More recently, jobless recoveries that last years and years have become the norm, and as a result, people cannot keep up. Inequality has risen to an almost comical degree, while more and more people sit on the other side of a gated community. This breeds anger, unrest, and ultimately enormous amounts of needless suffering.

And as long as government is captive to interests which place their corporate well-being above the well-being of the people, it will remain this way.

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.”

Cramdown Returns

The Federal Reserve revealed survey results today showing the economy stabilizing throughout the country and the recession nearing an end. But without jobs, people won't feel that recession's end. As a result, even the Fed survey showed consumer spending "soft," and employment "weak" in all 12 Fed regions. And that will impact the still-unresolved sector of the economy that could easily relapse us into a double-dip recession, the housing market.

Although the ailing residential real-estate market is still weak, it also flashed signs of improvements. The Fed regions of Chicago, Richmond, Boston and San Francisco observed an "uptick in sales." Most regions said buyer demand remained stronger at the low end of the housing market, although Philadelphia did note an "upturn in sales at the high end of the market."

The Boston, Cleveland, Dallas, Kansas City, Richmond and New York regions credited the first-time home buyer tax incentive with spurring sales. Most regions reported downward pressure on home prices, although Dallas and New York said that prices were "firming."

That first-time homebuyers credit will soon expire, and this analysis fails to take into account the problems from those facing foreclosure, particularly those who got into adjustable-rate mortgages. The interest-only loan holders, in particular, could see a real disaster in the months and years to come when their rates reset.

Edward and Maria Moller are worried about losing their house — not now, but in 2013.

That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years [...]

With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.

“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

These people are going to lose their homes, with devastating consequences for the rest of the real estate market and the greater economy ($908 billion dollars are tied up in active interest-only loans). Even the Treasury Department expects millions more foreclosures in the same report that they tout their homeowner protection programs.

This is why it's good to see cramdown return. The provision, allowing bankruptcy judges to modify primary home loans unilaterally the way he would a vacation home or a yacht, would give those facing foreclosure a level playing field against lenders who have no incentive to change the terms of their loans.

House Financial Services Committee Chairman Barney Frank (D-Mass.) tells the Huffington Post he plans to revive the effort to give bankruptcy judges the authority to renegotiate home mortgages -- by making it part of this fall's much-anticipated financial regulatory reform bill.

Wall Street banks scored an overwhelming victory in April when they soundly defeated a cramdown measure in the Senate. Only 45 Democrats voted with homeowners, dealing the measure the kind of defeat that often sends legislation off into the wilderness for years, if not for good.

Frank and Senate Majority Whip Dick Durbin (D-Ill.), who led the bill in the upper chamber, both said after its defeat that it was finished. Frank was dismissive when, about a week after the vote, HuffPost asked if cramdown might come back. "Excuse me, what planet were you on last week? The vote was 45 to 51. Why would you ask that? Do I think there's a likelihood we could overturn 45-51? No," said Frank. "I wish it weren't the case."

But since then, foreclosures have continued unabated and the unemployment rate has continued to climb, increasing to 9.7 percent last month. Both forces feed on each other and create a drag on the economy.

The Obama administration had high hopes for the law Congress passed intended to encourage mortgage modifications. The law is all carrot, however, and no stick. Cramdown is the stick. If banks think they could get hit in bankruptcy court, they're more likely to bargain.

Because regulatory reform is a big bill with enough populist-friendly elements in it to be difficult to oppose, it could be a good vehicle for cramdown. Add that to the Consumer Financial Protection Agency and more credit card reform legislation, and that bill will be the subject of a huge fight, perhaps even bigger than the health care bill, at least in terms of lobbyist energy.

Jobless Recoveries Aren't Recoveries

The President's poll numbers, which haven't slipped as much as has been reported if you take away crazy Zogby Internet polls (42%? Really, Zogby?), have little to do with his policies and much to do with the economy. Most political leaders are falling right now as the economic slump continues to worsen. The "recovery" that we're seeing is really more of a case of getting worse more slowly. The so-called "liberal interventions" that Obama has made in the economy clearly staved off a deep depression. Virtually everyone who's studied the issue would agree. But it's hard to prove a negative, and this is the source of Obama's troubles right now. For example, Joe Biden is right to say that the stimulus is working, but this is a difficult concept for people to wrap their heads around:

"The recovery act has played a significant role in changing the trajectory of our economy, and changing the conversation in this country," Biden said. "Instead of talking about the beginning of a depression, we are talking about the end of a recession."

Absolutely true, but if there are still no jobs, this won't register. People feel that the recession is still happening because, for their personal lives, it is. The rates of job loss have slowed but remain negative. That means less people working. That means less money available to spend. That means lower consumer spending. And so retailers feel the pinch, individuals feel the pinch, and even with economic growth, everyone feels like they're in a recession.

Jobs lag a recovery, so there's a chance for the White House to break out of this. But in recent times, the jobless recovery has become more and more prevalent. Know this - an economic "revival" which benefits elites and not the overall public will not be looked upon favorably. In fact, people will blame the President for failing to turn things around. You can put together all the white papers you want about the recovery meeting benchmarks, or whatever. But the only answer to the economic troubles are JOBS. If we don't value work over wealth in this country, we will not sustain an economic future.

...Biden's speech on the Recovery Act actually does some good message-building about the economy and the need for public investment, which is key.

We're also investing what everybody knows is necessary to build a 21st century economy. I have people sometimes say, aren't you guys doing too much? You know, Presidents in the past have been able to -- and I've been here for eight of them -- they've been able to take the problems that they have and segregate them -- said, we're going to take these two first. We'll put these other four or six or five aside, and we'll get to them next, because they know the status quo ante will pertain. But name me one problem that landed on the President's desk that allowed him to say, no, no, we're going to focus on this, and then in three years we'll get to this?

I say to my friends, does anybody think we can lead in the 21st century without a radically altered energy policy? Does anybody think we can sustain our position in the world without a radically altered education system, where we're no longer 17th in the world in the number of college graduates we graduate? Does anybody think we can sustain without radical change in the cost of health care in this country, and bending that curve? [...]

To state the obvious, we will emerge from this great recession. And I believe that is only -- that's necessary but not sufficient. We have to emerge better positioned to lead the world in the 21st century as we did in the 20th century.

Where the last cycle generated billions of dollars -- billions from investments made via high-speed trades, this cycle needs to make real investments in high-speed rail.

In the last cycle, "innovation" meant bundling and selling subprime mortgages. In this one, our innovations will bundle and sell technologies to produce clean, efficient, renewable energy.

Where the benefits of productivity have not grown in the past, from 2000 and 2007, productivity grew 20 percent; yet the middle-income households fell 3 percent, their income. In this cycle, we're determined to make sure that productivity doesn't elude the poor and the middle class. And this cycle must be one in which, once again, American workers get his or her fair share of the wealth they helped produce.

About That Deficit

Many are speculating that the President re-appointed Ben Bernanke in the middle of his vacation to get the story away from this:

The Obama administration, citing an economic downturn that has been deeper than it had first thought, raised its estimate on Tuesday of the government’s deficit over the next decade to $9 trillion from $7.1 trillion.

Despite the shortfall, White House officials said they saw no reason to back away from President Obama’s ambitious and costly goal of overhauling the health care system. The new amount includes the cost of the health care overhaul as well as about $600 billion in additional revenue that the administration hopes to raise, two initiatives Congress has yet to approve [...]

Analysts at the Congressional Budget Office put their 10-year deficit estimate slightly lower, at $7.14 trillion, though the agency uses a slightly different method to reach its number. The budget office takes into account only policies already in place, while the administration can consider policies and budget decisions that its hopes to install.

White House officials predicted that the budget deficit this year will peak at $1.58 trillion, though they said the 2009 shortfall will be about $261 billion lower than they had predicted in May. The main reason is that officials have decided that they will not need another round of bailout money for the nation’s banks. The Congressional Budget Official also estimated a deficit this year of about $1.6 trillion.

Paul Krugman puts the numbers in perspective, saying that the added debt in the next decade is bad, but would equal 40% of annual GDP, which is comparable to what many other countries have dealt with in the past. What I'm wondering is if the deficit has ever actually been registered that way. I've certainly never seen it reported in the papers in ten-year increments - you usually see what the annual deficit is, and then the total debt. This seems like a new tactic that plays to the fiscal scolds.

Meanwhile, the way to reduce deficits is to increase productivity, output and employment, and that's the real problem with these numbers.

The real story in the new CBO projections should be the more dire economic outlook. CBO now expects the unemployment rate to be near 10 percent through most of 2010. Its new projections will show that the unemployment rate will only return to more normal levels in 2013 or even 2014, more than six years after the collapse of the housing bubble threw the economy into recession.

The implication of the new CBO projections is that millions more people will be needlessly suffering because of the economic mismanagement of the Greenspan-Bernanke-Bush crew. CBO views 4.5 percent unemployment as being the sustainable rate of unemployment. If the unemployment rate is 10 percent, more than 8 million people are needlessly out of work, with another 5 million or so being forced to work part-time because they cannot find full-time employment. These people will be struggling to pay their health care bills, cover their mortgage or rent payments, and meet other necessary expenses for themselves and their families.

The rational response to the news that the economy will be far worse than had previously been projected should be a demand for more stimulus. After all, why should millions of people lose their jobs, their homes, and their health just because the people who managed the country's economic policy over the last decade were incompetent?

But the focus is placed on the deficit, meaning that the ability to spend our way into full employment has become politically impossible. A second stimulus looks unliklely at this point.

...by the way, a good bit of these 10-year projected deficits - probably half of the total - comes from Bush Administration unfunded mandates. Ten years' worth of Bush tax cuts for the wealthiest Americans could have filled the rest.

...And also note that this near-term projection has a deficit that's $260 billion less for FY2009 than expected, because there is no need for another bank bailout. That could be a headline too, if reporters wanted to write it, especially considering that near-term projections are more reliable than ones about what the economy will look like in 2019.

Bernanke Is Back-y

The kid stays in the picture:

President Barack Obama will announce Tuesday that he is nominating Ben Bernanke for a second four-year term as chairman of the Federal Reserve, White House Chief of Staff Rahm Emanuel said.

Mr. Emanuel said Mr. Obama will make the announcement from Martha's Vineyard Tuesday. He said the president credits Mr. Bernanke for "pulling the economy back from the brink of depression."

Mr. Bernanke's term as Fed chairman expires in January. His renomination requires Senate confirmation.

Dean Baker said at Netroots Nation that he supported Bernanke's re-confirmation because "otherwise, Larry Summers would become the chair, and that would be awful."

Not exactly praiseworthy. But probably where we're at.

I'd say that, as a condition of Bernanke's re-appointment, we need a full audit of the Fed so we can figure out where the trillions of dollars that they used to staunch the bleeding in the financial markets has gone. But Senators may disagree with me.

The Charge Of The Hack Brigade

If the Capitol Weekly is going to have a right-wing corporate shill on their editorial pages, the least they could do is get a good one. Because I don't know where anyone, even John Kabateck of the National Federation of Independent Business, gets the cajones, after the legislature just passed a cuts-only budget completely on the backs of poor people, to fret about the plight of possible taxes for the business community.

"Get the monkey off your back and relocate to Las Vegas", barks a new ad trying to lure hard-working small businesses away from California. If legislators don't listen, small businesses that have already been hit hard by the effects of a fragile economy and the billions in taxes that were passed earlier this year will go under.

Um, right, this "rich people and businesses are leaving California" Galt-ism is not true and has never been true. But do go on.

The Legislature is back and up to its old tricks. The budget that was passed in February and revised in July will need to be "fixed" again this fall. If history is our guide, we all know that it will be an uphill battle and an unpleasant environment for small businesses. There are currently $2 billion in tax hikes being proposed, including taxes on everything from gas, internet purchases and vehicle license fees.

Oh noes! Oil companies might have to pay for the natural resources they take out of California's ground for the first time in a century of drilling! Get the smelling salts! The vehicle license fee might return to still-well-below-the-average-percentage relative to every state in the nation! This is terrible!

You'll notice that Kabateck fails to mention the $2.5 billion annually in corporate tax cuts passed in the previous two budget agreements, which miraculously exceed the tax hikes - beaten back by the Yacht Party and the Governor in July - about which he is fretting so. These massive corporate tax cuts do nothing to keep the largest corporations in America doing business in California - they would hardly abandon a market of 38 million people. It's nothing more than a kickback for services rendered. And if that's a transaction of prostitution, then John Kabateck is the guy who cleans up the courtesan's antechamber afterward, eager to grab a buck for himself for the privilege of working for whores.

It's amazing how little the California office of the National Federation of Independent Business speaks for independent business. He could have written a nice little article about how corporate behemoths are screwing small businesses when it comes to state purchasing, which currently favors out-of-state multinationals. Instead, he offers the party line that the structural revenue gap is fine and leaving citizens out on the street to die is a small price to pay for protecting oil and cigarette companies. Kabateck doesn't seem to understand that this mentality is destroying the California economy, and with it all of those small businesses he claims to represent.

Hacktackular job, CapWeekly! With any luck, you'll get Jon Coupal or Joel Fox to offer a rebuttal.

A California Economy In Free Fall

Whether it's the continued foreclosure crisis, the impact of state budget cuts or the cumulative effect of depressed consumer spending, it's now extremely clear that the state's employment picture shows no sign of bottoming out, reaching an all-time high in the post-war period.

California's unemployment rate took an unexpected leap in July, reaching a post-Word War II high of 11.9%. The increase contrasts with the national rate, which declined slightly over the same period, and reflects ongoing weakness in the state's battered construction and financial services industries.

The state lost a net 35,800 jobs last month, more than any other state, the U.S. Labor Department said today. It has lost 760,200 jobs over the last year.

Every category of nonfarm jobs in the state except education and health services experienced year-over-year losses. The construction sector was the hardest hit, shedding 18.6% of its jobs. Manufacturing jobs fell 8.7% from the same time last year.

Job loss did slow relative to the previous two months. But I don't think anybody believes that 11.9% is a floor. Los Angeles, where the jobless rate jumped 0.7% in just a month, is one of the worst big cities to find a job in America. The city has 15,000 homeless veterans. And areas of the Central Valley and the Inland Empire are in far worse shape. It's basically a depression in those parts.

And we are just starting to add a round of painful state budget cuts to increase the economic shortfall. Whether it's closing parks that provide economic benefits, or dropping or cutting aid to 100,000 IHSS recipients, or wiping out the entire domestic violence budget, the cuts will not only force the poor and infirm to slip through the cracks and cause mass suffering and even death, but the economic impact will be profound. Caregivers will lose their jobs. Relatives will shift their schedules to care for their families. Productivity will reduce. It's just a plain fact that lowering public spending during a deep recession will negatively impact the economy. Consumers aren't spending, companies aren't trading and businesses aren't investing. Government is the spender of last resort. And that spending has been slashed.

I honestly don't know where the bottom is.

Florida's High-Tax Population Flight?

Via Joe Mathews, here's yet another powerful piece of evidence that the Yacht Party scaremongering over how high taxes force people to leave California is a load of fertilizer.

TALLAHASSEE -- For the first time since the end of World War II, the growth state of Florida lost population, researchers say, in a sign that the economic recession is even worse than many had feared.

In all, the state lost about 58,000 people from April 2008 to April 2009, according to a new estimate from the University of Florida's Bureau of Economic and Business Research.

"It's such a dramatic shift from what we've seen in the past,'' said Stan Smith, the bureau's director.

"Florida's economy is, in a lot of ways, driven by population growth,'' he said. "Perhaps more importantly, population growth is a reflection of how the economy is doing both in Florida and in the nation.''

It goes without saying here that Florida has no state income tax.

Attributing population shifts to taxes is about as rational as attributing student test scores to rain. If you want to correlate populations and the economy, the Occam's razor explanation would be that people go where the jobs are. And I would add that people who cannot find a job probably won't stay around a place long if the social safety net is vaporized.

The lack of political media in the state allows urban legends like this to take hold through the only outlets left, right-wing radio and persistent rumor. You get the falsehoods you pay for listening to such garbage. If we had 100 Peter Schrags in the media and twice that in the Democratic Party leadership forcefully rebutting such misinformation and making the value-based case for the kind of progressive government they'd like to see, at least there would be a counterweight. But it's hard to argue something with nothing.

Wildly Successful Government Program

Americans have been conditioned by wingnut rhetoric into believing that government cannot possibly work well. I think that ought to be contradicted by the success of the Cash For Clunkers program, which leveraged $4-5 billion into the economy in seven days, got consumers spending again on big-ticket items, and improved fuel efficiency on 250,000 cars well above expectations (preliminary Congressional reports show a 69% increase in fuel efficiency - most people are trading in SUVs with 100,000 miles or more on them for solid passenger cars). The program is working so well that Congress wants to continue it.

Congress is moving quickly to save the depleted cash-for-clunkers program, as the House passed a $2 billion spending measure Friday afternoon that would keep alive a program that has encouraged American car owners to trade in their old gas guzzlers for more fuel efficient vehicles.

Despite some criticism from Republicans who called the legislation another bailout for another industry, the bill easily passed on a 316-109 bipartisan vote.

Under the fast-track bill, Democratic leaders will use funds from a renewable energy loan guarantee included in the stimulus. The bill would extend the program through Sept. 30, 2010. Democrats have portrayed the run on cash for clunkers cash as a great success for the $1 billion program, which allows car owners to turn in older, less fuel efficient cars for a $4,500 rebate to purchase higher gas mileage vehicles.

These are the same Republican stooges who complained that GM and Chrysler were shutting down too many auto dealers. Now the government designs a program that massively helps dealers, achieves fuel efficiency and with a small investment gets a lot of economic activity going, and they scream "bailout." Hypocrites. There's also the fact that this is not even new money, but money already in the stimulus package. They're also whining that the dealers haven't been paid yet, even though the program kicked off a WEEK ago. Apparently they all receive their paychecks instantly for all work they perform.

Sadly, too many people see a government program run out of money and think it failed. No, that means demand was so high that it fulfilled its purpose in a matter of days. I see Claire McCaskill rejecting the idea of "subsidizing auto purchases forever." Apparently "forever"=anything more than one week.

We still have a tough economy. The recession has leveled off into something approaching stagnation. And there is compelling evidence that the stimulus package is responsible for even getting us back to the stagnation point. Consumers still aren't spending and a lot of people still have no job. Until businesses start hiring again government needs to drive economic activity, which is why you're seeing second stimulus packages proposed in the form of extending measures from the initial stimulus.

Except lots of those extensions revolve around corporate tax breaks and not things that put money into the economy. Things like Cash for Clunkers. And Democrats ought to tell the story that this successful government program, going deliberately and directly to Main Street, represents our best hope for economic recovery.

UPDATE: Obama said this today:

Now, one of the steps we've taken to boost our economy is an initiative known as "Cash for Clunkers." Basically, this allows folks to trade in their older, less fuel-efficient cars for credits that go towards buying fewer, more -- newer, more fuel-efficient cars. This gives consumers a break, reduces dangerous carbon pollution and our dependence on foreign oil, and strengthens the American auto industry. Not more than a few weeks ago, there were skeptics who weren't sure that this "Cash for Clunkers" program would work. But I'm happy to report that it has succeeded well beyond our expectations and all expectations, and we're already seeing a dramatic increase in showroom traffic at local car dealers.

It's working so well that there are legitimate concerns that the funds in this program might soon be exhausted. So we're now working with Congress on a bipartisan solution to ensure that the program can continue for everyone out there who's still looking to make a trade. And I'm encouraged that Republicans and Democrats in the House are working to pass legislation today that would use some Recovery Act funding to keep this program going -- funding that we would work to replace down the road. Thanks to quick bipartisan responses, we're doing everything possible to continue this program and to continue helping consumers and the auto industry contribute to our recovery.

So I'm very pleased with the progress that's been made in the House today on the "Cash for Clunkers" program. I am guardedly optimistic about the direction that our economy is going. But we've got a lot more work to do. And I want to make sure that all the Americans out there who are still struggling because they're out of work or not having enough work know that this administration will not rest until the movement that we're seeing on the business side starts translating into jobs for those people and their families.

Absolutely true. Democrats don't accentuate enough positives.

UPDATE: McCaskill backtracks, says she would consider using existing fund for C4C, wants to study program's effectiveness.

UPDATE: Enviro-blogger Adam Siegel, a critic of the C4C program initially, has some thoughts, conceding that the program is working very well but suggesting some tweaks. The best critique of the program is that it props up the car culture, which I don't doubt, but people with 140,000 miles on their Hyundai SUVs probably aren't candidates for biking or the subway, and what's more, this is a successful economic program with definable environmental benefits, not vice-versa.

Getting Shrill On Governor Failure

Arnold Schwarzenegger will sign the FY2010 budget revision quietly tomorrow, with up to $1 billion dollars of line-item cuts that could potentially cause more pain for California citizens. He'll claim that he was acting responsibly and in the best interests of the people. As CalBuzz says today in about as shrill a way as imaginable, it's a load of crap.

“(T)he biggest winner to emerge from our negotiations is California,” the governor bragged, “our state’s legacy, its priorities, and its budget stability.”

Wrong, wrong, wrong!!

Schwarzenegger’s triumphalist braying was little more than a one-step-ahead-of-the-posse exercise in spin control, a pathetically transparent bid to establish a positive narrative for the budget disaster over which he’s presided, in hopes that voters and his suck-up pals in the national media will buy his story without bothering to check it out.

(NOTE TO NATIONAL POLITICAL WRITERS: Schwarzenegger did NOT solve or stabilize California’s budget. Despite his assertion to the contrary, his budget – passed in February and now revised twice – actually RAISED TAXES by $12.5 BILLION. With the latest revision, he threw off enough ballast to keep his hot air balloon afloat but in no particular direction.) [...]

In truth, Arnold’s entire tenure has been one continuous failure of leadership. This is just the latest chapter.

From his first days in office (when he sowed the seeds of today’s never-ending fiscal crisis by his irresponsible cut in the vehicle license fee) to his ill-considered $15 billion borrowing bond (which helped make interest payments the fastest growing item in the budget) and his current shameful spending plan (which gives the University of California a major push into mediocrity while continuing the slow death of K-12 education and punishing the aged, blind and disabled), he has been little more than a narcissistic, tone-deaf poseur, surrounded by sycophants and devoid of principle or conviction.

Allow me to sit up and take notice at the shrill-ness.

And their points are completely inarguable. It's not just this budget revision, which makes draconian cuts and multiple faulty assumptions of revenue in order to pretend to fill a partially self-created deficit (we're not getting $1 billion from the federal government for Medi-Cal reimbursement, for example, nor will we sell the State Compensation Insurance Fund for $1 billion). It's that his entire tenure has had the goal of enforcing the tax revolt and eroding the New Deal consensus that Californians still by and large support as an electorate, though they lack the governmental structure to carry it out. And in that respect, he was wildly successful. Except Californians have figured out implicitly that this vision of the future is abhorrent, and while they haven't yet put their finger on who to blame, they could do worse than looking at the Governor. It is no accident that Schwarzenegger is viewed unfavorably by both parties, having driven the state completely into a ditch and hastened the near-depression in which we find ourselves. The structure of government resists workable solutions to our fiscal problems. But Schwarzenegger's reckless management has greased the skids and achieved nothing for the citizenry but future pain and suffering.

In the latest outrage, he enthusiastically endorsed a budget process that will help push the whole country into a deeper recession by canceling out the impact of the federal stimulus package.

Tens of billions of dollars are cascading into California from the federal stimulus package, but the economic oomph is being weakened by massive cutbacks in state spending.

The financial crosscurrents show up in places like downtown Sacramento's old railyard, now undergoing a huge facelift. Stimulus money from Washington, D.C., will help move the train tracks, a key element of the plan. Separately, though, the slashing of redevelopment funding by the Legislature might derail a housing project at the site.

This push-pull effect will play out in education, transportation and other sectors. Economists say the likely result will be prolonged pain and a weaker recovery despite the $85 billion coming to California from the stimulus program over the next two years or so. Unemployment stands at 11.6 percent in Sacramento and statewide, and is forecast to exceed 13 percent next year.

The state budget "absolutely … will blunt the impact of the stimulus," said Chris Thornberg, head of Beacon Economics consulting in Los Angeles.

Remember all this when you see some Twitpic of the Governor brandishing his pen and telling his list of followers tomorrow that he "fixed" the budget. The fix is in, to be sure - and the people will feel the results.

More Evidence Of Goldman Sachs' Blood Funnel

I saw Bill Maher offer Matt Taibbi some pushback last night about his Rolling Stone piece on Goldman Sachs. Maher wasn't willing to believe that Goldman has been uniquely positioned to profit from the breakdown of the financial system and the various bubbles created. Maher offered the predictable "why just Goldman" response, and Taibbi decided to talk about the many Goldman officials in high positions in the government. He could have just pointed to this story that leaped from Zero Hedge to the New York Times yesterday.

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets [...]

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

They literally place their super-fast computers physically close to the machines that govern NYSE trades, to get the jump on competitors and make enough pennies off of the brief ups and downs of stocks to rake in mounds of cash. And in some cases, investors can buy access to buy and sell order information on certain exchanges that can be used to make these quick orders. When Chuck Schumer is calling for an investigation of Wall Street, you know something has gone horribly wrong.

No, Goldman Sachs is not the only organization profiting from this scheme, or any of the numerous others. But their name keeps surfacing among those that are, in pretty much every case. I don't know how much evidence it takes to understand their role in all of this. Taibbi may not have gotten every single solitary thing right in his very long piece, but he got enough right to make some very powerful people nervous. And rightly so.

We need to go further in determining what caused this financial crisis and what pitfalls remain. The new iteration of the Pecora Commission, a Depression-era panel that uncovered the origins of that crisis, can lead the way.

We, the undersigned, call on you to fulfill the responsibilities of your position by joining together in non-partisan cooperation to investigate the origins of the financial crisis in ways that lead to a full understanding of the institutions, people and practices that are responsible for our economic collapse.

In particular, we encourage the adoption of three guidelines that history has taught us are essential to an effective inquiry:

Appoint a single investigator. This individual must have a proven record of exposing fraudulent elites and institutions, and must provide a professional, non-political spirit to the investigation.

Afford no special treatment. No one is off-limits or gets special protection in the investigation.

Provide the tools to do the job. The investigator must be given ample budget and time, full subpoena authority, and the ability to hire and fire staff.

These principles were applied in the 1930s when Congress launched a formal inquiry into the causes of the Great Depression. That commission - led by Ferdinand Pecora - was willing to reach into the highest levels of Wall Street and finance to determine the causes of the economic collapse of 1929. The courage with which the commission greeted its task - and the revelations that courage ensured - inspired the sweeping banking and financial reforms that were the bedrock of our financial system for decades.

Building a new financial foundation requires us to begin on solid ground - the truth. It is only by illuminating the mistakes of the past that we will be able to meet the great challenges of the future.

And they can start by photocopying Matt Taibbi's notes.

The Larger Context

California's troubles have been well-documented. But as I've said on multiple occasions, while we may be an acute example of the problems with state budgets in an economic downturn, we are not alone. And the decisions, some forced, some unforced, of the nation's governors in responding to these challenges are unquestionably threatening economic recovery.

It’s easy enough, of course, to mock state governments nowadays, what with California issuing I.O.U.s to pay its bills and New York’s statehouse becoming the site of palace coups and senatorial sit-ins. But the real problem isn’t the fecklessness of local politicians. It’s the ordinary way in which state governments go about their business. Think about the $787-billion federal stimulus package. It’s built on the idea that during serious economic downturns the government can use spending increases and tax cuts to counteract the effects of consumers who are cutting back on spending and businesses that are cutting back on investment. So fiscal policy at the national level is countercyclical: as the economy shrinks, government expands. At the state level, though, the opposite is happening. Nearly every state government is required to balance its budget. When times are bad, jobs vanish, sales plummet, investment declines, and tax revenues fall precipitously—in New York, for instance, state revenues in April and May were down thirty-six per cent from a year earlier. So states have to raise taxes or cut spending, or both, and that’s precisely what they’re doing: states from New Jersey to Oregon have raised taxes in the past year, while significant budget cuts have become routine and are likely to get only deeper in the year ahead. The states’ fiscal policy, then, is procyclical: it’s amplifying the effects of the downturn, instead of mitigating them. Even as the federal government is pouring money into the economy, state governments are effectively taking it out. It’s a push-me, pull-you approach to fighting the recession.

The stimulus package provided some money for state fiscal stabilization, but that turned a package designed to create jobs and circulate money into the economy into simply a life raft. The states have both sucked up some of that money and directly counteracted it through their actions, so that an already too-small stimulus shrinks even further. State and local governments are 1/8 of our total GDP, and their fiscal austerirty in the midst of crisis has a very damaging economic effect.

In this article, James Surowiecki argues that federalism is starting to crack in the face of extreme economic calamity. Some of the elements of the stimulus that are national priorities - high speed rail, a smart national power grid - must be funneled through an inefficient and often dysfunctional state and local process. It simply makes things difficult to have so much decentralization in projects designed to move across state lines. So what can be done? We can move big items like Medicaid under federal control with local administration. Or we can set up a permanent federal fiscal stabilization fund, maybe kicked off in a second stimulus, to massage the states through tough times. It's almost a rainy day fund at the federal level.

But something must be done. We are destroying ourselves from within by leaving things as they are.

Angelides On Pecora II

Tim Fernholz talks with Phil Angelides, the new chairman of the Financial Crisis Inquiry Commission, a modern-day analogue to the Pecora Commission of the 1930s, charged with finding out the origins of the financial crisis, who we should hold responsible, and how we can ensure it never happens again. There are some interesting tidbits in the interview. First, we can be sure that Angelides has an understanding of the problem.

Why is this commission important?

The magnitude of what's happened in this country is astounding. Millions of people have lost their homes, millions of people have lost their life savings, millions of Americans have seen their pensions disappear. We have seen over a trillion dollars in taxpayer money go to prop up a dying financial system. This is a cataclysm. My view is that there is a real hunger in this country to have a pursuit of the truth, to find out what happened and why it happened, so hopefully, instead of sweeping it under the rug, it will not happen again in our lifetimes. This is an important commission with a critical role of serving the nation's best interests because we are called on to look into something that has been fundamentally important to this country: The very foundations of our financial system have been shaken [...]

Do you believe we already have a broad understanding of what led to this crisis, or do you feel there are a lot of questions still unanswered?

All of us come with our personal views. I'll start by saying that in the early part of this decade, as early as 2002, I was concerned about what was happening the marketplace. I was deeply concerned about executive compensation so I mobilize shareholders across the country to push back on executive compensation. I was concerned about lax enforcement at the SEC. ... I was part of a movement of activist shareholders in an effort to bring some common sense to the market place. In the wake of the Enron and Worldcom, we had some momentum, but the economy recovered and the regulators took their foot off the brakes. We all come in with our own viewpoints, but our job is to look at this fresh.

Next, he's willing to give his Republican colleagues on the committee some input, but he's setting ground rules and he thinks he can get the others on the commission to play ball:

The commission has the ability to subpoena information, but only if at least one of the Republican appointees supports the decision. Are you at all concerned about disagreement within the committee hurting its ability to gather information?

When the Speaker and the Majority Leader asked me to serve as chair, [I knew] this would be a hard and difficult road. I'm starting on the assumption that other commissioners, like myself, are interested in getting to the facts and the root causes. If we have to issue subpoenas, I hope we can do that. Hopefully people [with information] will cooperate, but if not, we were given the tools to get the facts. I would want to start on the basis that no commissioner would want to deprive us of information to make a good judgment on behalf of the American people. The commission is interesting because it really focuses on the inquiry, rather than the policy and political implications. I think that gives us a better chance of coming up with a nonpartisan, bipartisan findings of facts.

And finally, he seems to recognize something that a lot of people don't - the regulators probably had the capacity to stop at least the most egregious criminality happening in the markets, but they didn't use the authority they had. What the Financial Crisis Inquiry Commission can offer is, in Angelides' words, "a road map" and "a guidebook" to the next generation of regulators, so they know what to look for and where to go.

Now, Zachary Roth has a long piece about Bill Thomas and the other Republicans on the FCIC, or Pecora II, and how they are partisan enough to resist a real inquiry. The provision that one Republican must vote with Democrats in order to issue subpoenas could allow anyone Republicans don't want testifying to be able to do so; and all of the Republicans appear, to Roth, to be candidates to hang together:

None of the three rank-and-file Republican appointees seem like good candidates to break ranks. Peter Wallison is a fellow at the American Enterprise Institute, who has been a prominent advocate of the favored conservative notion that Fannie Mae and Freddie Mac are the true culprits in the crisis, and who argued this week in the Washington Post against creating a consumer protection commission for financial products -- an idea seen by many as a cornerstone of any effort to reform the financial regulatory system. Doug Holtz-Eakin, for his part, was John McCain's top economic adviser at the time when the GOP presidential nominee declared the fundamentals of the economy strong. And Keith Hennessey is a former economic adviser to President Bush and a former aide to Sen. Trent Lott.

But it's the identity of the Republican-appointed vice chair -- whose support is required by law for the commission to perform several other key functions, like hiring staff -- that's the really ominous sign. That's Bill Thomas, the Republican former congressman from California, who earlier this decade chaired the House Ways and Means committee.

During his years in Congress, Thomas, who now works for a major DC lobbying firm, acquired a reputation as a smart, highly-skilled and acutely partisan supporter of big business, who once tried to have Democrats forcibly ousted from a capitol meeting room, and was accused of being literally in bed with a corporate lobbyist.

I'd agree that Wallison and probably Hennessey and Thomas are useless, but Holtz-Eakin, a former head of the CBO, has at least displayed flashes of intellectual honesty when he wasn't in charge of a Presidential campaign's economic policies. He has acknowledged the need for higher taxes. He has called for the Bush tax cuts to expire. He's definitely conservative and he sometimes says some boneheaded things, but I don't see him as a hardcore partisan, actually. And if Angelides structures this as a just the facts inquiry, there's at least the promise of a legitimate investigation.