Coming Around On The Jobs Crisis

Bob Herbert wonders today if the Obama Administration understands the nature of the jobs crisis. He says that millions of Americans need to get back to work, and if the private sector is unwilling or unable to produce those jobs, then the government must step in. This was the most crucial passage:

The survey for the Economic Policy Institute was conducted in September by Hart Research Associates. Respondents said that they had more faith in President Obama’s ability to handle the economy than Congressional Republicans. The tally was 43 percent to 32 percent. But when asked who had been helped most by government stimulus efforts, substantial majorities said “large banks” and “Wall Street investment companies.”

When asked how “average working people” or “you and your family” had benefited, very small percentages, in a range of 10 percent to 13 percent, said they had fared well.

I think the White House got an advanced copy of Herbert's column, because their message today has a lot to do with jobs. Peter Orszag reiterated that the President is "exploring additional options to promote job creation." Bloomberg covers it as well:

President Barack Obama is considering a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label.

The discussion of the initiatives, including a boost in transportation spending and an extension of an expiring tax credit for first-time homebuyers, comes as the White House is balancing rising concern about unemployment and a budget deficit the Congressional Budget Office estimates will total $1.6 trillion for 2009, and $1.4 trillion in 2010.

Administration officials have told allies in Congress that a broader transportation bill, and extensions of a homebuyer tax credit and unemployment benefits are all on the table, a Senate aide said.

As well as Herbert's paper, The New York Times:

President Obama’s economic team discussed a wide range of ideas at a meeting on Monday, following his Saturday radio address in which he said it would “explore additional options to promote job creation.” But officials emphasized that a decision was still far off and that in any event the effort would not add up to a second economic stimulus package, only an extension of the first [...]

Among the options for additional steps is some variation on Mr. Obama’s proposal during the stimulus debate to give employers a $3,000 tax credit for each new hire, which Congress rejected last winter partly out of concern that businesses would manipulate their payrolls to claim the credit. Another option would allow more businesses to deduct their net operating losses going back five years instead of the usual two; Congress limited the break to small businesses as part of the economic stimulus law.

Not to mention the WSJ and a separate Times article.

Calculated Risk worked through some of the safety net options the other day. Extending unemployment benefits and COBRA reductions sounds fine, but I don't see exactly how they create jobs - though added consumer spending may save some. The homebuyer tax credit, while popular, is a complete waste of money, costing tens of thousands per new home sold, and it isn't boosting housing and construction to any great degree.

As for the rest, infrastructure spending through the transportation bill would be great, but is the Administration willing to waive paygo rules, or do they have some idea to pay for it? The business tax credit for new hires seems ripe for abuse, as does the "carry-back" provision allowing major tax breaks for corporations. That just sounds like trickle-down economics to me, and thus far it hasn't worked.

Robert Reich has some much better ideas, though he does side with the new jobs tax credit.

Use existing authority under both the stimulus package enacted earlier this year and the nefarious TARP bailout fund -- extending and combining them into a fund to make up for state and local cuts in public school budgets, childrens' health, public health (we need workers to administer swine flu vaccine) and public transportation. Instead of bailing out banks and giant automakers, we should switch to bailing out public services that average people need.

Propose a one-year payroll tax holiday on the first 20,000 of income. Republicans as well as Blue Dog Dems could go along with this, and it would be a highly progressive tax cut since 80 percent of Americans pay more in payroll taxes than they do in income taxes.

Give small businesses a "new jobs tax credit" for every net new job created over the next year. Granted, under normal circumstances this sort of jobs credit doesn't have much effect, and it's difficult to separate hires that would have happened anyway from net new ones. But we're not in normal circumstances; small businesses, which are responsible for most new jobs, still aren't hiring. They need a boost.

Dramatically expand the Small Business Administration's lending programs and have the Fed buy up the SBA's debt. Big banks are not lending to small businesses. TARP has been an utter failure in this regard. The SBA and the Fed should circumvent them and help small businesses get the capital they need, so they can start hiring again.

These might work in separate bills instead of one big stimulus bill that would have a target on its back. There's no question that state aid should be on the top of the list, and I think accelerating infrastructure spending is vital enough that deficit spending makes sense; government interest rates remain low, after all.

More than anything, the Obama Administration has to show through their actions a concern for those struggling right now. The jobs picture is intimately tied to their economic fortunes, so they have every incentive to do so.

Still Shedding Jobs

Last month's employment report:

Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate (9.8 percent) continued to trend up, the U.S. Bureau of Labor Statistics reported today. The largest job losses were in construction, manufacturing, retail trade, and government.

Household Survey Data

Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent.

The change in total nonfarm payroll employment for July was revised from -276,000 to -304,000, and the change for August was revised from -216,000 to -201,000.

Economists were hoping for something around 175,000 losses.

Earlier this week, I wrote about how Obama's approval rating is intimately timed to the jobs situation. A report by two professors at Rutgers says it will take until 2017 for jobs to reach pre-recession levels. That could be two Presidents from now, the way things are going.

Obama doesn't need a full recovery, but he needs to show improvement. And the only way, at this point, to improve the jobs situation is with another stimulus.

...Krugman:

Stocks are up. Ben Bernanke says that the recession is over. And I sense a growing willingness among movers and shakers to declare “Mission Accomplished” when it comes to fighting the slump. It’s time, I keep hearing, to shift our focus from economic stimulus to the budget deficit.

No, it isn’t. And the complacency now setting in over the state of the economy is both foolish and dangerous.

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.

Falling Down On Making The Argument For Good Government

I think this post from John Aravosis is a little bit unfair, but only a little. The White House has soft-pedaled their defense of the stimulus package, but really with the jobs picture as it is, it was always going to be a hard sell to tell people who are losing their job that the stimulus prevented things from getting worse. The problem lay in the lack of job creation in the stimulus itself, rather than job saving. Those who follow these things closely understand that the stimulus really saved us from a deep recession if not a depression. But we also know it didn't go far enough to truly bring about recovery. Those who look at their own lives and don't pay attention to the day-to-day debate only see that they and their colleagues can't find work.

I think the White House will eventually get some credit for the inevitable recovery, but only if it includes jobs. A second stimulus simply won't happen now, and we're basically at the mercy of large firms and when they decide to hire at this point, which isn't likely in the near term if they can increase productivity without bringing anyone back.

That said, when the White House goes out and defends the stimulus, the least they can do is defend the underlying ideology. This AP "fact check" on the stimulus is fairly ridiculous, more a nitpick than a fact check, but assuming they quoted Biden right, this is terrible:

Biden exercised some restraint in his praise for the stimulus' impact. He took a more cautious approach, for example, when asked if his declaration of stimulus success means Americans can now rethink the common view that government is wasteful and inefficient.

"I think it's too early to make that decision, to be very blunt about it," he said.

No, it's not too early to make that decision. The point of stimulus is to get money out quickly and into people's hands. If anything, Biden and his team are being too deliberate about that, to keep away the newspaper headlines of wasteful spending. Pro Publica, for example, needs to blow it out their ass. Anything that creates jobs is stimulus, people. Pro Publica tries to catch Biden in a lie by claiming that money isn't flowing to hard-hit communities, when Biden was clearly talking about increased unemployment benefits and food stamps and help for all low-income Americans. It's hoops like this which modern Presidencies have to jump through that create such a "common view" about inefficient government.

But Biden needs to attack that. The fact of the matter is that public investment creates jobs and saves people's lives. It's OK to state that aggressively. If he doesn't, Republicans certainly won't. And they'll continue to demonize government.

The Administration is in a tough rhetorical spot, considering the jobless recovery. But that's not a time to give ground.

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.

CA-10: An Interview With Lt. Gov. John Garamendi

John Garamendi has been seeking votes in California for well over 30 years. He first took a run for the Governor's mansion in 1982, and was set to do so again in 2010 until the seat in CA-10 opened up, and he was inspired to return to Washington, where he served in the Clinton Administration in the Department of the Interior. He has the most diverse record of anybody in the race, with stints at the federal level, the state legislature, and in two statewide offices, as the Insurance Commissioner and now Lieutenant Governor. In our interview, we discussed health care, lessons learned from regulating insurance, No Child Left Behind, saving the NUMMI plant in Fremont (more on that from Garamendi here), and foreign policy in Iran. I found Garamendi to come at issues in a very comprehensive and thoughtful way, and you can see this for yourself below. A paraphrased transcript follows.

DD: Thanks for talking with me today.

John Garamendi: My pleasure.

DD: So how's it going out there on the campaign trail?

JG: It's going very well. Every day, I feel we're moving along well. You have everything being done that is normally done in these campaigns. We have a strong volunteer grassroots organization committed to getting out the vote. Phonebanking has started, we've hit about 30-40 thousand homes. We're walking in different communities. We just had a meeting in Rossmore, with 300 people turning out. So I think it's going very well.

DD: Your last several campaigns have been statewide, with district-level campaigning being more retail, how are you finding it?

JG: To me, it's exactly the same, only it's done in a smaller area. I've always believed strongly in retail politics. The only difference is that after the event's over, I don't have to get on a Southwest Airlines plane. We did an African-American church out in Fairfield over the weekend, same as any African-American church in Southern California or anywhere else. It's just easier for travel.

DD: OK, let's hit some issues. First off, health care. August is this time where everyone's making their feelings known about health care in their districts. What are you hearing in yours?

JG: I am hearing a strong element for single payer, or Medicare for All. As you may know, I've led that debate in this state for many, many years. I've always found it the most efficient, most cost-effective way you can possibly do this. Just send your premiums to the Medicare office.

So I hear a lot of individuals trending in that direction. And some of the unions, the California Nurses Association, are also trending in that direction. There is also a concern about the complexity of the legislation moving through Congress. And people want to see at the very least a public option to compete with the insurance companies. Also, with a lot of seniors, the drug issues concern them, both with fixing some of the issues with Medicare Part D and also maintaining what they like about Medicare. So that's the range.

DD: Would you vote for any bill that didn't have at the least a public option that's available from day one, without a trigger?

JG: Well, I've always been a strong voice for Medicare for All. The fallback position is the public option. That's already a compromise. And so the legislation had to have a public option, I can't go any further away from that. The other thing I want to express is that I understand insurance reform, which is a lot of this bill. I was the main regulator for insurance companies in the largest state in the union. So I bring a set of knowledge to this debate that not only doesn't exist among my competitors, but doesn't exist in Congress.

DD: Let's talk about that. Right now, insurance companies are regulated in the states, and so the regulations vary from one place to the next, and can be corrupted by local interests. Do you support a federal role in insurance regulation?

JG: This is something that we have to figure out with insurance reform and with respect to financial regulation. The regulatory mechanisms need some clarity. It simply won't work to write a law saying to the insurance companies, "Take all comers." They will not do it. So you need a police force. Someone to enforce that law. Will that be federal, or based where it is now, at the state level? That's the kind of detail that must be worked out. I mean, we've had auto insurance here in California that's supposed to take all comers, and they find numerous ways to avoid that. And of course, this is why I support Medicare for All. You don't have to worry about any of that. But as long as we're going with health insurance reform, I can add something to that process.

DD: What are the pluses and minuses of putting this in the hands of the Feds?

JG: If it's a federal process, you'd have to set up a massive new federal bureaucracy. In the positive sense. But you have to have a police force, because otherwise, the insurers won't do it. That's a major, expensive undertaking for the federal government. There's an advantage to the existing mechanism in that it already exists, like with Medicare or Medicaid. However, you mentioned some of the problems with how the regulation changes depending on the state. So both options have shortcomings. Either way, if we have a bill based on insurance reform, it has to be dealt with. And I've been dealing with these companies for eight years of my life. I know how to do this.

DD: Medicare for All will apparently get a vote now. Is that helpful?

JG: It's enormously helpful. It got pushed to the side of the debate for too long. Medicare provides about 60% of the care in dollar terms already in this country, and it's very popular. If you bring the rest of the population in, on a per-person basis, the cost would decline dramatically. The money in the private system is good enough to get this done and cover everybody. And the other important thing is that Medicare allows individual choice of provider. Whatever doctor you like, you can keep them. Of course, we know that private insurance restricts your choice of doctor. So this is the big lie in this debate, the idea that Medicare would have government telling you what doctor to pick. That's what happens right now.

DD: Let's move on. I noticed on your website you took a lot of time talking about the need to rebuild manufacturing. We're seeing this cash for clunkers program becoming very successful as an economic stimulus for the auto industry. Is that the kind of incentive-based programs that we can use to bring back manufacturing to America?

JG: Not exactly. The auto industry is not central, but it is important. That's why I'm trying to save the NUMMI plant. 1,200 businesses are direct suppliers to NUMMI. The auto supply industry is one of the largest in America. So cash for clunkers will help NUMMI. But what I'm talking about with respect to manufacturing is an economic theory that I developed in the 1980s. Basically, I figured that you need certain things to maintain the ability to lead as an economic power. You need a world-class education system and a commitment to research and development. Through both of those, you can create new things, with a high profit margin, whatever those things are, but new innovations that people find valuable. Eventually, those new things become a commodity, and once that happens, like all commodities, it seeks the lowest-wage place to be made. So those things get pushed off, and you have to create more new things, to keep feeding that engine. So that's what I'm talking about, high-end manufacturing.

DD: Couldn't the NUMMI plant be retooled to serve as a place to manufacture those new things, be they innovations in solar or wind technology or new batteries?

JG: Well, we tried this a few years back. I endorsed a bill in the legislature to provide a specific exemption for sales tax on manufacturing equipment to retool the NUMMI plant for hybrid vehicles. And that probably would have been enough to keep NUMMI open. But it didn't pass. Right now, what we're doing is putting together a package for NUMMI of incentives that will hopefully keep them in California. But it's more complex than that. This is like a divorce. You have GM and Toyota fighting over who owns what widget on the line. So there are legal issues in play now. I think we can get it done, because that's a very efficient plant, one of the most efficient in the country. But we have to manage this divorce.

DD: Education is another issue you talk about a lot. The Department of Education just put out this Race to the Top program to offer money to the states with good outcomes, but they are restricting the funds to states which incorporate student testing into teacher evaluations, and because California doesn't do that, they don't qualify. What are your thoughts on that, and this larger divide between education reformers and groups resisting their reforms?

JG: My question about it is basically, what is the equation between the test and teacher evaluations? Are we talking about just the test score? In that case, do I get to choose the students? Because the students and their backgrounds are a contributing factor to their performance. So it's a complex equation. There's a socioeconomic element to it. And it's very difficult to do to take everything into account. I don't think that testing should be the sole measure of a teacher evaluation. There are multiple factors. My daughter's a kindergarten teacher, and this year she got to school and there were a lot more kids in her class. So is that a factor? I think we need to evaluate teachers, but we must be fair.

DD: Do you support a reform like paying teachers more to go into poor-performing inner city areas?

JG: I've always supported reforms like that. I put up a bill in the 1980s to pay more to math and science teachers, to make sure we were attracting the best of them. And I support sending good teachers into the inner city. We have to pay our teachers better if we want to get the best outcomes.

DD: We are having such a tough time in California, what can the federal government do to alleviate some of the burden here where we are destroying our social safety net during a deep recession?

JG: Well, just to go back to education, one thing the federal government can do is fix No Child Left Behind. It was a great concept, but not good in detail. The reauthorization is coming up, and the Feds had better fund it. You can't place a burden like that on the states and expect them to deliver. So funding, and some reform of the law, has to get done. I don't think testing should be the only evaluation of students. There's a place for it, but we're building a nation of robots by teaching to the test. I have significant concerns about No Child Left Behind that need to be addressed.

DD: What about beyond that. Would you support a second stimulus focused on the states?

JG: I don't know whether there will be a second stimulus. But the problem is pretty elemental. California is the 7th, 8th-wealthiest place on Earth. We have made a decision, and it was a decision, not to invest in education. We have plenty of money to fund it, but we made the decision not to. The leadership has refused to use that wealth in the greatest resource we have, and that's our education system. It's clear to me that the federal government cannot substitute for the effort that California must make for themselves. We need investment, coupled with serious reform, to break the gridlock. Voting to tax students by raising college rates is just insanity. And the regents and trustees refused to support legislation for an oil severance tax to fund higher education. I brought it to them, and they wouldn't support it. We are the only oil producing state with no tax on the natural resources coming out of our ground. The oil companies have been able to take it for free for over a century. It's madness.

So the federal government cannot substitute for California. But I'll fight to bring money back to the state. First by funding No Child Left Behind. And also, there's the issue of medical services. The formula for state participation in Medicaid in California is 50-50, an even split between the Feds and the state. In other big states, that ratio is different. In Illinois, New York, it's more like 60-40, 70-30. Getting a better split in that formula represents a huge amount of money for California. And there are numerous formulas like that. So experience counts in understanding all that.

DD: OK, final question. On your website, I noticed very strong language supporting Israel, and also warning Iran not to continue with their alleged nuclear program. And you advocate for stopping shipments of refined oil to Iran if they refuse to cooperate. Now, I'm assuming that was written before the most recent uprising.

JG: It was, yes.

DD: Do you still believe, given the events over there, that it's a good idea to stop refined oil shipments, when it may hurt not the regime, but the very people in the streets who are resisting it?

JG: There's no doubt that the effect of an embargo would hit the economy and the people. That's what it's designed to do. I've thought long and hard about this, after watching the events take place, and I still believe in the concept. What you have over there is the current government's legitimacy being questioned. Does that mean they are more willing to negotiate on the nuclear program, to bring something tangible to the people? We don't know. So I think you have to pull together the interested groups, and that's Europe, and Russia, Pakistan, the Arab states, they might be more interested than us. And you create a larger coalition to change the behavior of the government. The uprising actually helps in that regard. And like in any negotiation, you have to have a big stick. So I would not drop the embargo possibility. And again, all of this is down the road a piece. Now another big stick would be bombing their facilities, and I think there are some unadvisable consequences to that. So I'd rather use the other stick.

DD: Thanks so much for talking to me today.

JG: Thank you.

CA-10: An Interview With Sen. Mark DeSaulnier

Mark DeSaulnier has had a rapid ascent through the state legislature and now, potentially, into Congress. Within three years, this former restaurant owner won elections to the State Assembly (in 2006) and the State Senate (in 2008), with a Congressional primary scheduled for September 1. Prior to that, he was a 3-time member of the Contra Costa County Board of Supervisors and the California Air Resources Board. A former liberal Republican in the mold of Edward Brooke, DeSaulnier switched parties several years ago and compiled a liberal voting record in the State Legislature. His first ad of the campaign covered the topic of health care, and I asked him about this and several other issues in an interview conducted last week. Having taken place before the crucial budget vote, I spent a good deal of time asking DeSaulnier about that, and you can see his responses here. Depending on your perspective, he either did or did not fulfill the promise to vote against "most" of the budget, by the way, voting no on 11 of 26 bills, including all of the more controversial ones.

I'll pick up with a paraphrased transcript of the rest of the interview below:

DD: So, other than the budget, how's it going with your campaign?

Mark DeSaulnier: Well, this is a tough campaign, with a big field and a lot of good candidates. The polls we've done show us winning. We've got 70% of the money that we need to compete, and a lot of great endorsements. I would say we have the most local endorsements inside the district. And we're going to be able to put together a great ground campaign, with people I've worked with for 20 years in the district. I think we're going to be concentrated in Contra Costa County, where we can post a big number. I think we're putting ourselves out there as the local candidate, who has represented the district for a long time. And we have people out there walking and phoning, putting forward that message.

DD: As long as we're on California, obviously you've seen the dysfunction at the local level. What do you think you can do at the federal level to remedy this situation?

MD: You know, I read a lot of Paul Krugman, and I agree with him that we're going to need a second stimulus package. And I think we need it sooner and not later. I think we can take what's been learned from the stimulus package that we're doing now. I think the problem is that the banks like Citi and Bank of America aren't lending, and so we need to require the banks to lend, with relief for the credit worthy who are falling behind on their payments, and more money out to the credit unions who have done a better job handling this crisis. Next, I think we have to do some sort of fiscal stabilization. I see it in this state, people who need to access the safety net go up when the economy goes down. And so we have to break that cycle, and I think we can by providing some relief. Finally, we should say that we can do things more efficiently. There shouldn't be this silo mentality. I'll give you an example. We put together these "one-stops," places where you can go for unemployment and job training. And people tell me that you have to get out of one line and pick up a phone in the office to get your unemployment benefits. That just doesn't seem like good government to me. And I think we have an opportunity to make government work better.

DD: Let's move on to health care. Seems to be a big issue for you. What are the principles you carry in this debate?

MD: To me, the gold standard is single payer. We have the problem of getting health care to those who need it, and also how we get control of costs. I think the public option is the first step, and if we do it right, it could be, and really I think it should be, single payer. The question is what are the Democrats willing to give up to get moderates on board, and I think there have to be some lines we cannot cross there. In the end, it has to be about flexibility and more choice. That's the way you're going to sell this thing. It's telling that the moderates want firewalls in their plan, they don't want the people to have more choice, they want to preserve something for the insurance companies.

DD: Will you commit to not vote for anything that doesn't have a quality public plan available on day one, not a trigger, open to everyone, and with the kind of rates necessary to force the insurance companies to compete?

MD: Yes. I think as liberals, as progressives, something we don't do a lot but which we can learn from Republicans, sometimes we've just got to say no.

DD: Congress has started to debate the regulatory reform ideas put forward by the Obama Administration, and they're getting a ton of pushback from the banking industry, particularly on the concept of the Consumer Financial Protection Agency. It's the same way on a lot of these issues, the banks just won't relent. How do we solve this problem?

MD: Honestly, the politics will never get totally fixed without a public finance system in this country. And then people say, "why should we pay for elections?" The truth is that the average American is paying disproportionately already, when the giveaways to businesses and corporations are factored in. They buy elections fairly cheaply, and they get the rewards. So that's something we have to pursue. As far as your question, yes, I think we need a Consumer Financial Protection Agency, in fact I think it should be cabinet-level. A Secretary of Consumer Protection. The point to all of this is that if middle income people don't have wealth, democracy ends. That's just the bottom line. And one way to ensure that is by protecting consumers, so you don't see all their wealth go into someone else's pockets. Inequality is just killing us right now. Kevin Phillips wrote about this years ago, in Bad Money, and he was very prophetic. I also think that you can't reform the financial system without holding people accountable. And so I would involve the Department of Justice right at the beginning. That's the only way to really ensure it doesn't happen again.

DD: You mention inequality, it's something Democrats don't talk about enough. A recent Wall Street Journal story talked about the top 1% earning 35% of all the compensation in the country.

MD: It's stunning. And our tax structure, by the way, rewards the accumulation of wealth, not work. This happens when you get a financial services economy, which is completely not sustainable. We don't have manufacturing, we just have this financial services giant, and it trades in bubbles. So one way to reduce that inequality is to retool the financial services sector, make it smaller, make it more boring.

DD: OK, last question. I wanted to ask you about SB375, the smart growth measure that you played a big part in passing last year. This bill doesn't get a lot of attention, but it really offers a blueprint to how to achieve smart growth policies with the statewide authority working in concert with local communities. Do you plan to scale that up if you make it to Congress?

MD: Oh, absolutely, and this is where I think my background really suits me to replace Ellen Tauscher. I chaired the Transportation Committee in the Assembly as a freshman, I think the first person to do that. I spent ten years on the California Air Resources Board, and I co-authored SB375. I'm pretty sure there's a companion bill in Congress right now. Doris Matsui (CA-05) is carrying it right now. I have honed in throughout my career on the changing transportation and mobility side of the energy issue. We accomplish this, in part by reducing miles, and also finding new energy sources for transportation. We need more transit, and a move away from single-occupancy vehicles and long commutes. It's about bringing the work space closer to the living space, and creating livable communities. So I think I'm naturally suited for such a task. I'd like to get on the Transportation Committee if I get to Congress.

DD: Thanks for your time today.

MD: No problem, thank you.

CA-10: An Interview With Anthony Woods

The race in CA-10 for the seat vacated by Ellen Tauscher features three lawmakers with long resumes at the state level. And then there's Anthony Woods, a young man with no prior history in elected office, but festooned with what Benjy Sarlin of The Daily Beast called the best political resume ever. Woods is an African-American product of a single mother who found his way to West Point and Harvard's Kennedy School of Government. He is a two-time Iraq war platoon leader who returned all of his men home safely and received the Bronze Star. He is someone who, after returning home, was dismissed from the Army for challenging its Don't Ask Don't Tell policy. But politicians don't vote with their resumes. They must have the conviction to vote with their principles. I actually conducted the first interview with Woods back in April, and since then others have taken notice. So I thought I'd return to Woods and ask him about some of the key issues facing the Congress in the coming months. A paraphrased transcript of the conversation, executed last Wednesday, is below.

DD: Thanks for talking to me today.

Anthony Woods: No problem, thank you.

DD: So how's it going on the campaign trail?

AW: You know, it's really exciting. We're reaching that point where we're really building some critical mass. As you know, I did pretty well in the last fundraising quarter, we're going to have enough money to compete with some experienced lawmakers. The Human Rights Campaign and the LGBT Victory Fund just endorsed me, which is very exciting and shows their commitment to this campaign. We just had a great grand opening of our office with 50 volunteers from across the area. I'm holding a town hall meeting in Fairfield (this already happened -ed.) coming up and we're really starting to see a path for this to happen. It's great.

DD: OK, well let's start with the biggest issue on everyone's minds right now and that's health care. The way it's looking, if you're elected you might get a vote on this. What are your principles for this debate, and how would you like it to go.

AW: Well, I've been getting more concerned every day. At first, I was thinking that Congress gets it. They're going to do something to deal with the health care crisis in this country that I see talking to folks every day. But as we get into it, they're moving further and further away. First of all, they should have started the conversation at single payer so that if they had to move to the center they would have been coming from a better place. What we have are two issues: access and cost. Clearly the system right now is broken on both fronts. 50 million people go without health insurance and the costs are skyrocketing. And the Congressional effort looks to be falling short. I'm very concerned that there may be no public option.

DD: OK, so will you take a stand right now and say that if the bill before you has no public option that's available the day it's introduced, you won't vote for it?

AW: I don't know if I'd exactly go that far, but here's what I would say. I think there has to be a public option that's efficient and effective. And if the Democrats have some bold leadership, they can do it and do it right. What we need is some competition in the individual marketplace. If people have to buy insurance, we have to give them a choice that's affordable. So that's my first priority. And if the bill before me doesn't have that, yeah, I'd have trouble voting for it.

DD: You say it's about bold leadership, OK. Right now, about 90% of all private insurers offer abortion coverage as part of their health care plans. If a public option is supposed to compete with the private insurance market, doesn't it have to offer the same kind of baseline coverage that private insurers offer, especially if they are legal medical services?

AW: I think so. I am pro-choice, and I don't believe in limiting the right to choose. And if you're giving someone health insurance who has had trouble affording it, if they have to make the difficult choice to get an abortion, they need the same kind of resources that you could get on the private market. So I would agree with that.

DD: OK. I want to talk about the F-22. As you know, the Senate just voted down funding for additional funding for F-22 fighters that were designed for the Cold War and have never been used in Iraq or Afghanistan and are apparently vulnerable to rain. What's your reaction to that, and then I want to get into the military budget more generally.

AW: I support stripping the funding. My view is that if the Secretary of Defense and the Chairman of the Joint Chiefs of Staff and the President all say we don't need them, we probably don't. And regardless of the impact on jobs, we should listen to that. I think we need in procurement a short-term view and a long-term view. We should obviously be prepared to defend the country, but we should be prudent with those funds, because it is real money.

DD: The F-22 funding and some other funding may stop, but the military budget will increase this year. And we still spend more on military activities than any other country on Earth combined. How can we continue to do that, isn't it unsustainable?

AW: My deployments in Iraq taught me that the military cannot be the solution to all of our problems overseas. Because we have this mindset currently, we've created a situation where the military is providing resources that other agencies could provide. We shouldn't have the Defense Department doing the work of the State Department or NGOs or US AID. I think if we shift some of that burden, it will actually make the troops safer, because we can focus resources on protecting them and providing them the equipment they need, instead of making the military the sole solution to every problem overseas.

DD: I want to tell you about a story I saw in the Wall Street Journal. It showed that the top 1% of wage earners in this country, the executives, the wealthy, are now earning 35% of all compensation. How do you react to that?

AW: Wow. That says a lot. You know, these are tough times, and when you see a tiny fraction like that benefiting from the resources of this county, I think it says that they need to sacrifice. We're in a situation where we implemented tax cuts in the middle of a war. We're trying to figure out how to pay for health care. And the top 1%, they're doing pretty well. I think we need some shared sacrifice.

DD: Why do you think it's so difficult for Democrats to simply say what you just said in that way? Even the surtax they've come up with in the House to pay for health care is getting dismissed. Why can't we just make the case that America is worth paying for, especially for those who use the public commons so much?

AW: I really think it starts with people who are willing to say that. And it's why I want to be there representing this community in Washington. My opponents are mostly the same politicians who we keep sending to Washington again and again, and I think we need someone who isn't afraid to say that, you know, the country has provided a lot to a small group of people, and they should give a little bit back.

DD: OK, let's move on. The foreclosure crisis is still hitting California hard, and so far the solutions that have come from Congress hasn't worked. What are some of your ideas to keep people in their homes?

AW: This is something I hear about from people every day when I'm campaigning. In California, we had a moratorium on foreclosures for a while, and I think that's part of the equation, but if you don't provide loan modifications for people, eventually that's not going to be enough. The immediate crisis we have is that people are losing their homes, so we need to make the necessary adjustments to allow people to refinance. After that immediate crisis, I think we have to clean up the regulatory environment, both in the mortgage market and also in banking.

DD: I've heard an interesting proposal called "right-to-rent," where people facing foreclosure can pay rent on the home for a number of years, they get to stay where they are, the banks have a revenue stream and don't have to deal with a blighted property, and the community gains from not having foreclosed properties on their block. What do you think of that?

AW: Sounds good. A lot of people are suffering right now. And it's traumatic to uproot yourself and have to leave your community, to have your kids leave schools. So anything that keeps folks in homes and communities sounds like a smart idea to me. It's certainly better than what we're doing.

DD: But how do we institute something like that when the banks, in the words of Dick Durbin, "own the place"?

AW: That's a tough problem. You know, the healthiest banks right now are the ones who separated investment and lending. And I think that most people I meet are frustrated to see the banks get us to this point. They want common-sense regulatory solutions to change that environment. I think the banks will have a real problem on their hands if they keep pushing and pushing, and people don't see a change in their daily lives while the banks rake in tons of money.

DD: OK, but what's the theory of change? How do we get all this done? When you have a situation where special interests rule and campaign contribution money means more than constituents, how can we fight for progressive outcomes in a Congress that appears to care more about the next election?

AW: Well, I think we have to elect people who are accountable to the ones who sent them. For me, I will give as much access to everyday people as possible, and let them shape my agenda rather than special interests and lobbyists. And I think we need to elect more people who have this philosophy. We're going to have to do it one representative at a time. And I think that's one of the reasons why my campaign is taking off. We cannot expect different results with the same politicians dealing with the same problems year after year. So I don't know if we can deal with everything at once, but we'll have to do it one representative at a time.

DD: OK, last question. Obviously, here in California, we're looking at a terrible budget and lots of structural problems. What can be done at the federal level to perhaps help the state out of this mess?

AW: Well, just looking at the state budget deal, it's basically more of the same. There's a crisis of leadership in Sacramento, and it produced a budget full of accounting tricks that just kick the can down the road. It's clear that the system is broken, and that's why I'd prefer a Constitutional convention and at the least getting rid of the 2/3 rule for budgets. California is such an important economy, it's a big chunk of the country, and when we aren't doing well, the country suffers. At the federal level, I think we need smart investment. The state is a donor state, it doesn't get back in funds what it pays in taxes. So I'd like to help reduce that. And also, we can take advantage of the resources and opportunities in California. This state has the chance to be a new energy leader, through wind and solar. And so I'd like to see those kinds of smart investments in California.

DD: Do you support a second stimulus, focused on state fiscal stabilization funds to save those jobs that rely on state spending?

AW: I think we're having a hard time distributing the funds from the first stimulus. So I think we have to give it some time to work. But we are definitely at a crisis point in this state, I see it every day, so I think we need to monitor the situation. And we have to make sure there's a safety net in place for the people of California.

DD: OK, great, thanks for taking the time to talk to me.

AW: Thank you.

Playing Defense vs. Playing Offense

Joe Biden took to the pages of the New York Times to defend the stimulus package on Sunday.

The single largest part of the Recovery Act — more than one-third of it — is tax cuts: 95 percent of working Americans have seen their taxes go down as a result of the act. The second-largest part — just under a third — is direct relief to state governments and individuals. The money is allowing state governments to avoid laying off teachers (14,000 in New York City alone), firefighters and police officers and preventing states’ budget gaps from growing wider.

And those hardest hit by the recession are getting extended unemployment insurance, health coverage and other help to get through these tough times. The bottom line is that two-thirds of the Recovery Act doesn’t finance "programs," but goes directly to tax cuts, state governments and families in need, without red tape or delays.

As for the final third, the act is financing the largest investment in roads since the creation of the Interstate highway system; construction projects at military bases, ports, bridges and tunnels; long overdue Superfund cleanups; the creation of clean energy jobs of the future; improvements in badly outdated rural water systems; upgrades to overtaxed mass transit and rail systems; and much more. These investments create jobs today — and support economic growth for years to come. Far from being a negative, the wide array of these investments is needed given the incredible diversity of the American economy.

Projects are being chosen without earmarks or political consideration, and many contracts have come in under budget. More than 30,000 projects have been approved, and thousands are already posted on recovery.gov — providing a high level of transparency and accountability. Taxpayers should know that we have not hesitated to reject proposals that have failed to meet our merit-based standards.

None of this is false - in fact, some of us objected to spending so much of the Recovery Act on non-stimulative tax cuts, which some, though not all, of the tax cuts in the package are. But when faced with an economy like this, you can do one of two things. You can defend the actions taken to this point, or you can look at the economic picture as it is, and make changes based on those evolving conditions. This would require admissions that the package may have been too small, but it's better than the alternative, defending a faulty program while unemployment heads into double digits. That's why it's sad to see Nancy Pelosi tossing aside talk of a second stimulus. By the time people realize something has to be done, it'll be too late to do it.

I recognize the political difficulty in getting another round of stimulus passed, but it becomes impossible if nobody is willing to say what needs to be said.

Also, Mr. Vice President, a little less emphasis on projects coming in "under budget" when the whole point is to get as much money out into the economy as possible would be helpful.

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.

Stimulus As Self-Preservation

I've seen enough polls showing a small but demonstrable downtick in President Obama's approval rating that I think it can be pegged as a trend. Polling expert Mark Blumenthal attributes this fall to the concurrent fall in economic indicators:

While the significance of the shift among independents may vary, depending on what poll you look at, the decline in Obama's numbers during June and July has a clear culprit: A spate of bad economic news over the last 10 weeks.

Read more from Mark Blumenthal on the economy's effect on President Obama at Pollster.com.
Obama's ratings fell in June and July after remaining mostly flat during the spring. Our Pollster.com trend estimate, a composite of all public polls, had shown Obama's job approval rating at a fairly consistent 59 to 60 percent during March, April and May. His approval percentage fell roughly 5 percentage points during June and the first week of July, however, and as of this writing, stands at 55 percent [...]

We can see the effect clearly thanks to a new question tracked since December by the Pew Research Center's News Interest Index surveys. Once a month, they ask Americans if they are "hearing mostly good news about the economy these days, mostly bad news about the economy or a mix of both good and bad news." Back in December, four out of five respondents said they were hearing mostly bad news. Early this year, that number steadily declined, bottoming out at 31 percent in mid-May. As Pew reported last week, however, perceived bad news has once again increased, to 37 percent in mid-June and 41 percent in the first week of July.

The chart below compares the trend in perceived bad news to Pollster.com trend estimates for both the Obama job rating and a question asked in many national polls about whether the country seems to be "headed in the right direction" or "off on the wrong track."

Not surprisingly, the "right direction" and "heard mostly bad news lately" trend lines are mirror images of each other. And while Obama's approval number held mostly steady from March through May, the chart strongly implies that the recent bad economic news has taken its toll.

The President is starting, as expected, to own the economy, as his decisions take prominence over those of his predecessor. And with the jobless rate, by Obama's own admission, likely to tick up over the next several months, in addition to the crisis of the underemployed (as much as 1 in 4 workers in some states), this is likely to continue and further drag on both the economy and the President's approval rating. Therefore he has a responsibility for his own self-preservation to turn the economy around for working people, and that means at least preparing for the eventuality of another round of stimulus, even if it's not needed. Even Mark Zandi, one of John McCain's economists during the campaign, admits that:

It is premature to conclude one way or another if the economy needs another dose of fiscal stimulus. The current stimulus has not had a sufficient opportunity to work, and while it has already provided some benefit to the economy -- the downturn would be even worse without it -- its benefit won't be fully felt until later this year. A reasonable judgment regarding the need for more stimulus should wait until year's end.

Planning now for another round of stimulus is prudent, though, given that the economy remains in an extraordinarily severe downturn and the risks are decidedly to the downside. If additional stimulus is needed, then it probably should include more aid to hard-pressed state governments, whose budget woes are intensifying, more aid to stressed households hammered by what will be double-digit unemployment, an expansion of the housing tax credit to stem the ongoing slide in house prices, a delay in legislated increases in marginal personal tax rates in 2011, and perhaps even a payroll tax holiday.

I'd tend not to include additional tax cuts, which have been revealed not to work as stimulus. Because of the lag time with getting infrastructure projects and other federal monies into the hands of communities, most of the stimulus money currently in the economy comes in the form of tax cuts. And it has had little stimulative effect.

Oberstar defended the $27 billion in the stimulus for highway and bridge projects as the right amount to help the economy during the next year. However, he said that more transit money in the stimulus would have been helpful to an economic recovery over the next three years, rather than the nearly $300 billion in tax cuts.

“Not many people realize they got a tax cut,” Oberstar said. “I have not received a single e-mail, phone call, snail mail, personal comment from anybody since we enacted this bill, since the end of February, saying, ‘I got my tax’ or ‘Thanks for the tax cut’ or ‘I hardly noticed it’ or anything.

“But I have had people saying, ‘I’m back at work because of the funding in the surface transportation program.’”

I know the fiscal scolds don't want to hear about another stimulus and additional federal debt. But Robert Reischauer has a decent compromise proposal to "time-release" deficit reduction measures in tandem with stimulus funding:

[A]ny "Son of Fiscal Stimulus 2009" should include a significant "time released" package of deficit-reduction measures. While these tax increases and spending cuts shouldn't begin phasing in until 2013 or 2014, when the economy has recovered, we need to send a strong signal to our creditors that, notwithstanding our addiction to another shot of fiscal stimulus, we will soon be on the recovery road to fiscal responsibility. If we don't, the nation could face a more serious economic collapse in the not-too-distant future -- without an ability to borrow to finance needed fiscal stimulus.

That would certainly achieve the goal of ensuring the most stimulative actions stay in the bill, while allaying concerns about debt (which aren't entirely off-base).

Talk To Us Like Adults

The President returned from his overseas trip and came out fighting by defending the recovery package amidst signs that Republicans would attack it as a failure.

Nearly six months ago, my administration took office amid the most severe economic downturn since the Great Depression. At the time, we were losing, on average, 700,000 jobs a month. And many feared that our financial system was on the verge of collapse. The swift and aggressive action we took in those first few months has helped pull our financial system and our economy back from the brink. We took steps to restart lending to families and businesses, stabilize our major financial institutions, and help homeowners stay in their homes and pay their mortgages. We also passed the most sweeping economic recovery plan in our nation's history.

The American Recovery and Reinvestment Act was not expected to restore the economy to full health on its own but to provide the boost necessary to stop the free fall. So far, it has done that. It was, from the start, a two-year program, and it will steadily save and create jobs as it ramps up over this summer and fall. We must let it work the way it's supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity.

And it's fine for him to defend that action - I generally agree with his assessment that it's ramping up, that unemployment lags behind economic growth, that this summer and fall should see more stimulus money pumped into the economy, that the package was necessary and even proper. It's fine for the White House to wrestle control of the debate away from Republicans on that score. But this does not address at all those critics who found the stimulus package too small, and who continue to find shortfalls in demand that need to be filled by public spending.

Last December the Obama administration to be decided on a fiscal stimulus package which they believed would have minor effects on the economy in the first two quarters of 2009 and major effects--would push unemployment down below what it would other wise have been by more than half a percentage point--starting in the third quarter of 2009. They believed that the economy was not that weak, and that with the fiscal stimulus package taking effect unemployment would be peaking now at a rate of 7.9%.

Instead, unemployment is now probably in the 9.5-9.7% range--and without the stimulus package it would right now have turned out to be above 10%:

The financial crisis of last fall hit the economy's levels of production, spending, and employment much harder than people thought at the time. If we had known then what we know now, it would have been prudent then to propose twice as large a fiscal stimulus program as the Obama administration in fact did propose.

It is interesting and important to note that the excess unemployment now forecast over 2009 relative to last December's forecast is of the same magnitude--1.2%--as the deficiency in real GDP [...] If I were running the government, I would be trying to make up that GDP shortfall right now: I would be rushing a clean $170 billion--$500 per citizen--aid-to-states-that-maintain-effort package through the congress this week. It would seem the right and the obvious thing to do.

The White House is simply not speaking straight with the public on this one. They have every right to defend their actions, but the evidence clearly shows that they did not go far enough back in February. That's an intellectually consistent stand, rather than this mish-mosh of "we misread how bad the economy was, but we would have done the exact same thing if we knew and it's working great." Continuing that incoherent course risks a loss of credibility.

The Stimulus Trap

Krugman today:

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

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

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

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

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

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

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

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

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

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

They take care of their own.

Listen To The Hippies This Time

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

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

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

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

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

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

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

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

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

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

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

Stimulus II: The Restimulating

Laura Tyson, an informal advisor to the Obama White House, dared to talk about a second stimulus yesterday. I don't totally agree with her about the focus, but it's good that someone values preparation.

The United States should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 billion rescue package launched in February, an adviser to President Barack Obama said.

"We should be planning on a contingency basis for a second round of stimulus," Laura D'Andrea Tyson, a member of the panel advising President Barack Obama on tackling the economic crisis, said on Tuesday.

Addressing a seminar in Singapore, Tyson said she felt the first round of stimulus aimed to prop up the economy had been slightly smaller than she would have liked and that a possible second round should be directed at infrastructure investment.

As Chris at Americablog notes, the first stimulus should have been designed to be sufficient enough, but it wasn't, and the President and his team should just drop the "nobody could have anticipated" crap and start anticipating the reality of a continued shortfall in output.

Where I disagree with Tyson is in the focus of Stimulus II. She says infrastructure investment, which is of course important. Maybe more of our projects could have been shovel-ready if we followed France in recognizing that any construction-creating jobs are valid, instead of disqualifying the building of museums or parks due to nonsense about "pork." But more to the point, we should in a Stimulus II provide relief for the states so they can maintain their budgets and contribute to economic recovery instead of damaging it. The perverse nature of balanced budget amendments and a recession is really stagnating the national economy. We need a permanent state fiscal stabilization fund that kicks in during recessions.

I guess Wall Street doesn't like the notion of a second stimulus, mainly because it turns their green shoots to mud. Tough. We have to look at reality, which is that the economy is not working for regular people, and without consumer spending or private investment only government can provide the kickstart necessary.