In the first full week of the year the issue underlying everything was the collapsing economy – not Israel’s war in Gaza or who gets to be a senator. The Gaza invasion is a continuation of a centuries-old quite existential issue, and this one war won’t settle it. The fighting may sputter out and die, or engulf the whole region, or the world, but none of it is new.
And Illinois will get its second senator, probably that strange little man appointed by the flamboyantly corrupt and quite mad governor, soon to be impeached and sent packing. The appointment was quite legal and proper, even if the parties involved are far beyond colorful and well below competent. And Minnesota will get its second senator, Al Franken, the former comedian – he was certified the winner after all the recounting, and his opponent, Norm the Former Senator, is suing and says he can keep that up for years so no one gets the seat. But he will eventually grow old and tired and pack it in, and Franken can then catch a plane for DC and get to work, even a bit late, or years late. Actually, the courts have to listen to the arguments and decide the matter in a few weeks, no matter what Norm intends – so this will end.
The issues with the economy will not end, and things are far worse than anyone had been admitting:
The U.S. economy is likely to deteriorate further this year and unemployment will rise into 2010, according to the latest forecasts from the staff of the Federal Reserve.
This bleak forecast was presented to Fed policymakers when they met last month and lowered interest rates to near zero. Low interest rates are one key tool the central bank uses to try to spur economic activity.
According to the minutes from that meeting, the central bank is now predicting that gross domestic product, the broadest measure of economic activity, will fall in 2009.
“I think that the Fed is really very scared right now – like everybody else – and they want to pull out all the stops,” said David Wyss, chief economist for Standard & Poor’s.
Yep, whatever the Fed does about rate changes and other efforts to adjust the money supply, what people wait for are the meeting minutes – they want to know what the thinking is. It seems the thinking is that total economic collapse, here and worldwide, is quite possible, alarmingly possible, frighteningly possible – choose your adverb. Everyone suspected this – they just hoped it wasn’t in the minutes.
But it was:
The Fed indicated that most members at its meeting expected a slow recovery to begin in the second half of the year, but that unemployment would still rise “significantly” into 2010.
Employers cut 1.9 million jobs over the first 11 months of 2008, which took the unemployment rate up to 6.7%. The December report will be released by the Labor Department Friday and economists surveyed by Briefing.com expect a loss of 475,000 jobs and that the unemployment rate will rise to 7%, which would mark a 15-year high.
The Fed cited a multitude of problems dragging down the economy besides rising unemployment, including stock market declines, low consumer confidence, weakened household balance sheets and tight credit conditions. It said business spending is also likely to fall due to weak retail sales and the credit crunch.
In addition, some members of the Fed expressed concerns that the economy could worsen even more than currently expected.
Okay then – things are really bad, and will be increasingly bad not only through this year but well into the next, but that could be the optimistic view. It’s interesting when the Federal Reserve folks are terrified and not sure what is coming. It adds a bit of spice to things. Maybe they shouldn’t publish the minutes.
Did anyone see this coming? That’s an interesting question, which Matthew Yglesias considers here:
As the financial crisis has unfolded, I’ve heard a lot of voices loudly insisting that nobody could have foreseen this. And I’ve also heard a lot of voices wondering why nobody foresaw it. And I’ve also heard a lot of voices insisting that, hey, damn it, I did foresee this. What there’s been less attention to is what I think is the more disturbing angle to the crisis – the extent to which the people who mattered were perfectly aware that something was amiss and just didn’t really care.
Yglesias cites Chuck Prince of Citigroup in the Financial Times:
When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.
And he cites James Surowiecki in the New Yorker here:
That sounds like someone who realized that there would be a drying up of liquidity, and that things would be ugly as a result, but who decided that it didn’t matter… Even when people recognized the possibility of dragons, they decided it was in their short-term interests (even if it wasn’t in the company’s interests), to run the risk of getting incinerated anyway.
And, indeed, as best I can tell Prince is still a multimillionaire. Looking back, I think it’s clear that Prince didn’t exactly maximize his wealth with his decision-making. But he didn’t really blunder, either. Nobody’s perfect, and he made out extremely well in the scheme of things. If in the course of doing so he contributed to huge problems at his company and massive suffering around the world, well, that’s not really his problem. He’s a businessman trying to get rich. And he succeeded.
Some people always win.
But things will get better. There’s a stimulus plan in the works, although the Noble Prize winner, the economist Paul Krugman, is worried:
Bit by bit we’re getting information on the Obama stimulus plan, enough to start making back-of-the-envelope estimates of impact. The bottom line is this: we’re probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is low-balling its plans in an attempt to get bipartisan consensus.
Well, the Republicans need to be onboard, at least some of them, and they hate the idea – you don’t create jobs by creating jobs, by putting people to work, but by cutting or even eliminating all taxes on businesses, and on those with capital (the wealthy), so they have the incentive to make lots of stuff at low cost for people to buy, if they choose to do that, which they might, but might not, as it’s a free country and all that.
Obama is working with that:
Obama is wooing apostles of small government by promising that 40 percent of his stimulus package, which will be worth at least 775 billion dollars, will be devoted to tax cuts.
House of Representatives minority leader John Boehner welcomed the tax proposals but said they did not go far enough. “I remain concerned about wasteful spending that might be attached to the tax relief,” he said Monday after talks with Obama on Capitol Hill. “Simply put, we should not bury future generations under mountains of debt and create 600,000 new government jobs … in the name of ‘economic stimulus’,” Boehner said.
There’s the fundamental disagreement – if it’s a binary choice, on the one hand massive unemployment and economic collapse and another Great Depression only worse, or debt that must be paid off for generations, the Republicans would rather have the Depression thing.
But Obama is trying to mollify the Republicans, as explained here:
President-elect Barack Obama’s proposed stimulus package would provide businesses with billions of dollars in refunds on taxes they paid several years ago. The refunds are popular among business groups and could increase pressure on Republicans to support Obama’s massive stimulus package, even though most of them are wary of government spending increases that could send its total cost to $800 billion or more.
It’s all in the details:
The refund provision would enable some companies posting losses last year to get refunds for taxes paid as far back as five years earlier. The businesses could refile their old tax returns, using the losses suffered last year to offset profits made when times were good.
Under current law, businesses can use losses to offset profits the two previous years.
And that is working:
House Republican leader John Boehner of Ohio said he is concerned the package could include “wasteful spending.” But he is pleased Obama and congressional Democrats “agree with Republicans that tax relief for middle-class families and small businesses has to be a major part of this economic package.”
Matthew Yglesias here tries to think this through:
The first and most important thing about the Obama stimulus plan is that it’s about the size we need. That’s absolutely critical. And while I shared many progressives’ initial flinch away from the idea of having so much of the stimulus be tax cuts, I checked in with some folks and came to the conclusion that Obama’s has the balance about right, and they have perfectly valid reasons for relying on a hefty dose of tax cuts.
Still, that leaves the question of what kind of tax cuts. The simulative effect of tax cuts varies wildly across different genres of cut. The details of the Obama plan thus far released contain plenty of good stuff in terms of refundable tax cuts that make sure to offer both some middle class relief and also get money into the hands of the poor people who are in the most objective need and who have the highest propensity to spend. But there’s also plenty of talk about this idea of letting businesses get a refund on past taxes paid based on present losses.
Yglesias sees it this way:
The way this works is that you may have racked up enormous profits in past years by, for example, packaging a lot of bad debt and pretending it was good debt. That would mean awesome profits in 2004 and 2005 and 2006 on which you paid taxes. But you may have huge losses in 2008, since actually your business model was a house of cards. Huge losses mean no taxes.
But this backdating provision would let you spread your losses back in time, allowing you to claim refunds on all the taxes you paid back when your firm was profitable. As stimulus, this doesn’t work.
Businesses spend money based on calculations of the likely returns on spending. Insofar as it is profitable to expand operations, businesses will spend money on expanding operations. Insofar as it’s not profitable to expand, businesses won’t expand. Transferring lump sums of money to existing firms doesn’t alter the profit-loss calculus. A firm with no expansion opportunities it sees as profitable will just pocket the lump sum and consider itself fortunate. And a firm with expansion opportunities it sees as profitable will only be very marginally impacted by an infusion of cash.
Meanwhile, the distributional impact is regressive. Since this is basically free money for corporate executives, business loves the idea. But it’s weak, weak, weak on the merits and unworthy of an overall solid economic agenda.
But then some people always win. See Kevin Drum here:
Technically, this sounds right, but I think the reality might be a little different. Lots of things in the business world are sticky, and jobs are one of them. Corporations generally don’t like to lay off employees, partly for business reasons (they don’t want to lose good workers that they might not be able to rehire later), partly for ordinary human reasons (most bosses really don’t enjoy laying people off), and partly just because of inertia. So it’s possible that a tax refund that eased the profit and loss a bit might prompt them to keep on more workers than pure hard-hearted economic calculations might dictate. It would probably be a fairly small effect at the margins, but it might still be noticeable. Especially if the rest of the stimulus package gives business owners hope that the downturn might be short-lived.
Besides, all this does is change the tax timing anyway. Corporations that booked big losses in 2008 will be able to carry them forward against future profits regardless, which will decrease their taxes in the future. But maybe we’re better off letting them get their refunds now, rather than two years from now when the economy has picked up again?
Alternatively, this is just another big corporate giveaway.
That’s what Dean Baker argues:
The break that allows businesses to write-off losses against taxes paid 4-5 years ago (as opposed to 2 years in current law) is simply a give-away to the financial industry and homebuilders. These are likely to be the only businesses that will have losses so large that they can’t fully deduct them from earnings over the last two years.
This tax cut has nothing to do with stimulus. It is difficult to imagine that this sort of tax break would even be considered if it were not for the political power of the financial industry.
Yep, some people always win.
And see Robert Borosage at The Huffington Post, with The Price of Consensus: Obama and Congressional Republicans. He’s not happy:
Politically, Obama’s generosity is unlikely to be rewarded. The congressional Republican caucus is more conservative and clueless than ever. They will see Obama’s preemptive concessions as weakness, not generosity. They are already pocketing them and asking for more. Boehner is grousing about “the size of the package” Mitch McConnell responded by calling for more tax cuts and peddling the lunatic notion that rather than providing grants to states and localities to avoid massive layoffs – perhaps the most effective dollar for dollar spending that we can do in terms of saving jobs – the federal government should loan them the money instead.
Republicans don’t want unemployment insurance to go to part-time workers, and oppose paying for health care for those who have been laid off. They are pushing for permanent reductions in capital gains and income tax rates for — imagine our surprise – business and the highest income earners. These are the very ideas that helped get us into this hole.
And Paul Krugman fears that the stimulus package is now going to be too small to work. He does the math, and then concludes:
I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
Let’s hope I’ve got this wrong.
See Michael Scherer at Time’s Swampland for what seems to be the real story – that this stimulus stuff will fail, which he says is “the political outcome that Republicans are quietly hoping will happen.”
They know what’s what:
The alternative – Obama and his big government intervention saves the day – poses a near-existential threat to the Republican Party, as I wrote here.
And there may be a historical precedent for this secret Republican hope. Republicans still feel burned for not getting credit for what they argue were the simulative effects of the Bush tax cuts in 2001 and 2003. (The post-September 11 recession messed everything up, they say.) They know it’s a hard sell to tell the American people: “Well everything sucks, and you are not as well off, but if we didn’t sharply increase the national debt and spend your money it would be much worse.”
That’s the line Henry Paulson has essentially taken with the TARP spending, and though he is almost certainly right, it’s not the sort of message Democrats want to be taking to the polls in 2010.
Yep – they can come out on top if they get their concessions – tax cuts for the wealthy and a severely reduced program to create jobs – and this creates big deficits. Things will be a mess, and additionally there will be another Great Depression, and they can pin it all on the Democrats. That’s continuing the policies of the last eight years that got us to where we are, and tricking the Democrats into claiming it’s their policy. Cool.
Yep, some folks always win, even in the worst of times. It’s funny how that works. Or, if you believe DC Danny at Talking Points Memo, it works this way:
Is Obama crazy to try to get Republican support? He has made it known he wants 80 votes in the Senate. Isn’t this giving the conservatives far too much leverage? It’s a wonderful goal but risks two bad outcomes: the Republicans can ruin the recovery package with bad policy demands (make it too small, include tax cuts that further the inequality of the Bush years) or, just by withholding their support, make what should be a victory (the passage of a recovery package with 60 or so votes in the Senate) appear to be a defeat?
We know from the campaign that Obama is anything but naïve. He’s betting that by devoting half of his recovery package to tax cuts, he will co-opt the Republicans into supporting a plan that is otherwise progressive. The question is whether – as the legislative process unfolds in all its complexity – he will, in attempting to co-opt, be forced to concede….
This will be a close-run thing.
But the general idea here is that someone will win, and someone will lose. It has always been the big-money Republicans who win. It seems odd to think that just this once that might not be true.