ECONOMY: The Triple Threat

The American economy is under a triple threat: Inadequate stimulus, Ideology of the budget balancers and Our National Margin Call.

Let's take these in reverse order. A margin call is when the person to whom you owe money asks for their money back. Hopefully you have enough cash to pay them. If not, you're in trouble. In banking crises, things go from bad to worse when everyone panics and "calls in their margins" at once or, in other words, demands all their money NOW! This is part of what made the crash of '08 so bad. The United States has had its own national margin call. Namely: the bubble of consumption that was fueled by credit cards, manic property markets, internet stock crazes and an upper class waging the most effective class warfare in U.S. history, concentrating outrageous amounts of wealth and income upwards to the top 1% while the rest of the population sees stable manufacturing jobs disappear and replace their consumptive prowess with large amounts of household debt. The rich got richer, everyone else got credit cards, and double mortgages, and reverse mortgages and every other thing that the priests of American capitalism told them was good for them.

But you cannot run a successful advanced economy on borrowing when you have less and less to back it up in actual physical infrastructure. Unlike the Germans, we really don't make stuff here anymore. And now, the bill has come due. And there is little reason to have much optimism about a full recovery anytime soon. Here's why: the answer to this gluttony of debt and theft is...wait for it...more debt. That's right. The only way to bring the economy out of the doldrums is to inject yet more stimulus (read: deficit spending) into the US economy. But the problem is worse than that. We also need to invest some of that stimulus into projects that will improve the infrastructure, both physically (in new roads, bridges, environmental improvements, etc) and technologically (to restart the hi-tech manufacturing base).

And this brings us to our second Threat. Too many leaders from the Democratic president to his (self-professed) enemies in the Republican party all share a superstitious belief in the evils of the budget deficit. It's a sad day when one of the smartest guys on economic policy is Dick Cheney, but in today's political class, Cheney's the man. He has actually looked at American political economic history and seen what is splattered right in front of all our faces: "Reagan proved deficits don't matter." At least they don't matter in the same sense that borrowing for college education doesn't matter. In fact we encourage that. It doesn't matter in the same sense that businesses investing in new technologies to improve their productivity doesn't matter. In fact we encourage that. In doesn't matter in the same sense that consumers who take out mortgages to own their own homes doesn't matter. In fact we encourage that. Oh wait...it does matter if those mortgages are made out of funny money like derivatives and bought and sold like mad.

It isn't that deficits don't matter (I take it back, Cheney's wrong) it's that they matter in very different ways than what most people seem to think. If a deficit or a debt is taken out to pay for wasteful projects, then the debtor would have been better off not to have taken out the debt: for instance a drunken binge during finals week if you are a college student--not so good; or fighting a war against a non-existent threat half way across the globe--Also not so good! The key is that we need the investment to be for good things that help. But the ideology of the budget hawks is that all deficit spending is bad because all government spending is bad. This is just ideology run amok with no basis in fact. Like all spending, it depends what it is going for. There are some things the government has no businesses spending money on and there are some things that only the government can spend money on and make work-like universal health care, universal mail service, fire protect, etc. Private industry will never be able to run a light house profitably, nor would we want them to. Safety should not be up to the highest bidder. But when it comes to our economy, the Budget Hawks are endangering our economic safety everyday. And every day things get a bit more unsafe.

This leads us to our third Threat. We need to have another massive injection of spending into the economy to get things kick started and reduce unemployment. Paul Krugman estimated back before the stimulus bill had even passed that it was about half as big as it needed to be and too much of it was in the form of tax breaks (always the least efficient form of stimulus). Looking back, he seems to have been quite accurate. The deficit spending that stimulated the American economy out of the Great Depression came from war spending during WWII and we are not even beginning to approach that level of deficit as a percentage of our economy. These massive 1940s deficits were not an albatross around the necks of our children, they are what helped to create the "Great American Century" and the prosperity of the next decades. Today we are increasingly hearing that we must cut the budget deficit or face doom. The truth is, if we cut the budget deficit we are going to see 9-10% unemployment for a long time. It has also become vogue to blame this whole mess on homeowners and the poor schlubs that took out those mortgages. But as Stanley Milgram proved many years ago, people respond to authority--especially when that authority is dangling a five bedroom, three car garager with a swimming pool in front of your face and swearing you can afford it.

Most of the chances to do something truly historic for our economy have slipped through our fingers, but there is still time to minimize the damage. Or who knows, maybe what it will take is another slide off the cliff, dangling over oblivion. There is, it seems to me, every chance that this "crapolla" economy is going to last a long, long time. And its possible we could even face another dramatic collapse if the dominoes fall just right.

Maybe then we'll do what we should have done the first time around.

POLITICAL ECONOMY: After the Speech, The Real Work Begins...

In a masterful speech to a joint session of Congress the president made a forceful call for universal health care. While I would have liked him to be more firm on his commitment to a public option or some other cost-saving and quality-ensuring measure, the speech will very likely change the momentum in the debate. Clearly aimed at shoring up independent voters who had shifted against him over the course of the summer, the speech should make the political points it set out to score. In addition, the president clearly aligned himself with some of the more promising aspects of the various health care bills that have been or are about to be passed in congress.

Having said that, he also embraced a few ideas that take him a step backwards. There remain some very basic problems with the president's approach to universal health care. And in truth the speech was short on specifics. Just what exactly is in the "basic care" package everyone will be entitled to? How much will be too much before the public subsidy kicks in for those cannot afford it? In the end, it is hard to know exactly what "the plan" really looks like, how well it will really work, or what it might actually cost. And the frustrating part is that health care is delivered reliably to millions of people in countries similar to the United States every day.

We know what works. But instead of doing that, because of an irrational fear of the government, we are embarking on an untested experiment in keeping private insurers healthy while gambling with the health of American citizens. The Reagan legacy is still with us, and the president has not taken the opportunity he was given to end it, nor have the Democrats in congress.

So, all hopes of finally putting the Reagan philosophy in its rightful place (the dust bin of history) rest on the success of health care reform. And there are real reasons to be fearful for the chances of success. The problem is primarily economic not political. But it will become political, I fear, and that is where the real problem exists. Without a vehicle to control costs and ensure quality, like a public option could provide, prices are likely to (continue to) sky rocket and quality of care likely to stay at the lowest possible floor companies can get away with.

The problem is complex in the details, but simple in broad outline:

Requiring insurance companies to take all who apply and force everyone to buy coverage will result in profit losses to the insurance companies that they will have to make up somewhere. Now, some of this can be made up from the premiums of young healthy people who are not now insured and presumably would be under the new requirements. But will these new young folks actually enroll and will that cash make up for the losses of the other high risk folks who would otherwise not get insurance? The Congressional Budget Office doesn't seem to think so.

And, as he has hinted at previously, the president once again reiterated his desire for the public option to actually be a "not-for-profit" option that will be funded only by the premiums it collects. This would undermine one of the chief cost control features of a public option: not needing to advertise for healthier and wealthier clients. But if the structure is dependent upon premiums then the option will depend on getting those wealthier, healthier patients on roll and there goes a big chunk (but not all) of your cost saving.

Don't get me wrong, I could care less about the budget deficit. There is simply no evidence that the deficits do any damage to an economy until you get into truly stratospheric numbers--far from where we are right now. Government debt is not paid on the backs of our children as so many often claim and it does not cause interest rates to rise. In fact a deficit can create enormous economic growth. Right now we are probably hurting our economic growth significantly by not running much larger deficits. It could cause inflation and a devaluation of the currency if it gets too out of hand and is spent on non-productive things. But we are not in that territory now. Cost savings matters to me because it matters to everybody else. Politicians of both stripes have bought into this fairy tale and that belief has real consequences.



For instance, a truly troubling part of the speech is when the president added that if the cost reductions he is counting on do not materialize, cuts in spending will be enacted to bring the expenditures into balance. The Congressional Budget Office does not believe his plan will cut costs in the long run and neither does simple logic. So to achieve some mythic balance of the budget, that has never been proven to have any beneficial economic effect, he is going to cut needed government services to pay for a massive tax payer give away to the insurance industry. This is not a good idea.

Let us hope that this is simply an idle threat that is never acted upon. The same logic that is likely with a "public option trigger"--that the trigger would never be pulled no matter how bad things get for the uninsured--might also apply to such cuts. After all they would take place after 2013 and would need to be voted upon.
That might never happen.


In the end, the president's speech was masterful politics, but the economics behind it remain murky and questionable.

But one thing seems likely. The president is back in the game and momentum is on his side. The votes are there in congress. Now it is up to us to put the pressure on.


Check back soon for my secret weapon I will offer the president...

I welcome your comments.