Giving Geithner a chance

Via Professor DeLong, Nouriel Roubini and Matthew Richardson think Geithner's plan, while not perfect and the going still perilous, a step in the right direction. It's worth reading.

Fools

One has to appreciate that the G20 summit will begin with dinner on April Fool's Day. But Simon Johnson sees a glimmer of hope.

It’s an uphill struggle to force Europe to save itself, but with the discussion around the IMF, the President has a chance to move things in the right direction — and to back Secretary Geithner with actions as well as words (for more on this, see TNR online from March 28). The Europeans do not respond to sweet talk; only tough pressure will bring results.

As I suggest in my latest piece (this morning) in The New Republic online, the Europeans have left themselves open to effective confrontation on a key point; if the President can seize the day and really push the Europeans hard on this dimension - and tell me if you see other ways he can make European complacency painfully evident - we might actually make some progress.

FDR's failure, Obama's opportunity

How many times does Amity Shlaes' revisionist history of the New Deal have to be refuted for the Post to stop publishing her? This is kinda, as they say in poker, The Tell:

But Roosevelt the economist is unworthy of emulation. His first goal was to reduce unemployment. Of his own great stimulus package, the National Industrial Recovery Act, he said: "The law I have just signed was passed to put people back to work." Here, FDR failed abysmally. In the 1920s, unemployment had averaged below 5 percent. Blundering when they knew better, Herbert Hoover, his Treasury, the Federal Reserve and Congress drove that rate up to 25 percent. Roosevelt pulled unemployment down, but nowhere near enough to claim sustained recovery. From 1933 to 1940, FDR's first two terms, it averaged in the high teens. Even if you add in all the work relief jobs, as some economists do, Roosevelt-era unemployment averages well above 10 percent. That's a level Obama has referred to once or twice -- as a nightmare.

So, unemployment is reduced from 25% to just over 10%. That's some kind of failure. And, as the above link shows, she doesn't count emergency relief work, so called "make-work jobs."

She writes that the depression should have ended by 1936 instead of 1940, but we know that it was the success of FDR's programs through 1936 that led to his decision to try to reduce the deficit, thus stopping the steady rise of GDP. Something she later admits, but again positions it as a failure of FDR's overall plan, rather than a mistake that was probably inevitable since FDR was performing Keynesian experiments before Keynes' General Theory had even been published.

In other words, FDR was simply not bold enough, as David Leonhardt writes in the article you should read today.

The economy will recover. It won’t recover anytime soon. It is likely to get significantly worse over the course of 2009, no matter what President Obama and Congress do. And resolving the financial crisis will require both aggressiveness and creativity. In fact, the main lesson from other crises of the past century is that governments tend to err on the side of too much caution — of taking the punch bowl away before the party has truly started up again. “The mistake the United States made during the Depression and the Japanese made during the ’90s was too much start-stop in their policies,” said Timothy Geithner, Obama’s choice for Treasury secretary, when I went to visit him in his transition office a few weeks ago. Japan announced stimulus measures even as it was cutting other government spending. Franklin Roosevelt flirted with fiscal discipline midway through the New Deal, and the country slipped back into decline.

This is an opportunity, Leonhardt writes, to correct FDR's mistake and to invest in our nation's infrastructure in ways we haven't since immediately after WWII.

ONE GOOD WAY TO UNDERSTAND the current growth slowdown is to think of the debt-fueled consumer-spending spree of the past 20 years as a symbol of an even larger problem. As a country we have been spending too much on the present and not enough on the future. We have been consuming rather than investing. We’re suffering from investment-deficit disorder.

You can find examples of this disorder in just about any realm of American life. Walk into a doctor’s office and you will be asked to fill out a long form with the most basic kinds of information that you have provided dozens of times before. Walk into a doctor’s office in many other rich countries and that information — as well as your medical history — will be stored in computers. These electronic records not only reduce hassle; they also reduce medical errors. Americans cannot avail themselves of this innovation despite the fact that the United States spends far more on health care, per person, than any other country. We are spending our money to consume medical treatments, many of which have only marginal health benefits, rather than to invest it in ways that would eventually have far broader benefits.

Along similar lines, Americans are indefatigable buyers of consumer electronics, yet a smaller share of households in the United States has broadband Internet service than in Canada, Japan, Britain, South Korea and about a dozen other countries. Then there’s education: this country once led the world in educational attainment by a wide margin. It no longer does. And transportation: a trip from Boston to Washington, on the fastest train in this country, takes six-and-a-half hours. A trip from Paris to Marseilles, roughly the same distance, takes three hours — a result of the French government’s commitment to infrastructure.

These are only a few examples. Tucked away in the many statistical tables at the Commerce Department are numbers on how much the government and the private sector spend on investment and research — on highways, software, medical research and other things likely to yield future benefits. Spending by the private sector hasn’t changed much over time. It was equal to 17 percent of G.D.P. 50 years ago, and it is about 17 percent now. But spending by the government — federal, state and local — has changed. It has dropped from about 7 percent of G.D.P. in the 1950s to about 4 percent now.

The daunting trouble is, Leonhardt continues, is that there is often a friction between short-term stimulus and long-term growth, nowhere better illustrated than in the investment in "green" energy technology and raising the cost of carbon-based fuels and the effect that that will have on coal mining and oil exploration in this country.

And, of course, there is a Republican Party (and a few Blue Dog Democrats) who are biologically opposed to federal investment into any technology that doesn't involve blowing things up. Worse, many of them just want the Obama administration to fail.

UPDATE: More on Shlaes inchoherency from Dean Baker.

"Headless body found in topless bar"

Now, that was a great headline. In contrast with today's

Steep Slide in U.S. Economy, but Not as Dire as Forecast

I dunno, seems pretty dire:

The gross domestic product — a crucial measure of economic performance — shrank at an annual rate of 3.8 percent in the fourth quarter of 2008. The decline would have been much steeper — more than 5 percent — if shipments of goods had fallen as sharply as orders did.

“The difference between 3.8 and 5.1 percent is the inventory buildup,” Nigel Gault, chief United States economist at IHS Global Insight, said. “My only explanation is that companies could not cut production fast enough.”

With inventory accumulation gone, the economy will contract in first quarter at more than a 5 percent annual rate, Mr. Gault predicted.

Relief

The stimulus bill does have its disappointing elements, particularly in its short change for mass transit, but this is very positive.

Congressional Democrats developed the package in close consultation with President Obama. Health care provisions of the bill taking shape in the Senate are broadly similar to those in the House bill, though they may prove less expensive. Obama aides and advisers said the president would insist on health insurance assistance for the unemployed as part of a final bill, which he wants to sign by mid-February.

The legislation would allow states to provide Medicaid to an entirely new group: those who are receiving unemployment insurance benefits, their spouses and children under 19.

Medicaid is normally for low-income people, and for decades it has been financed jointly by the federal government and the states, with the federal share averaging 57 percent of costs.

The economic stimulus bill prevents states from enforcing a means test, saying, “No income or resources test shall be applied with respect to any category of individuals” who become eligible for Medicaid because they are receiving unemployment benefits. The federal government would pay 100 percent of the costs for people enrolled under this option through December 2010.

Republicans said this proposal would take a big step toward federalizing Medicaid. For their part, Democrats said the changes took a major step toward their goal of coverage for all Americans.

For those of us wondering if we'll have a job in six months, this would come as an enormous relief and one less thing to keep us up at night.

David Leonhardt highlights the positives and the negatives of the package.

Fiscal stimulus and the loyal oppostion

John Boehner, in another episode of "Are you smarter then a fence post?"

Income inequality

Floyd Norris looks at the effect of the financial collapse of the 1930s, its effect on Wall Street salaries, and the similarities with what's happening now (Merrill Lynch excluded). This may not be good news for New York City and Fairfield County realtors, but it may result in better regulatory expertise.

It is one thing when the best-paid people seem to be the smartest and the most accomplished. Those who make much less may not like it, but the differential seems understandable. It is another thing when those people are shown to have committed huge blunders that would have driven their companies out of business, and them into the unemployment line, but for government bailouts.

So it is now with Wall Street. In both Europe and the United States, antipathy toward the bailout is rising amid complaints that the money has not helped the economy by encouraging loans, but has kept the bankers in Champagne and caviar.

Are financial workers overpaid? And if so, will it continue?

The answers, according to a new study by two economists, are yes, they are overpaid, and no, it will not last.

“Wages in finance were excessively high around 1930 and from the mid 1990s until 2006,” wrote Thomas Philippon of New York University and Ariell Reshef of the University of Virginia, in a National Bureau of Economic Research working paper released this week, “Wages and Human Capital in the U.S. Financial Industry, 1909-2006.”

They forecast that up to half the wage differential observed in recent years “can be expected to disappear.”

Happy Chanukah

May your heat stay on for the next 8 days.