In the latest issue of Rolling Stone, economist,* New York Times* writer, and Nobel laureate Paul Krugman writes a letter to Barack Obama, telling him what he thinks Obama needs to do to solve our current economic crisis. There isn’t a copy available online for me to link to, but it’s in the January 22, 2009 issue. I will try, probably ineptly, to outline was Krugman says. I can’t offer any real analysis, because despite 18 credits of economics as an undergrad, economics is not an area of expertise for me. I was hoping you could tell me where you agree with Krugman and where you don’t and why. Please offer cites as to why. Fight my ignorance.
Change TARP to demand that banks lend out finds to the rest of the economy. Help homeowners. Use Fannie Mae and Freddie Mac to lower borrowing costs for qualified homebuyers.
Get job creation right. The unemployment rate is projected to soar to about 10%, and “full employment” is considered to be 5%. Krugman says it costs $200 billion/ year to drop unemployment by 1%, so it’s going to cost the government $1 trillion to reverse our current trajectory. Less than $500 billion ain’t shit. Don’t worry about the deficit. Use the money to upgrade infrastructure. Use it to aid the poor, whose ranks will be swelling in the next couple of years as people lose their jobs. Cut taxes to the poor and middle class, who will actually spend the money.
Do what FDR did-- social welfare, this time in the form of universal health care. Start out by requiring insurance for children, subsidizing low income families, allow everyone to opt in if they want, or keep their employer provided plan if they have one. Make the public plan cheaper and better than employer provided health care so that more people opt in. Krugman says that health care reform will save us money in the long run because the current system is bloated, inefficient, and not acting in the best interest of the patient.
Strive for another Great Compression ala Roosevelt, wherein a true middle class was created by high employment and wages, facilitated by unions. The economic boom of the 1950s was a direct consequence of the compression, and the American standard of living doubled. Pass an Employee Free Choice Act so that workers can be more free to unionize.
2009 will likely not be the year that Obama can introduce cap and trade measures to reduce greenhouse gas emissions, but spending should be on developing alternative fuels and green technology.
Get out of Iraq. Do your best in the messes that are Afghanistan and Pakistan. We need the money at home. And do investigate and prosecute wrongdoing that took place under the Bush administration. Don’t sweep it under the rung and let bygones be bygones. Drag it all out into the sunlight.
I’m sure I made glaring omissions from Mr. Krugman’s letter. If you can get your hands on it to read it, it’s very interesting, and correct me where I’ve gotten it wrong or left out something important.
2, 3, & 4 are pretty much the macroeconomic thought I’ve been hearing for the last several years from the center-left, & correspond somewhat to my sense of what we need to do.
Not sure about 1 & 5.
6 is a few different things, but yes, Obama should demand accountability for criminal acts from previous administrations. Ignoring criminal acts by those in power is effectively condoning, & breeds corruption. (I don’t expect Obama himself to do it, he’s an appeasement junkie. But maybe his AG will; or Biden will drop several anvils if Obama is assassinated.)
Hey! Have you no sense of humor? I have no intention of cutting **Rubystreak **down, but as I have neither taken any college-level economics, nor stayed in a HIE, I have nothing more to add other than: sounds pretty good to me. It sure beats the economic strategy of Let’s Go to War and Everyone Else Should Go Shopping.
I’m not all that knowledgeable about economics either, but I did want to bring this up before it gets lost in the noise:
Back in the '90s, I worked (as a software guy) for a mortgage portfolio analysis company; FNMA loans were among the easiest to deal with because they had more and better documentation, in addition to more stringent qualifications that had to be met by the borrower. As far as I could tell, the point was that the higher level of regulation resulted in a reduced risk to the lender. Which, in turn, would justify lower rates.
I don’t know where along the way that changed – well, I have a vague understanding of it, but not enough to lay it out off the top of my head – but that makes sense to me, assuming the regulation is in place. I’m in favor of bringing that back. (And note, this doesn’t at all address regulation outside of the government affiliated institutions – that’s a different kettle o’ fish entirely.)
I think Krugman is exaggerating the role of fiscal policy and is implicitly assuming that monetary policy is conpletely ineffective. Certainly the normal interest-rate measures aren’t very effective in the current environment but the ‘quantitative easing’ that has been carried out on a huge scale is bound to have some effect over the next year. Therefore the fiscal stimulus ,while important doesn’t have to bear the full brunt of reducing unemployment and could be a bit smaller.
What about the idea of the government racking up a trillion dollar deficit on top of what we already have to prevent job loss? Krugman said that was a mistake that FDR made, being afraid of creating a huge deficit, and that limited his effectiveness at holding down the unemployment rate.
This makes some sense. Problem is, though, that the multipliers for fiscal stimulus are (fairly) well known, whereas the effects of funny Fed experiments are much less certain. And the Fed can always reverse course if the stimulus is “too big”, whereas we’d be dealing with perfectly avoidable problems if we shortchange ourselves in an entirely predictable way.
And frankly, I just don’t see the hazards of a short-term run up of debt, since we’ve held a larger burden than this before (as percentage of GDP). A weakening dollar, sure, but a collapse? We’ve got a lot of desirable assets that can be sold to the highest bidder if worst comes to worst. I just don’t see demand for the USD falling off a cliff if we put a few major corporations on the auction block.
I’m not overwhelmed by any of these insights. It’s just ordinary leftist rhetoric.
When my own federal taxes went somewhere north of $100k I did start to wonder exactly how much of the tax burden could be shifted much more…we tend to focus on taxing income in this country b/c there is no good way to tax wealth.
As far as I know, the poor don’t pay any income tax, and the burden for the middle class depends on how you define the middle class.
We do need to tax me more, but we need to find out how to tax wealth better. The idea that we haven’t already shifted the tax burden to high earners is bogus, in my opinion; it’s more of an issue that high-earners can outmaneuver income-based taxation and that many wealthy people don’t have very much income relative to that wealth.
I’d love to look at Mr Krugman’s full financial statements to see whether, like most of us, he’s in favor of more taxes–for the other guy–but makes sure his own accountants protect his personal finances.
We can’t borrow our way into prosperity, and if the jobs we create are just jobs that do not in turn create greater wealth than the cost to taxpayers like me of providing those jobs, we’ll run out of money just like all the other socialist countries that tried that model of full employment and generous benefits.
We are already well past the point at which most citizens get back more than they pay in. That’s a dangerous point.
I agree that a big fiscal stimulus is required but that is what Obama is proposing after all. Krugman wants an even bigger stimulus but his argument seems to rest on the assumption that monetary policy is going to be completely ineffective which is too stark IMO.
As the fiscal stimulus becomes larger and larger it does run into diminishing returns in the sense that the quality of the projects and oversight will deteriorate. And while I haven’t looked at the issue in detail, I am somewhat worried about the possibility of a dollar collapse especially if Chinese central bank treasury purchases drop very sharply. Again I think Krugman is being too stark in saying that there is no downside if the fiscal stimulus is too large. The downside may not be huge but it does exist. So a balance must be struck and I am not convinced that the Obama proposal hasn’t achieved this.
I don’t understand 1. Why is the market not already providing the appropriate amount of housing? Long-term loans are not something I’ve ever heard of as being undersupplied for any reason. Is the market failing here so that we need government to push things along?
I’m all for universal coverage but I don’t believe nationalized medicine is the way to go. I think there are better alternatives, like compulsory savings accounts (government subsidized below some threshhold) that people use their own funds at their discretion for, along with catasrophe insurance. Health care costs soar because of the stupid way we’re doing it now, because it means doctors argue with insurance companies, leaving the patient out of it.
Number 1 is really two different statements in one. The banks aren’t loaning the TARP money to anyone right now, not just homeowners. I work in commerical real estate and we basically just can’t get money right now. Last year we borrowed about $100 million, and paid it back by the way. This year the banks are saying, “Sorry, we don’t have a square to spare.” They’re saying the same thing to other businesses, not just commerical real estate. So, 1 is about lending the money to anyone, and, seperate from that, providing relief to homeowners.
The TARP loans were supposed to make lending money available. It was used to acquire other banks, left in their own banks or given out as salaries and bonuses. When we asked them what’s left ,they said it is none of our business. It was always the wrong way to go.
If the problem is foreclosures ,they should be directly dealt with. They were not. They still are increasing. We have done little to fix the core problem. I hope they get to it now.
One problem is that most mortgages are not owned by one financial institution. They were chopped up and spread around the word banks. So who decides what new terms should be? It is a fine mess they got us into.
Cite? Sure. And sure I am, among many other ways of measuring what I said. The easiest way to think about it is to notice how much of a deficit we run. We all take (collectively) much more than we put in. We just don’t like to take assignment for government expenditures with which we don’t agree. One guy doesn’t consider money spent on defense to be coming back to him; another gets no college aid…on and on.
And as a nitpick, social security is argued by many not to be a tax. It’s a fund financed by collective contributions. BS, I know. It’s a tax and there ain’t no fund anywhere.
“Even for current and many future retirees, the amounts of payroll taxes continue to be dwarfed by the amounts of benefits received, as seen in figure 2.” (Sentence just above Figure 2)
Uh huh; and when the banks tell you that the loan applications they’re getting are not creditworthy, we just go ahead and make them issue the loans anyway, right? Wonder how that’ll work out. Wonder who’ll get blamed.
Creditworthy is a flexible term. What they need to do is figure out a way for banks to be comfortable again lending to people with scores under 720. Something that would make me happy is a more transparent credit rating system that has clear and solid rules so that since that the number rules adult American’s financial lives they can have more imput. There’s something disturbing knowing that three massive corporate giants are all that allows you to prosper or die on the vine. There needs to be some federal regulation regarding the measure of your credit score so that your Equifax matches your Transunion in some meaningful way.
Cite? (You do not appear to be talking about Social Security.)