The Great Debate

What happens after Obama’s jobs bill dies?

Nicholas Wapshott

Oct 26, 2011 14:29 EDT

By Nicholas Wapshott The opinions expressed are his own.

You can add to the list of hollow cries from history–such as “Ban the Bomb!” and “Bring the Troops Home!”–the president’s favorite refrain, “Pass the Jobs Bill Now!” Like the rest, Obama’s oft repeated demand is a sham, a mere slogan. Neither he nor his party, and certainly no Republican, believes Congress is going to pass even a small part of the bill, for it combines two elements his opponents detest the most: public works and higher taxes on the rich.

While the GOP squabbles over which of a barely electable field to pick as its candidate, Obama has already begun his reelection campaign in earnest. The simple message he is taking on the road is that Congress should “pass the jobs bill now!” That’s a plea he knows is sure to be ignored, leaving him in a position, he believes, to blame persistent joblessness on the Republican obstructionists. He is onto something. As Jimmy Carter found out, Americans hold their presidents to account when the economy is tanking; they expect them to improve the economy and are prepared to fire them when they don’t. It is a lesson for conservatives who believe that governments can’t and shouldn’t attempt to change the economic weather. Voters blame the government anyway, whether they intervene or not.

Obama, like Franklin Roosevelt, believes in trying to fix the symptoms of a broken economy, while his GOP opponent, whoever it turns out to be, must hold to the Hayekian orthodoxy insisted upon by the Tea Party and the Republicans’ fiscally conservative wing that there is nothing much governments can or should do to improve the economy and that stimulus spending either does not work at all or will only make the smallest of differences in the short term. As Obama gleefully knows, a rival promising austerity, the long haul, a far worse economy before it gets better, and a dim light at the end of a long, long tunnel will be running against the spirit of optimism that Americans feel and like to hear from their leaders.

Obama’s American Jobs Act is a thinly disguised second Keynesian stimulus designed to pump $450 borrowed billions into the economy to raise aggregate demand and give jobs to some of the 9.3 percent of Americans out of work. Obama’s task is to convince the American people that stimuluses work. The results of his first hurried stimulus, all $814 billion of it, are mixed. It set off a burgeoning cottage industry among conservative economists taking it in turns to prove that the stimulus did nothing or little to improve growth or job creation. Take Alan Reynolds of the Cato Institute: “There’s no evidence for the theory that state spending has shortened this or any other slowdown.” Or this, from John F. Cogan and John B.Taylor, of the Hoover Institution: “Beware of politicians proposing public works and other government purchases as a means to stimulate the economy. They did not work then and they are not working now.”

It is easier to show that Obama’s initial stimulus did not work well – the money went to pay off private debt, or went into private savings, or was spent on foreign goods, or replaced state and local government borrowing with federal government handouts – than the broader point: that stimuluses don’t work in any circumstances. So, will Obama’s stimulus work? We will never know, because it will not be enacted. If the president is reelected he will have to propose a new stimulus to suit the conditions of November 2012.

That leaves a whole year for his economic advisers to come up with a stimulus that works. There can be no excuse next time that the stimulus was flawed because to avert an imminent economic crisis it had to be brought in quickly without adequate planning. There is no need to find elusive “shovel ready” public works projects that can be started immediately as there is a whole year to find and design job-creating schemes that will not entail pouring billions into the sand. There is a whole year to find ways of giving cash only to those who will spend it on other Americans, not blow it on foreign consumer goods or hoard it as has happened the last time.

The fight of the century: behind the scenes

Katharine Herrup

May 4, 2011 12:32 EDT

Keynes and Hayek are back. As rappers. For those who don’t know about these two economists, or can’t keep their philosophies straight, there’s a great rap video just out that clearly explains the warring ideologies of those two men, titled “Fight of the Century: Keynes vs Hayek Round Two.” And it is the fight of the century, or at least, right now. If Hamlet were giving a soliloquy about the economy, it would start, “to spend or not to spend. That is the question.” For John Maynard Keynes, the answer is to spend. For Friedrich August Hayek, the answer is to not.

What is interesting, and less known, about this economic rap video is that the idea for it didn’t come from an economist. Or anyone remotely close to being one. Instead, it came from a video producer named John Papola, who went to Penn State for film. And despite having worked at MTV after graduating from college, it’s also his first dive into rapping.

Papola become interested in economics partly because of the Ron Paul campaign in 2007. He was struck by what Paul was saying and how the economy played out in 2008. “Nobody else was saying what [Ron Paul] was saying,” Papola says.

With his growing interest in politics and the economy, and a sense that what was unfolding following the collapse of Bear Sterns was history in the making, Papola started to listen to audio books about American history and important political figures like John Adams and Ben Franklin on his two hour-plus commute between Vernon, New Jersey and Manhattan. He also listened to various podcasts, including’ EconTalk, Russ Roberts’ “economics podcasts for daily life”.

“You start to get a little bit of history under your belt and it comes alive,” Papola says. “Those were real people going through real life, and it makes for great stories — and movies. (I don’t know why it makes for such bad lectures).”

And bring history alive is what Papola has done with Roberts. Both of their “Keynes vs Hayek” rap videos make tangible what is happening in the economy and what Keynes and Hayek believed should be done about it. Despite no longer being alive — Keynes was born in 1883 and Hayek in 1899 — their philosophies are quite relevant today. For what we are seeing now is not much different from what happened in the 1920s. And the US economy may soon look like it did in the 1970s, when the we had high unemployment and low production.

Institutional failure week

James Saft

Nov 2, 2010 09:01 EDT

-The opinions are the author’s own-

By the end of this week, the U.S. will face a government that is unable to act to aid the economy and a Federal Reserve that is unable to stop.

The stock market may well rise on this dysfunctional combination, only serving to prove that the economy and market are becoming fundamentally disconnected.

Tuesday’s election may well deliver a split Congress with the Republicans in control of the House of Representatives and the Democrats clinging to a narrow majority in the Senate. This means that there is no chance of further meaningful stimulus and that Democratic timidity will likely harden into an intransigence to match that of the Republicans.

Rather than building bridges, the next two years will be spent dickering over tax codes, and, as the 2012 election nears, fighting trade and currency wars.

Many will argue that this is right, that the election will freeze stimulative spending that is wasteful and unpopular.

Perhaps, but economic growth is extremely weak. The initial reading of third-quarter gross domestic product, released on Friday, showed the economy expanding at a faster 2.0 percent rate. Most of the growth, however, was from inventory rebuilding, a process that is very likely to slow. Actual growth in real final sales was an anemic 0.6 percent, making this the weakest such recovery on record, according to economist David Rosenberg of Gluskin, Sheff.

Can recovery and credit crunch coexist?

J Saft

Nov 12, 2009 08:46 EST

(James Saft is a Reuters columnist. The opinions expressed are his own)

New studies from the Federal Reserve and European Central Bank show that, whatever else, a recovery in the economy is not being supported by a resumption in bank lending, raising concerns about how exactly growth will become self-sustaining when official stimulus ebbs.

The ECB last week released its loan survey showing banks tightened credit yet again for businesses and consumers, though at a less severe rate than in the previous quarter. Much was made of the fact that banks said they expected to ease terms to businesses, but not individuals, slightly in the last three months of the year.

Days later the Fed was out with its own survey, and again the news is getting worse more slowly, which must mean it is time to pop open the tap water. Banks are tightening terms and conditions to large firms, though fewer are doing so than before. Of course we should be thankful for small mercies, but the fact remains that this is a relative rather than an absolute survey, which means that even if fewer are being tougher the vast majority are being just as tight with money as they were three months ago when things were very tight indeed.

But wait, I can almost hear you ask, banks are making money again. If not making loans, what are they doing with it? Funny you should ask, they are lending it to the government. According to Fed data October marked the first time in years that banks held the same amount in Treasuries and Fannie Mae and Freddie Mac bonds as they did in commercial and industrial loans. Business loans have plunged 18 percent in a year, while Treasury and agency bonds are up 8 percent.

Banks are choosing to lend to the government and to government-backstopped mortgage firms because they see it as the best way to survive: hunker down, take fewer risks and content yourself with the thin gruel and thin margins of taking deposits and lending to the entity insuring those deposits. It’s a good way to get solvent but it will take a terribly long time.

Falling demand for credit is a factor too. Firms are concentrating on expanding margins by cutting back on costs, rather than positioning themselves for an upswing in demand. That means they want fewer loans to support capital expenditure. It also sadly means that they are not yet hiring.

First exit for the Fed

Agnes Crane

Jun 23, 2009 07:59 EDT

– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Call it a battle for beginnings and endings, and the Federal Reserve is smack in the middle.

As Fed policymakers convene for a two-day meeting starting on Tuesday, the lines are growing more defined between those who want the Fed to do more to stimulate a still fragile economy, and those who are calling for a defined exit strategy to prevent the global economy from going into an inflation-inducing overdrive.

There’s a way to placate both camps, at least in the near-term, and that’s for Ben Bernanke and his colleagues to retire some of the temporary short-term lending facilities put in place at the height of the financial meltdown last year.

It would show good faith that the U.S. is serious about exiting some of those emergency facilities, and it would give the central bank breathing room to keep its ultra-easy monetary policy in place until it’s ready to call the all clear.

Bernanke, as a scholar of the Depression, is all too aware of what can happen should the central bank move too quickly and forcefully in removing stimulus.

One program in particular is a ripe candidate – the Commercial Paper Funding Facility.

Obama healthcare drive looking sick

James Pethokoukis

Jun 22, 2009 09:37 EDT

– James Pethokoukis is a Reuters columnist. The views expressed are his own –

What just happened to American healthcare reform?

The political prospects for major U.S. healthcare reform have taken a decided turn for the worse in recent days (at least from the point of view of many Democrats). And you don’t need to be some totally plugged-in Washington insider to understand that.

Just take a look-see at the stock market performance of industry players such as Aetna Inc, Cigna, UnitedHealth Group, and WellPoint. Shares have been trending higher of late. What’s been slowly dawning on Wall Street is that the legislative process in Washington is unlikely to produce a national public health insurance option that could eventually squeeze out the private sector.

Fact is, the prospects for any sort of bill that would produce major changes are in as much doubt as at any time since President Obama took office. Worried that the plan was growing too expensive, the critical Senate Finance Committee appears to have jettisoned any idea of a public plan option and is also cutting back on subsidies to help fully insure the nearly 50 million Americans who don’t have health insurance for one reason or another.

So what just happened? How is it possible that Democrats cruised to a huge victory on Election Day in November 2008 and are yet again unable to make good on their top legislative priority? Why are the ghosts of Bill Clinton’s 1994 healthcare reform debacle suddenly flitting about Capitol Hill?

What happened was the Great Recession, the political impact of which the Obamacrats completely misunderstood. Oh, they knew the financial and economic crisis helped sweep them to office. That part they got just fine.

Obama’s disappearing stimulus

Christopher Swann

May 29, 2009 09:06 EDT

– Christopher Swann is a Reuters columnist. The views expressed are his own –

It’s not just California that threatens to sabotage the Obama stimulus. State and local governments across the nation are gradually unravelling federal efforts to revive growth.

The states have been inveterate stimulus eaters in the past. For most of the 1930s the expansionary policies of the federal government were just sufficient to offset the shrinking of state and local governments. Click here for PDF.

States also raised taxes in the recession of the early 1990s and in 2001. It was a problem that Obama — his team stocked up with renowned  scholars of the Great Depression — was determined to avoid.

Sadly, the financial woes of the states and cities — many of them self inflicted — are overwhelming these good intentions. The maths now looks distinctly unpromising.

The Obama administration has pledged around $140 billion in fiscal assistance to the states with the express goal of saving them from tax increases, layoffs and painful cuts in services. But as state tax revenues have tanked, they now appear to be heading for a $370 billion shortfall over the next few years. Federal largesse will cover just 40 percent of the gap.

Nor is the roughly $200 billion fiscal drag from the states Obama’s only problem. America’s towns present a fiscal headwind as well, with an expected funding gap of  nearly $100 billion, according to the National League of Cities. Taken together these could cancel out up to 40 percent of the federal stimulus.

The recovery will feel familiar: lousy

James Saft

May 5, 2009 14:10 EDT

– James Saft is a Reuters columnist. The opinions expressed are his own –

The good news that the United States cannot keep contracting the way it has been is not to be confused with a return to robust expansion, a point financial markets eventually will grasp.

Consumers, the mainspring of the U.S. economy, will see the cash from government stimulus slip through their fingers but will still face very ugly personal balance sheets and a brutal job market. Their party is not going to get started again for some time.

And falling interest rates will have a hard time sparking investment by businesses until they become convinced that a recovery in manufacturing will do more than just take inventories from nearly empty to barely stocked.

The basic hope for the U.S. economy, that inventories are being run down so swiftly that a turn in the cycle must come, has been more or less confirmed by recent data.

The ISM manufacturing index advanced to 40.1 in April from 36.3, and especially encouraging is a sustained rebound in new orders, a leading indicator of forward demand, which having been more or less moribund in the early months of the year, now is in a sustained uptrend.

Inventories are still being cut, but this, optimists argue, is setting the stage for a recovery when managers see that their depleted stocks represent the threat of losing out on business.