Can Obama Turn Things Around?

Can he? Sure. Here's the formula:

Stop the bailouts, let companies and banks fail. They are sapping good capital out of the financial system.

Drastically cut government spending and start paying down the debt. This will strengthen the dollar and keep its reserve status. Lean on the Federal Reserve to raise the funds rate.

If we still have enough gold to do it, bring back the partial gold standard. In a world of weakening currencies, this would really strengthen the dollar and give a huge jump in standard of living.

Drastically cut corporate income taxes to attract investment.

Bring home all the troops from Iraq within 1 year. Develop and begin an Afghanistan exit strategy. Evaluate all other foreign military bases. Close all of them that aren't strategically necessary. Build more and better domestic bases.

If we do these things, it will get worse before it gets better. If we don't do these things, it will get worse before it gets better. If we do these things, we will have economic recovery within Obama's first teram. If we don't, we will be worse off in 4 years.

 

Weslinder, great post. I like all of those proposals.

 

First off, these two don't go together. If the banks and companies fail, government spending goes up. At the very least, if Citi and BoA fail, the FDIC has to pay out tens of billions for the guaranteed checking and savings accounts. Then, you have all additional unemployment and social welfare payments, as well as added medical costs for newly uninsured, etc. The estimates of what this would all cost are through the roof. Add to that the lowered tax revenue base from having many millions of fewer people employed, and the $700B "bailout" (who's true cost will be much lower, if not zero) will look small in comparison.

Stopping bank bailuts and paying down debt do not, in any way, go together.

The dollar has strengthened over the past six months on its own, because it IS the reserve currency that everyone is turning to. For all the problems here, it's just as bad everywhere else.

Besides which, a strong dollar increases spending power for foreign goods, but it reduces exports which doesn't exactly help in rebuilding an economy.

Corporate taxes aren't the reason people aren't investing right now. It's fear - and a lack of customers. If you start letting banks fail, that's only going to increase. "Attracting investment" and "let the financial sector fail" do not go together.

Beyond that, this whole "cutting taxes for business" thing is bogus. If I run a business, and I pay less in taxes, I'm not going to suddenly take that extra money and expand and hire more people. I'm going to hire more people if I have unfulfilled demand. Cutting my taxes doesn't give me more customers, so I'd be expanding to fill orders that I don't have. If you get money into the hands of my customers, and they spend it on my business, then I'll expand because I'll make more money that way. Demand-side economies is far more efficient than supply-side when you have a demand problem, which is what we face right now.

 

Great points. I'd like to hear some of your proposed solutions.

 

I like Weslinder's post. Doubt the bailouts will stop. They are so afraid of further unemployment of bankers and the disaster that will be insuring everyones deposits that they will continue to use TARP funds for it. Hopefully they go no further than that though.

The deficit is our number one problem right now. Small deficits are one thing, but when they grow this large we are talking about decades of budget surpluses just to come back from TARP, 2 Stimulus Packages, and every other problem the Government has been throwing money at for the past year.

Obama can't turn things around. He is one man. The government alone can't bailout the economy. People, companies, & the government making better decisions as a whole will turn this around. It was the MC Hammer effect. People just think the money train will continue, but it just doesn't work that way.

Legalize mar1juana & Prostitution then sin tax the hell out of them. New jobs(ok maybe not as much new), new revenue. Just throwing it out there.

 

Still peddling this, huh? A lot more mortgages are going to reset. Now the Treasury owns a lot of those mortgages. If we get 10% of our investment back, I'll be surprised.

If you expect the world to keep buying Treasury bonds at 0-ish% return over the next two years (as Obama's economic advisory team expects), I've got a MBS that specializes in bridges to sell you.

W, is that you? Weakening the dollar for exports is incredibly short-sighted, and possibly the dumbest public policy theory available (except possibly disallowing failure).

Maybe it won't work next month, but oppressive corporate tax rates is a huge part of the offshoring of manufacturing over the past 40 years. If we don't lower them significantly, that trend will continue.

Overall, though, Obama seems to agree with you. It's a shame. It's 1965 all over again. Get ready for a lost decade or two.

 

The dollar is extremely weak against the Yen right now. The dollar is not as strong as it appears when you are only comparing it to the Euro.

 

Expect to be surprised then. The vast majority of the money so far has been spent on preferred shares with dividends. If these banks survive about 1 year, the preferred shares will have already turned about a 10% dividend in returns. The treasury is not even buying troubled mortgages right now. And if they were buying troubled mortgages, then assuming the mortgages are even written down / bought assuming a 50% failure rate, the only way you'd get only 10% back is if 95% of them failed instead of 50%. So far, both the AIG and Bear Stearns bailouts have netted more than expected for the government.

Of course they don't do it at 0% returns. They don't need to.

No one's talking about weakening the dollar. There's no need to make a major effort to strengthen it at this time. And that certainly doesn't help the economy recover anytime soon.

US base corporate tax rates are high. But due to the number of exemptions and the like, the net amounts US corporations pay is lower competitive than most of the world:

http://seekingalpha.com/article/92485-statutory-vs-effective-tax-rates

[T]he US is actually a corporate tax haven, with the lowest effective corporate tax rates of almost all the countries that participate in the OECD. That's a little fact that the Tax Foundation apparently doesn't want the American public to understand, since all its hype is in terms of statutory rates and not in terms of effective tax rates.

I'd prefer a lost decade than a complete collapse of the economy. Remember, the goal of a government is to provide for its citizens. At the end of the day, stability is as important as maximizing net growth. For example, if you have the choice of three years of:

(A) 3% growth, 3% growth, 3% growth
(b) 10% growth, -15% growth, 20% growth

The government's goal should be (A), not (B) despite (B) ending up a little better after year 3. Stability for the population during those 3 years is important in that it reduces the number of "losers" that occur in an economic upheaval. The bailout strategy may or may not have some long-term negative growth consequences (my opinion is that it won't) - but the purpose and likely effect is to create a softer landing that reduces the chaos within the economy.

 

First of all, apparently we disagree enormously about the role of government. We're not going to resolve that. But if we continue down our path, we're not going to have steady growth. Option (A) will look more like -2%, -2%, -2%, -2%, -2% for several years, with very slow growth after that. The economy will purge itself of malinvestment eventually. It took 15 years for our economy to recover the last time we went down this road.

Denninger's most recent post is especially frightening: http://market-ticker.denninger.net/archives/730-Heh-CONgress-Wake-Up!.html

 

if by worse you mean a severe depression. sorry i rather have a stimulus that will increase our debt but also provide for at least a halt in our decreasing gdp followed shortly by an increase.

my critique of obama's stimulus is largely krugmans. too many tax cuts, not enough spending.

as far as foreign policy goes, i doubt many of us expected that much realistically. iraq will continue. there will be at least 50k troops at the end of his first term most likely. afghanistan may have a troop surge but i don't see a viable solution to that problem to be honest. i think our rep in the world will increase tremendously, but i don't see the cabinet and others in the administration to be independent enough to have much success in the palestine situation.

im incredibly disappointed in obama/holder's attempt to ignore the bush torture crimes. similarly their signals of wanting congress to essentially create a system of courts that won't have to abide by typical rules e.g. hearsay or fruits from torture being thrown out.

as far as healthcare, i hope there's a huge push to put the unemployed who've lost their jobs into the federal plan or such, at least on a pilot basis.

 

I agree with Major, and I think the logic here is petty straight forward. I know that some will favour tax cuts because that's what will benefit them personally the most, but I think it would be hard to make the argument that that strategy would be the best one for the economy as a whole. Fortunately there are some fairly obvious win-win scenarios right now with respect to stimulating the economy. There are a large number of infrastructure projects that need to be done at the moment, and now is when they will be cheapest to do. Investing in these projects now will get needed work done, and it will take advantage of the competitive market to save money, and it will put thousands of people back to work and stimulate the economy as well.

 

Maybe we should have a seperate thread to discuss the stimulus package.

As currently proposed, using actual figures for the Keynesian multiplier, the stimulus will grow (or slow the decline of) the economy by just under $100 Billion this year and next. By comparison, if that stimulus was inacted last year, it would have reduced 4th Quarter GDP contraction from 2.9% to 1.9%.

Personally, I think it's immoral to pile a trillion dollars of debt onto our children's shoulders to avoid $200 Billion in additional losses today.

 

I’m not following your logic at all. If a business needs a piece of equipment, and that piece is on sale now, but the business would need to borrow money now to buy it, is it smart to wait to until later when the business has the money but will have to pay full price? You’d have to do the math on the cost of borrowing vs. the savings from the discounted price, but very often it makes the most sense to borrow and buy now. With respect to the infrastructure you’d actually be costing future generations more by not prudently managing your resources and taking advantage of the current economic climate. And as a by product, doing the work now stimulates the economy. In fact, this is exactly how this kind of economic cycle is supposed to work. Prices and labour costs come down, and that encourages more people to invest, and that in turn stimulates the economy. I think you could argue that the government would be very irresponsible and not adhering to the principles of capitalism if it didn’t invest in these project now.

If you don't mind me saying so, you seem to have a very unnatural dislike of governments for some reason, and it seems to me that it may be clouding your better judgment. Governments are essential to a healthy democracy. Without a government you can’t have a democracy, in fact. Government spending is neither inherently good nor bad. The proper question is, what is appropriate government spending? On this issue, if you objectively think it through, I think the general answer fairly clear.

 

Weslinder said Corporate tax cut, which probably wouldn't benefit him like the individual ones that Obama is proposing.

I like corporate tax cuts in terms of giving corporations more money. They aren't going to turn around and hire someone just because they are given money, but they are more likely to spend on other projects/goods that they want or need. It increases purchasing power, and will infuse the market with more money.

The biggest thing though is cutting government spending. They need to do more than just trim the fat, they need to get some emergency lipo.

 

No, he can't. At least not by himself.

Many of the problems we currently face are beyond the policy fixes and ultimately societal and all he can do is try and push public opinion and behavior.

Over the last 40 years, Repubs have done a great job in making the upper class attractive in ways it never was before. They convinced a lot of folks that one day they might be super wealthy, so you need to start voting like that now. They convinced a lot of folks that you too can have a big useless foyer and granite countertops and a jacuzzi garden tub and a luxury automobile with leather seats and a stupid backing up camera. They forgot to tell us that we can't afford all that but they did encourage us to buy it on credit. We can't keep it up. Those days are gone for most of us. The idea that the next generation has to have more material stuff than the previous one and that you're entitled to the trappings of wealth has to end. That's completely unsustainable.

If Obama can figure out a way to effectively push the message that we all need to live within our means, that every generation should do better than the previous one in education, freedom, civil rights, respect, and opportunity (instead of just material goods), that we need to reconnect with the ideas of our founders and the thinkers who built the intellectual foundations of this country... there I think he can make a difference.

 

If that business has already has debt that threatens to crush them, they should absolutely wait until later.

Your government could do that. It ran surpluses for most of the good times, and can borrow during the bad times to take advantage of lower labor and material prices. Our government hasn't managed it's checkbook at all, and it can't afford to borrow a tenth of its GDP right now.

I'd say that I have a healthy suspicion of governments and tend to really look at what they are doing. Personally, I think it's patriotic.

I agree completely.

 

One other thing that I think about the stimulus: I'm pretty sure that the amount was picked about the same way as the TARP amount: "We need a really big number to create confidence." A comparison: The spending portion of the stimulus package is $550 Billion to be spent over 2 years. 35 Years of building the Interstate Highway system cost $500 Billion in 2008 dollars. (Originally quoted at $12 Billion, or 80 Billion 2008 dollars.)

A friend of mine put it this way: It'd be like Houston looking at Minute Maid Park, talking about what a benefit it is to the city, and deciding to build 10 more.

 

I don't think Jesus himself could fix this mess.