Paul Krugman thinks the compromise stimulus plan announced today will have little real impact on our growing economic woes.
This plan leaves recession-fighting entirely up to the Fed. And as I’ve pointed out before on this blog, the Fed may not have enough ammunition.
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The imposter that painted the economic recovery of the last six years as a booming, beneficial example of expanding pies is being unmasked for what it was — a “CEO’s recovery” that has benefitted few beside those who already were doing well.
As Bob Herbert pointed out on Saturday,
From 1980 to 2005 the national economy, adjusted for inflation, more than doubled. (Because of population growth, the actual increase per capita was about 66 percent.) But the average income for the vast majority of Americans actually declined during that period. The standard of living for the average family has improved not because incomes have grown, but because women have gone into the workplace in droves.
The peak income year for the bottom 90 percent of Americans was way back in 1973 — when the average income per taxpayer (adjusted for inflation) was $33,001. That is nearly $4,000 higher than the average in 2005.
It’s incredible but true: 90 percent of the population missed out on the income gains during that long period.
That politicians of both parties have ignored this — allowing all manner of worker protections to atrophy, rewriting the tax code to redistribute money up the income ladder, writing trade agreements that push wages down — is one of the great shames of our generation.
The simple fact is that the people stewarding our economy should have seen this coming.
To quote Herbert again:
Economic alarm bells have been ringing in the U.S. for some time. There was no sense of urgency as long as those in the lower ranks were sinking in the mortgage muck and the middle class was raiding the piggy bank otherwise known as home equity.
Today’s Washington Post offers additional support for Herbert’s argument:
An unusually large share of workers have been out a job for more than six months even as overall unemployment has remained low, a little-noted weakness in the labor market that analysts said threatens to intensify the impact of the unfolding economic downturn.
In November, nearly 1.4 million people — almost one in five of those unemployed — had been jobless for at least 27 weeks, the juncture when unemployment insurance benefits end for most recipients. That is about twice the level of long-term unemployment before the 2001 recession.
The problem is ensnaring a broader swath of workers than before. Once concentrated among manufacturing workers and those with little work history, education or skills, long-term unemployment is growing most rapidly among white-collar and college-educated workers with long work experience, studies have found, making the problem difficult for policymakers to address even as it grows more urgent.
“What has happened is a polarization of the labor market. It was very strong at the very top and very strong until recently at the bottom,” said Lawrence F. Katz, a labor economist at Harvard University. “But in the recent weak recovery, and now recession, demand has been very weak” for jobs in the middle.
The Post goes on to say
With the economy sliding toward a possible recession and the jobless rate having spiked to 5 percent last month, the already high rate of long-term unemployment is likely to grow, as it has during past slowdowns, a prospect that has spawned calls in Congress and on the presidential campaign trail to extend unemployment benefits and expand tax cuts to protect jobs and fuel the economy.
The growth in long-term unemployment has occurred even as displaced workers have taken bigger pay cuts to reenter the job market. A 2004 study found that workers who lost a job in 2001 to 2003 took an average pay cut of 17 percent in their new jobs, more than double the average cut of those displaced in the late 1990s.
“When people are losing good jobs these days, they have a very hard time getting back to the type of job they had before,” said Andrew Stettner, deputy director of the National Employment Law Project, an advocacy group that presses for more generous unemployment benefits.
While strong corporate profits, low inflation and record manufacturing output characterized the extended recovery that followed the 2001 recession, some economists call that period of expansion a “CEO’s recovery.” Real wages were mostly flat, poverty ticked upward and an unusual number of people had a hard time finding work — a fact masked by relatively low overall unemployment rates.
“This tells you that this has not been as good an economy as the overall unemployment rate would make it seem,” said John Schmitt, a senior economist at the Center for Economic and Policy Research. “This dynamic causes anxiety among people even if they still have a job. It is very important to understanding the level of anxiety that the work force feels as a whole.”
That’s why the Bush plan — and most of those being offered by Democrats, as well — are unlikely to have more than a cosmetic impact on the economy. The infusion of a small amount of cash — assuming the Democrats are successful in winning rebates for those on the lower end of the income scale — will help some, but do nothing to address the systemic issues. The inequality will remain in place, the recovery that will come (they always do) will be partial and the bulk of Americans will be worse off in the end than they are now.
Herbert is right when he says that the focus should be on jobs:
Good jobs at good wages — lots of them, growing like spring flowers in an endlessly fertile field — is the absolutely essential basis for a thriving American economy and a broad-based rise in standards of living.
Forget all the CNBC chatter about Fed policy and bargain stocks. For ordinary Americans, jobs are the be-all and end-all. And an America awash in new jobs will require a political environment that respects and rewards work and aggressively pursues creative policies designed to radically expand employment.
He suggests a return to the New Deal — public works projects targeting aging infrastructure and alternative energies. I’d add that we need to rebuild the social safety net and expand healthcare coverage (single-payer healthcare, anyone?) to keep those that fall from falling too far.
Tax cuts and rebates are nice, but bigger changes are what is needed.
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President George W. Bush seems to know only one song when it comes to the economy — cut taxes and all will be well.
His rather vague speech today centered on rebates without saying who would get them or how big they would be. But he made it clear that tax cuts were his solution to the nation’s growing economic woes:
“This growth package must be built on broad-based tax relief that will directly affect economic growth, and not the kind of spending projects that would have little immediate impact on our economy.” He said it should include tax incentives for American businesses, including small businesses, to encourage major investments in their enterprises this year, and “direct and rapid income tax relief for the American people.”
Given his record on tax cuts — selling them (falsely) as huge savings to middle-class voters while making sure his cronies well up the income ladder benefited to the greatest degree — one shouldn’t expect too much. Plus, there is some question as to how effective these kinds of rebates tend to be.
John Sweeney, president of the AFL-CIO, is critical — and makes some strong points:
In a letter to Reid and Pelosi today, AFL-CIO President John J. Sweeney said Bush’s proposals appear to be “too heavily weighted towards tax cuts over much-needed spending, do not address crucial problems facing working families, and do not target tax benefits to those families who need them most and will spend them fastest.”
Unions also are worried that Bush’s proposed tax relief for businesses “would not be sufficiently timely and, because of the linkages between federal and state tax codes, could trigger economically depressing budget cuts and tax increases by state governments,” Sweeney said.
Citing lower property and sales tax revenues in many states, the letter urged Congress to “provide at least $30 billion in aid to the states in the form of revenue-sharing grants and increases in the Medicaid match.” It also called for $40 billion to accelerate “ready-to-go construction projects” such as repairs to schools and bridges.
In addition, Sweeney said, Congress should address “the most fundamental underlying causes of our current economic weakness,” notably “the stagnation of ordinary Americans’ incomes” and a lack of “effective regulation of the mortgage and financial services industries.”
Basically, the president is hoping that handing a little cash to most of us and a lot of cash to a handful of us will make the economic uncertainty hanging over the nation go away. Exactly how much did he say he wanted for the Brooklyn Bridge?
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Some interesting reading from today’s newspapers and blogs:
Paul Krugman writes about how the presidential candidates are misleading voters on the European economy and what it means for our own economy.
William Greider offers some advice to presidential candidate Barack Obama — borrow from John Edwards’ pragmatic antirecession program — while also skewering the lazy Washington press corps.
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I’ve said this before, but Paul Krugman is one of the best newspaper columnists out there.
Maybe it is because he’s not a part of the Washington establishment — he’s an economics professor at Princeton — or perhaps it’s his understanding of the economy and his willingness to contradict what has become mainstream orthodoxy. But he has served during these desultory Bush years as an antidote to the banal and inane that often passes for political analysis, at least on the tube.
That’s why I was pleased to hear that Krugman will be at Barnes & Noble tonight (read Time Off story) to hawk his book, The Conscience of a Liberal.
Krugman, according to the reviews I’ve read (unfortunately, I’ve yet to read the book), calls for a return to the liberal verities — to a government safety net and away from the redistribution of wealth from workers to the rich. He calls for universal health care and for protection of Social Security and he questions the priorities of the current administration.
In his column today, for instance, takes on the Paulsen mortgage relief plan. Henry Paulsen, secretary of the treasury, has proposed a voluntary plan in which some banks might be inclined to offer temporary relief.
Mr. Paulson’s plan — or, to use its official name, the Hope Now Alliance plan — is entirely focused on reducing investor losses. Any minor relief it might provide to troubled borrowers is clearly incidental. And it is does nothing for the victims of predatory lending.
The plan sets voluntary guidelines under which some, but only some, borrowers whose mortgage payments are set to rise may get temporary relief.
This is supposed to help investors, because foreclosing on a house is expensive: there are big legal fees, and the house normally sells for less than the value of the mortgage. “Foreclosure is to no one’s benefit,” said Mr. Paulson in a White House interactive forum. “I’ve heard estimates that mortgage investors lose 40 to 50 percent on their investment if it goes into foreclosure.”
But won’t the borrowers gain, too? Not if the planners can help it. Relief is restricted to borrowers whose mortgage debt is at least 97 percent of the house’s value — which means that in many, perhaps most, cases those who get debt relief will be borrowers who owe more than their house is worth. These people would be nearly as well off in financial terms if they simply walked away.
And what about people with good credit who were misled into bad mortgage deals, who should have been steered to loans with better terms? They get nothing: the Paulson plan specifically excludes borrowers with good credit scores. In fact, the plan actually provides an incentive for some people to miss debt payments, because that would make them look like bad credit risks and eligible for relief.
So the bulk of sub-prime borrowers are left to the market as the investor class gets a bailout. This makes sense only if you view government primarily as a catalyst for business and not as a defender of the citizenry.
So, off to Barnes & Noble I go tonight to hear what Krugman has to say and maybe pick up a signed copy of the book.
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Hank Kalet 