Conservative Keynesian Myth

There is a myth going around. Largely it is repeated in Conservative circles, but many political pundits (George Will and Newt Gingrich chief among them) like repeating it. They repeat over and over that "Keynesian economics has never worked." Yet immediately they turn right around and thoroughly disprove themselves.

The most openly Keynesian action by our government was the New Deal of FDR in the 1930s. Conservatives claim that Keynesian policy was an absolute failure because we didn't fully exit the Depression until World War II. They ignore two major flaws in this thinking.

The first problem is that Keynesian policy wasn't used throughout the Depression. From 1933 into 1937 FDR took the "kitchen sink" approach. He would try something, see how it worked and either continue it or move on to something else. The WPA and many other programs were started and got people back to work. For these four years, GDP grew an average of 10% per year, unemployment fell from 25% to a minimum of 12% in June of 1937 (using the same calculation for unemployment today that they used then, we are currently between 14 and 16%), and created an average 9% annual increase in average incomes.

Throughout this whole period FDR and his Treasury Secretary, Henry Morgenthau Jr., were constantly worried about the expanding deficit. By 1937, things seemed to be looking relatively better. GDP had grown from $56.4 billion to $91.9 (current dollars adjusted for inflation). Unemployment, as I said above, had fallen by nearly 50%. FDR let his inner deficit hawk take control and cut spending by over about two billion dollars (adjusted for inflation). When this happened, GDP stumbled and fell more than 3% and unemployment jumped to 19%.

Then we get to the second half of the Conservative myth wherein they contradict themselves. Every Conservative economist claims that the Great Depression disproves Keynesian economics because we didn't pull out of the Depression fully until the war effort ramped up. But if you look at that, it only proves Keynes correct. The war effort didn't have tax cuts, it didn't have a balanced budget (just the opposite, spending 140%+ of GDP). No monetary policy brought us out of the Depression during WWII. It was direct government spending unlike anything we had seen before or have seen since.

Other policies can help with recessions. Monetary policy has worked in the past, as recently as 2001. Tax cuts sometimes help, but rarely in isolation (see 2008 for an example of a tax cut failing in isolation). But these options aren't available to us and don't work in a demand death spiral like we are in now. Monetary policy is used up, we are at 0% interest. Tax rebates have already failed once and the smaller one being proposed now won't work any better. Tax incentives for purchases can't work if people can't purchase. The only thing left is for the US government to directly stimulate demand by direct spending. Other things like the middle class tax cut may help on the short term while government spending ramps up, but without the larger government projects, that short term stimulus will be wasted just as quickly as last year's stimulus checks.

UPDATE: Rachel Maddow discussed this as well. Here is an article with other good charts that reflect my points.

An Ending?

This glorious day has seen the end of a number of things. An end to the Bush administration. An end to the national shame of endorsement of torture. And as some have said, "An end of an error." We have also seen a brilliant first; the first black man elected to the highest office of the land. And it is this first that has brought an end to something else that many pundits are trying to put a finger on.

Many have said it is an end to segregation, to discrimination, or to racism. These pundits are lofty, but they ignore the reality that many African-Americans face every day throughout the country. Racism isn't going to be defeated by one election. Hatred and bigotry were an undercurrent (and sometimes not so under) throughout the election, and while it has suffered a defeat, it is not gone. The next time an African-American runs for president, the bar will not be as high, but it will still be higher than for a white man.

No, what I believe we saw an end to when Barack Hussein Obama took the oath of office is much more subtle. I believe we saw an end to an idea, to an undercurrent of modern culture, that African-Americans can't succeed. Children have been told that in America you can be anything you want to be: astronaut, fireman, or even president. But for African American children, this has always seemed a pipe dream. Only 45 years ago, dogs were sicced on them for attempting to attend school. 30 years ago a president ran on a platform of attacking welfare as handouts for the lazy and unworthy (with an implied "black"). Even this year, we saw a presidential candidate attacked for being black with opponents attempting to diminish him as just another black candidate or as uppity.

But this has come to an end. These children now can look at their chart of presidents and see a black man's face among the 44. They can look on their TVs and see 2 or 3 million people of all races cheering this man on as he takes the reins of power. They know that the words "all men are created equal" are finally being lived up to. And while discrimination and bigotry and hatred haven't ended, when they face these obstacles they will have the strength of knowing that over 60 million of their fellow citizens voted for a man born to an African imigrant, a man who grew up at times on food stamps, and who has the name Barack Hussein Obama.

Stimulate This

Congress and the President (elect) are now debating how best to work out a stimulus package to pull us out of of the recession we have been in for more than 12 months. And while we only have 535 Senators and Representatives (give or take) we have thousands of ideas how best to do this. Obama has promised for more than a year tax breaks for families making under $250k and for employers who hire American workers instead of shipping jobs overseas. Every member of Congress wants a tax break or direct hand out for their own local pet project (that they want their name attached to in stone after it's completed). And there are even some who think we should lock up the money and hope it's still worth something after our economy has collapsed.

In times like we are now facing, though, only the government has the capability of spending unfortunately. Even with trillions of dollars in bail outs, buy outs, and other promises, the lending institutions that could empower the private sector to drive the recovery are still hording their money, ensuring no improvements can come from there. Private citizens are (for the first time in decades) saving more than they are spending and, while wise for a population who's personal savings rate has been in the low $1,000s, this adds more to the stranglehold on our financial system. The Federal Reserve, even as lender of last resort, simply can't put as much on its balance sheet as would be necessary. This leaves only the federal government itself as the spender of last resort and the best chance of breaking through the deadlock.

But while the government does need to increase spending, it must do so carefully. Spending a couple million on a Woodstock Museum or $400 million on a bridge to nowhere will only serve to tie up that money and keep it from its full potential. We need to make sure the money we the people spend will work not just once for a handful of local jobs, but work repeatedly. We must invest in things that will serve us long term, as the interstate system has since it was started in the 1950s. We need to expand broadband access, improve our electrical grid to handle the new requirements that will be put on it, and create a true green economy that will last us for centuries longer than fossil fuels could possibly hope to.

To this end, governors and mayors from across the country have sent proposals to Obama's transition team. Many of these "shovel ready" projects will strengthen communities and create jobs as is needed, but many others are aptly titled pork. The President and VP (elect) have made it very clear there should be none of the later in the bill, but they have a 535 member body that is very accustomed to bacon and will put up a fight. Obama and Biden must hold the line because otherwise it will be even harder next time.

Some proposals though may just need tweaking to turn from pork to a true improvement. Seattle is proposing projects worth as much as $7 million (for one solar installation). This may seem ludicrous when you consider that some years there are more rainy days in Seattle than sunny days. But, while areas like Nevada may be able to make thousands of times more solar megawatt hours than Washington, it is unable, with the current electrical grid, to efficiently send that electricity up north. Meanwhile, countries like Germany, which gets a comprable amount of sunlight annually, is the leader of solar power in all Europe. Now, the plan as proposed would only power the (publicly owned) Qwest exhibition center and as planned would only reduce energy costs 14-16%. I don't know what the current energy costs of this building are, but that doesn't sound like much bang for the buck. It is possible, though, if Seattle uses lessons learned in Germany, to apply such funds to a solar network that may generate much better results and make that $7 million really work.

We are very lucky to have a President (can I drop the "elect" yet? PLEASE!!!) who values a high level of skill and expertise over dogmatic loyalty. This quality will hopefully guide policy and spend our money much more wisely than the failure of Bush and Paulson have.

Rumors of my death only show you weren't listening

It's been a while since I've been back over here. Sorry if it's gotten a bit dusty. It isn't for lack of things to talk about though; the last two months have been anything but quiet. Between failed bailouts, bailouts that failed to pass (but were implemented anyway), power hungry governors and egocentric wanna-be senators and war this has been a hectic transition period.

And while I have been silent here on my blog, my Twitter followers have suffered from an abundance of opinion. I will still come here and post periodically, most of my attention will be focused by the more concise 140 character limit imposed over there. Those who haven't already, feel free to come over and tell me there what I am getting wrong - http://twitter.com/trianglman

Open Hands

Now that Bush has started handing out money to any corporation that says they are about to fail, lots more companies are looking to spread the wealth from the American tax payer to their personal shareholders. Now it's the car manufacturers putting their hands out. Some questions that should be answered before we do anything are: how did they get there, how will (or just "will") a bail out help them and how should a bailout be structured?

GM has been on the path to this point for years now. At least since 2004 (I don't have data that goes back further) GM has steadily been posting decreasing net profits (2006 being an exception). The sudden spike in oil prices over the past couple years has exasperated the problem, which is reflected in 2007's $42,000,000,000 net loss. Over the same time period, Toyota has moved more strongly into the American market (exceeding GM for net sales this year). Toyota has done this through a reputation of quality (which GM and Ford have both lost over the past couple decades), a wide selection of low priced cars, and especially the past couple years a record of fuel efficiency. Only in the past year have the American automakers refocused their message on fuel efficiency, often still falling short (due to their focus on SUVs, all of the hybrids from GM, et al have been SUVs, which still barely break the 20 mpg mark vs. 40-50 mpg Prius, etc.). Just this month we learned that the automakers are still bleeding millions of dollars a month, even as they attempt to retool their factories and cut their workforce.

This brings us to what the companies are asking for the money for. One of the biggest costs facing automakers is changing their plants from building SUVs and Hummers to more fuel efficient hybrids and Volts. This is key to these companies being viable in the near and long term future, but it is a huge cost. Due to the credit crisis of the past few months, lending that could have financed such changes has dried up. What the automakers believe is that if they can get the money to make the cars people want, people will start buying again and they will return to solvency.

Sadly, I'm not completely sure this will be the case. The credit slow down has affected more than just banks and corporations. Buyers also are unable to get credit. Also, much of the purchasing power of American consumers in the past few years has been due to increasing home values and decreasing costs of borrowing on those houses. Now, with both of those reversing, the consumer just can't afford to buy a new car. This is reflected in the fact that even Toyota's sales are negative this past quarter. Also, because GM, Ford and Chrysler have been so slow to get into the hybrid market, it will take time to convince consumers that they are comparable to the Priuses and Civic hybrids of foreign automakers.

Because of this, I don't think we should or even can do a bail out similar to the one proposed for the bad mortgages. NPR's All Things Considered last night did a segment on the Chrysler bail out from 1979. Then, instead of directly giving Chrysler the nearly $2 billion, the government only insured the loans banks gave to the companies. In return, the government got preferred stock, required detailed plans on Chrysler's restructuring, and ensured that if Chrysler went bankrupt that it would get repaid first. Because of this action, Chrysler returned to profitability quickly and wound up paying off the loans seven years early and the government made money on the deal.

I believe a similar set up would be even easier to achieve now. The government, through the TARP law, has much more leverage over banks that could finance such loans. After the buyout of AIG, the government controls roughly 70% of the country's largest insurer. Through these two entities, we could potentially help both the auto industry and, depending on the success of the automakers, ensure long term solvency to the banking industry. This will also keep the government from being on the line for yet another $50 billion that we just simply can't afford right now.

The biggest problem right now is that the banks still aren't lending though. In the past couple weeks since the TARP package was passed, the rate banks lend to each other has dropped more than 4%, yet the rate banks lend to borrowers and to corporations has still remained high. Loosening that up, with targeted goals in mind, is going to be one of the best ways to get the economy moving again. There are two ways to loosen that up, and I think both should be taken: 1) Get money flowing to the middle class, which is where most of the consumer debt is held. You can do this through tools such as the stimulus checks of earlier this year, increased unemployment benefits during this slow down, and tax incentives for job creation. 2) Get loans moving to corporations again. The best ways of doing this are through insuring loans to targeted industries (green energy, infrastructure, automotive to name a few) and tax incentives for targeted initiatives (hiring and green energy again). The problem all along has been a trust issue, so if we can increase the trust, we may be able to pull out of this tailspin and not leave our children with $20 trillion in bad debts to collect.

Yes We Did

What a day yesterday was.

For my wife and I, it started at 4 AM. My wife was the canvas captain for the Airport Township for the Obama campaign. Meanwhile I was in charge of watching our four year old son until my mother finished voting and running errands so that she could watch him. I took Isaac to vote with me at 8 AM. The line was an hour long, but everyone near me was so excited to be there ready to vote. The couple in front of me were voting for the first time; they had just recently become citizens.

When I cast my vote, I couldn't be prouder. My son helped me by pushing confirm on every screen. Thirty years from now he will be able to tell his children he helped elect our first black president.

Afterward I helped a friend get to the staging location and took Isaac to my mother's. I heard word of a couple voter intimidation incidents and attempts by poll workers to keep people from voting by violating the law and attempting to require multiple forms of ID. These were quickly stopped by the volunteer lawyers and other Obama volunteers. That afternoon I canvased with several other Obama volunteers. Every house I went to the people had already voted. People seeing us on the street honked in encouragement or cheered the Obama tees we had on. There were even victory parties being started at 4PM.

Then came the hardest time. After 6PM it was too late to go out canvasing any more. We all met back up at the staging location and prepared to go out to help with long lines. While there were some long lines closer to St. Louis City (300 people still in line two hours after polls closed), every voting location in our township had almost no lines and we began to worry that not enough people voted.

When Pennsylvania was called for Obama at 6, we began to be hopeful; one of the four legs of McCain's victory path had been knocked out from under him. After polls closed at 7PM we broke up and many of the volunteers went to the watch party downtown while my wife and I, having been sick for the past couple weeks, went to get our son and headed home.

On the way, Ohio was finally called and I knew Obama would be our next president. Barack's message of hope and inclusion won out over McCain's calls for hate and division.

Now, as I said in my last post, the real work begins. After eight years of divisive politics, of trying to call one group more or less patriotic than another, we must unify. "And to those Americans whose support I have yet to earn - I may not have won your vote, but I hear your voices, I need your help, and I will be your President too." We are one country, INDIVISIBLE; we will, we MUST work together to bring our country out of the troubles that face us now.

As I said on Twitter last night: To all the staunch conservatives: Throw away the straw men and wait to see what really happens before judging Obama's presidency. To all the staunch progressives: Obama was always center left. You will not get all you want, but our country will be better than ever. This country has always been a country of moderates. When Bush attempted to take the country too far right the people spoke up in 2006 and again this year. Should Obama attempt to do the opposite they will speak up again. This must be a time of cooperation and compromise or it will always be three steps back for every step forward.

No Rest for the Weary

Hopefully 36 hours from now we will know who our next president will be. These next few hours are what it all comes down to. Obama and McCain supporters across the country are working night and day to get their candidate across the 270 electoral vote finish line.

Posting here has been very light the past few months because both my wife and I have been a part of that. Now, more than any time in the past 22 months we need your help. Get out and vote! If you have time (or even if you don't) volunteer. Call your neighbors and remind them to vote; go door to door doing the same; go polling place to polling place encouraging people to brave the hours long lines that are sure to confront us. This country is a representative republic and it ONLY works for those who participate.

Remember also, this fight doesn't end on November 4th. If we elect these people and then stop paying attention, our causes will fall by the wayside. The real work begins November 5th. We must make sure our officials never forget why we put them in office. I have seen many people on the blogs and on Twitter saying they don't know what they will do once this election is over. But we cannot create the change we need if we just leave our elected officials to do it alone.