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Bob Cesca

By Bob Cesca
Author, “One Nation Under Fear”

We’re only three months away from the midterm election when a shockingly large number of American voters will inexplicably vote for Republican candidates. I have no idea if this will mean a Republican takeover of the House or Senate or both, but there will definitely be enough voter support for Republicans to significantly reduce the Democratic majorities in the House and Senate.

Why? Because too many voters tend to be low-information, knee-jerk Springfield-from-The-Simpsons types, and the Republicans have lashed their crazy trains to this new wave of inchoate roid-rage to help sweep them into more congressional seats.

Here are a few of the ongoing economic conditions facing a vast majority of Americans, many of whom are all revved up to vote Republican in November. According to Michael Snyder of the Business Insider:

• 61 percent of Americans “always or usually” live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007.
• 66 percent of the income growth between 2001 and 2007 went to the top 1 percent of all Americans.
• Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.
• The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.
• In America today, the average time needed to find a job has risen to a record 35.2 weeks.
• More than 40 percent of Americans who actually are employed are now working in service jobs, which are often very low paying.
• Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009. (more…)

Leo W. Gerard

David M. Rubenstein

The United Steelworkers and the Carlyle Group don’t agree on everything, but on this we are in lock-step: the key to success of the stimulus is maximizing the economic activity generated by each tax dollar spent. The more money spent in the manufacturing sector, the greater the economic benefit. Manufacturing multiplies the spending because it has a ripple effect through the economy. That’s why it’s so important to concentrate the expenditures on products with significant domestic value added, which will more quickly generate more jobs and economic benefits.

Manufacturing is the bedrock of our nation’s gross domestic product, producing approximately $1.40 of additional economic activity for every $1 of direct spending in the sector – more than all other U.S. industries. Here’s how this “multiplier effect” works: Every dollar spent on a manufactured product pays wages and benefits to company employees, buys raw materials and purchases supporting products and services such as forklifts and shipping. The suppliers of the raw materials and supporting products, in turn, pay wages to their employees and purchase raw materials, supplies and services – and so on. And all along the way employees use some of their wages to buy products and services for themselves. Of the incremental spending generated by the multiplier, roughly 60 percent is spent in other sectors, meaning everyone from retailers to teachers to healthcare workers benefits from manufacturing activities.

Manufacturing has also been the engine of U.S. economic productivity. Since 1990, output per hours worked in the manufacturing sector has increased 94 percent, versus 49 percent for the economy as a whole. Greater productivity translates directly into higher pay. In 2006, wages and benefits for the average manufacturing position were 41 percent higher than the rest of the workforce.

But this critical part of our economy is now suffering terribly. While a serious recession is gripping most of the world, for U.S. manufacturing it’s the 1930s all over again. In 2008 alone, manufacturing jobs were cut by more than 540,000, an amount nearly equal to the population of our nation’s capital.

In the steel industry, for example, nearly 55 percent of capacity is currently idled, a level last seen in the Great Depression. Cumulative steel production for the first seven weeks of 2009 was down 52 percent compared to the same period last year.

The manufacturing collapse hurts our economy in two ways. First, layoffs create a vicious cycle of lower consumer spending, which leads to reduced manufacturing activity, which leads to still more lay-offs. Second, the multiplier effect cuts both ways. Just as a growing manufacturing sector lifts all boats, problems in the sector disproportionately ripple across the rest of the economy.

So, by ensuring spending flows to the manufacturing sector, the stimulus package can have a deep and lasting impact. And what’s more, results will come quickly. Job creation by supporting industries up and down the supply chain will begin as soon as infrastructure projects are awarded – even if the projects are not started immediately – due to lead time needed to support the new demand. For example, steel manufactures will begin relighting beam and bar capacity long before shovels are put to ground.

But stimulus spending can’t exist in a vacuum; as the President has said, it needs to be accompanied by action to loosen up credit markets and stem the tide of home foreclosures. Without access to credit, many manufacturers won’t be able to fund the inventory needed to address demand created by the stimulus program. This, in turn, will dampen and slow the program’s impact.

Secretary Geithner’s recent announcements include a number of important ideas and initiatives, but additional details need to be fleshed out. For example, a public-private partnership to purchase toxic assets is a positive step that sends a clear signal that we must find a way to attract private capital back to the markets. Before the private sector engages, however, the administration must identify who can sell assets, what type of assets can be sold and how the financing will work. In addition, the expansion of the TALF will provide additional liquidity to constricted markets, but policymakers should consider further broadening the class of asset-backed securities that are eligible for TALF support.

While jumpstarting credit markets is critical, it is equally important to take aggressive action to stabilize housing prices. The President’s recent announcement, which emphasized interest rate reductions through mortgage modifications, is a significant step in the right direction. However, we fear that homeowners will continue to lack incentives to stay in their homes unless the program places a greater emphasis on principal reduction. Interest rate reductions will help some homeowners, but those with significant negative equity may still have strong incentives to walk away from their homes. Stabilizing the housing markets is the most important action the government can take to revive consumer spending.

A well-implemented stimulus plan that focuses spending on manufacturing and industry, incentives for investment of new private capital and additional steps to prevent foreclosures will help to break the credit and investment logjam.

Leo W. Gerard is International President of the United Steelworkers and David M. Rubenstein is Co-founder of The Carlyle Group, a global private equity firm.

By Leo W. Gerard and David M. Rubenstein

Leo W. Gerard: Economist James K. Galbraith, the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the University of Texas, recently told Deborah Solomon of the New York Times that you are “the person with the most serious claim” for predicting the onslaught of the current credit disaster.

The promo for your most recent book, Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2009), says the fall of the bubble economy was “completely predictable.” But you were standing nearly alone out there for some time yelling, “The collapse is coming, the collapse is coming.”

When did you get the first inkling that the collapse was impending and what did that feel like?

Dean Baker: I learned from the stock bubble in the 90s that the timing was hard to predict but  I first became convinced that it was starting to burst in the fall of 2006, (house prices had begun to fall) and I wrote a forecast projecting a recession for 2007. It turned out that I was still somewhat premature. I was expecting the price decline to gain speed more quickly and to have a more immediate impact on the economy. However, according to the National Bureau of Economic Research, the official arbiter of recessions, the current recession did begin in 2007, so I was not too far off.

As a more general matter, I did feel somewhat vindicated, although it was striking to me, that even as the bubble was very much in the process of deflating in late 2007 or even early 2008, most economists were still convinced that it would have little consequence for the economy. I recall repeated pronouncements from former Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke that the problems were contained in the subprime market.

Gerard: What were the clues you saw that others ignored or missed?

Baker: For most economists, the idea that a market would take leave from its senses – that it would be driven by speculation – is almost inconceivable. Given that we had just seen a massive bubble in the stock market, it really should not have surprised people to see one also develop in the housing market.

The main factor that attracted my attention was the sudden spurt in house prices beginning in the mid-90s. For the hundred years from the 1890s to the 1990s, house prices nationwide had just tracked the overall rate of inflation. Yet, from 1995 to 2002 (when I first noticed the bubble), house prices rose by 30 percent in excess of the rate of inflation.

There was no explanation for this sudden jump in prices based on the fundamentals of supply and demand. Income growth had been healthy in the late 90s, but not extraordinary by the standard of the early post-war years. Furthermore, income growth had largely stopped during the 2001 recession.

Population growth was slowing, which should have slowed housing demand. On the supply side, we were building houses at near record rates, so clearly there was no serious supply constraint.

If there is a big run-up in house prices and no obvious force driving it on either the demand or the supply side, then it sure looks like a bubble. Just as additional confirmation, I checked rents, which tend to more or less follow sale prices. Rents had increased only slightly more than the rate of inflation in the late 90s, and by this decade, they were falling behind inflation. There certainly was no evidence of growing demand pressure on the housing market there. 

Finally, I noticed the rise in vacancy rates. This is consistent with people buying homes for speculative purposes. Many investors were willing to gamble on a high price for a new home or condo, betting that it would go up even more in the future. Of course, this is not sustainable. Not many people can afford to keep a unit vacant for a long time, since it means that they are paying the mortgage and getting little or nothing back. The high vacancy rates of this era virtually guaranteed that the bubble would burst.

Gerard: Did you also see problems with subprime mortgages contributing to the bubble?

Baker: The problems in the mortgage market were hardly a secret. The subprime share of the market nearly tripled from 2002 to 2006. The Alt-A share, which are typically mortgages taken out by small business owners with variable income (and often in accurate tax returns), exploded from around 1 percent to 15 percent. This should have set off flashing red lights to any serious economist.

And, the stories about liar loans and phony documents were everywhere. I was getting e-mail from people around the country telling me about friends and relatives employed by mortgage banks who were told to put in fake numbers so that the banks could issue loans. Certainly the regulatory agencies must have known this was going on.

Gerard: But if you noticed those clues, and looking back on it, those clues are actually quite obvious, why did the vast majority of financial analysts and economists and managers for large investment funds including pensions and endowments, fail to see the bubble and its implications?

Baker: The bulk of financial analysts and economists largely repeat the conventional wisdom without ever seriously trying to assess whether it makes sense. They unthinkingly follow the conventional wisdom because of the structure of incentives in their profession. No one is going to get fired because they didn’t see the housing bubble. In fact, few people are likely to even miss a promotion because they didn’t see the bubble.

Economists and financial analysts are not like steelworkers or people in other occupations. They don’t get evaluated based on their performance. They can mess up every day of the week through their whole careers, and this would be just fine, as long as they messed up in the same way as their peers.

On the other hand, the few economists/analysts who spoke up to warn about the bubble were taking huge risks. Of course, we were all ridiculed at the time. If you were an economist working at a major investment bank and tried to tell them that all their big money-making deals were going to get them in trouble, they would probably tell you to shut up and fire you if you didn’t.

If the housing market stayed strong and house prices kept rising or just remained stable, then any economist who had warned of the bubble would be laughed off as a chicken little.

In short, the incentives are such that the overwhelming majority of economists will never challenge conventional wisdom even if they think it is wrong. They are there to hold on to their jobs, not to inform the public about the economy.  

Gerard: Did you know the collapse would be this bad? How bad will it get?

Baker: I knew that it could be very bad. I was trying to be contained in my pessimism (I couldn’t completely ignore the conventional wisdom either), but I did warn that the downturn could develop into a Japan-style financial crisis. This obviously is the case that we are looking at.  Of course, if the Fed and Treasury had moved more quickly, they could have prevented some of the damage that the financial system is now seeing.

The same applies to fiscal stimulus. It was painful sitting through the months of the election campaign and then the transition when the government was completely paralyzed. At that point, economists from across the political spectrum all recognized that the economy needed further stimulus, but the politics were such that nothing could move.

As it is, the stimulus package passed by Congress is a good start, but it is nowhere near big enough to turn the economy around. The unemployment rate is virtually certain to shoot past 8.0 percent in the February jobs report and is likely to hit 9.0 percent by summer. If we are lucky, the stimulus will provide enough of a boost to keep the unemployment rate from reaching 10 percent, although I would not take this for granted at this point.

In addition to higher unemployment, house prices will continue to fall at least until summer. The big question in my mind is whether house prices return to their pre-bubble level or they overshoot on the way down. At this point, I would bet on overshooting. This implies an even larger loss of wealth for homeowners, more foreclosures and more big losses for banks.

Gerard: Will the stimulus stop the free fall?

Baker: If we are to turn things around, we really need much more stimulus and we need it quickly. My favorite idea at this point is a tax credit to employers for giving workers paid time off. For example, if employers offer paid parental leave or sick leave, or paid vacation, or increase the days they already offer, then the tax credit would cover the lost work. This can be a quick way to get millions of people back to work.

The arithmetic on this is straightforward. Suppose that employers of 100 million people give their workers an amount of additional paid time off that is equal to 5 percent of their work time. These employers would suddenly have demand for 5 percent more workers, or 5 million workers. I can’t think of a quicker, less bureaucratic way to create jobs at this point, especially now that we have already funded most of the shovel-ready infrastructure projects.

Gerard: What must be done to prevent this from recurring?

Baker: There are two key points. First we must rein in the political and economic power of the financial sector. The financial sector must serve the real economy, not the other way around. There is a long list of reforms that are needed to ensure this outcome, but the main point is that an efficient financial sector is a small financial sector.

One way to keep it small is to tax it. If we had a very modest financial transactions tax, for example 0.25 percent on the purchase or sale of a share of stock, it would have very little impact on people who invest for the long-term. However, it would have a huge impact on people who are buying at 2:00 and selling at 3:00. This sort of tax would discourage such speculation, making the markets friendlier to long-term investors.

It would also reduce the size of the financial sector, since the industry makes much of its profit off this sort of speculation. In addition, such a tax could raise more than $100 billion a year. That’s real money even in Washington.

The other point is that a balanced economy, in which workers share in the gains of growth, is not conducive to financial bubbles. We didn’t have any major bubbles in the three decades following World War II. During this period, productivity gains were passed on in wage gains, which in turn fed consumption, which led firms to invest in expanded capacity. The basis for the bubble economy was created in the 80s when this virtuous circle broke down and workers could no longer count on seeing their wages rise in step with productivity.

In short, if we want to prevent another financial bubble and the sort of economic collapse caused by its bursting, we should support policies that allow workers to share in the gains of growth. That sort of world favors investment in the productive economy rather than financial speculation.

***

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC., has written several books. His most recent, Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2009), chronicles the growth and collapse of the stock and housing bubbles and explains how policy blunders and greed led to the catastrophic market meltdowns. 

His analyses have appeared in many major publications, including the Atlantic Monthly, the Washington Post, the London Financial Times, and the New York Daily News. His blog, Beat the Press, features commentary on economic reporting. 

 He is a frequent guest on National Public Radio, Marketplace, CNN, CNBC and other news programs.

Leo W. Gerard

By Leo W. Gerard
International President

For a brief moment, when Congress authorized that $700 billion bailout for the Wall Street wise guys whose recklessness caused the financial crisis that we’re all suffering, federal officials actually considered giving part of the money to foreign banks.

Really.

They quickly backed away from using American tax dollars to prop up overseas financial institutions.

But now, the same issue is at stake with the $825 billion economic recovery package. Fifteen groups including the U.S. Chamber of Commerce and the Business Roundtable want to give American tax dollars to foreign manufacturers to create jobs overseas.

That’s right. The U.S. Chamber of Commerce wants to spend the tax dollars of unemployed Americans to create jobs in China and Indonesia, Korea and India.

The 15 business groups sent a letter to Congress opposing provisions added to the recovery package that would strengthen existing laws requiring government agencies buy American steel and other products when building public works projects with tax dollars.

The recovery package would use American tax dollars to pull the United States out of a deep recessionary hole caused by a blind belief that business knows best and shouldn’t be regulated – from banks to pharmaceutical manufacturers.

The package is, essentially, Americans agreeing to increase their national debt to revive an economy sucker punched by greedy Wall Street gamblers. So when business interests want to spend those tax dollars overseas, to create jobs there at the expense of unemployed Americans, while at the same time increasing the U.S. trade deficit, frankly, it looks a bit like treason.

To survive this economic catastrophe, Americans must assert themselves as economic patriots. They must stand up to the likes of the Chamber and the Roundtable and call them out for being economic traitors to the United States of America.

The measures proposed in Congress to strengthen the existing laws requiring that American products be purchased are simple, inexpensive and would not delay construction projects. For example, Ohio Sen. Sherrod Brown wants requests for waivers to the federal “Buy America” requirements to be publicly posted on the Internet in a place where people with knowledge of the situation can comment on them. That way, a government agency will likely quickly find out about attempts to use the waiver process to circumvent the rules.

The Chamber and the other business groups whine in their letter to Congress that strengthening “Buy America” rules may violate international agreements.

That’s bogus and the groups know it. America can honor its international obligations while using U.S. tax dollars to employ American workers. For example, states that receive federal grants for highway and mass transit projects may specify that products for that construction be purchased from U.S.-based producers without violating international agreements.

The Chamber and the other business groups also contended they were worried that strengthening the “Buy America” rules would prompt retaliation from foreign countries, so that U.S. companies would be prohibited from providing materials for construction funded by foreign stimulus programs.

When other nations nurture their industries and employ their own countrymen with their tax dollars, it won’t be retaliation. It will be reasonable. It will make good economic sense.

French President Nicolas Sarkozy announced in December that he would do whatever it took to save his country’s auto industry. No big protest broke out from anyone contending France should buy the auto parts from some low-priced American competitor. No, it seemed logical that France’s president would “buy French” and strive to rescue the industry that employs 10 percent of his population.

India already employs many protectionist measures to shield its industries. China subsidizes its manufacturers and manipulates its currency. But, somehow, the U.S. Chamber of Commerce thinks it’s wrong if U.S. tax dollars are spent in America to employ Americans.

These are the guys who were behind George W. Bush’s tax breaks for the rich these past eight years. These are the very ones whose wrongheaded policies brought America to its economic knees. And they are the business hotshots who don’t see that they’ve done anything wrong that should change.

Those Wall Street business wizards felt so entitled to Americans’ $700 billion in tax dollars given to bail them out that they spent it on $18 billion in year-end bonuses, a $16,000 commode and a $50 million Dassault Falcon 7X manufactured-in-France corporate jet. (Well, the Obama administration did tell Citigroup it had to cancel that jet.)

Here’s the thing to remember about these business groups so worried about preserving “free” trade. A dozen of them put America or U.S. in their names, like the United States Council for International Business. But it’s not the U.S. they care about. Their focus is themselves.

Many of them long ago shipped manufacturing overseas, to benefit from tax breaks provided by the Bush administration, slave wages paid to third world workers and zero enforcement of safety and environmental regulations. That’s why they oppose “Buy America” regulations. They want to use American tax dollars to pay subsistence wages at their factories in foreign countries, then ship the steel or aluminum or rubber back to the U.S. at untold cost to the environment and the trade deficit.

You can trust ‘em same as you can Bernie Madoff.

What you can trust is that empty feeling in your stomach and your pocket, a pang that’s spreading quickly while the U.S. Chamber busies itself trying to thwart “Buy America.” More than 2.55 million Americans have been thrown out of work since Bush’s recession began. On Monday alone, companies announced they would cut 75,000 more jobs. Unemployment stands at 7.2 percent, and it is expected to rise to 10 percent before year’s end if drastic action isn’t taken.

Drastic action isn’t sending American tax dollars overseas to create jobs there.

Last year, the Government Accountability Office reported that “Buy America” policies are effective by “protecting domestic employment through national infrastructure improvements that can stimulate economic activity and create jobs; protecting against unfair competition from foreign firms as a result of foreign government subsidies; and maintaining national security interests through the continued use and development of certain industries within the U.S. economy, like the iron and steel industries.”

That sounds like a policy worth investing in. A policy good for America.

Peter Morici

 

 

By Peter Morici

Professor, Robert H. Smith School of Business, University of Maryland

 
Today, the Commerce Department reported the November trade deficit was $40.4 billion. This was down from $56.7 billion in October, largely because oil prices fell and the recession is curbing demand for imported consumer goods and petroleum.

To the extent stimulus packages expected to be enacted in the United States, Europe and China lift the global economy, the reduction in the trade deficit will reverse. Oil prices will rise again, and with China increasing subsidies on exports, U.S. imports of consumer goods will soar. The trade deficit will emerge as a major drag on the demand for U.S. made goods and services, and pull the U.S. economy back into recession as the effects of stimulus spending wear off.

At 3.4 percent of GDP, the huge trade deficit indicates Americans continue to consume much more than they produce and borrow too much from the rest of the world, especially China and the Middle East oil exporters.

The huge trade deficit is nearly entirely by trade with China, imports and automobiles and parts. These are caused by a combination of an overvalued dollar against the Chinese yuan and Chinese protectionism, a dysfunctional national energy policy that increases U.S. dependence on foreign oil, and the competitive woes of the three domestic automakers. Together, the trade deficit with China and on petroleum and automotive products account for virtually the entire deficit on trade in goods and services.

To finance the trade deficit, Americans are borrowing and selling assets at a pace of about $400 billion a year. U.S. foreign debt exceeds $6.5 trillion, and the debt service comes to nearly $2,000 a year for every working American.

The trade deficit will make the recession longer and deeper, and lessen the positive benefits of President-elect Obama’s proposed stimulus package. If Obama does not fix the banks and significantly reduce the trade deficit, stimulus spending will not permanently pull the economy out of recession, and the economy will slip into a prolonged malaise or depression.

Simply, money spent on Middle East oil, Chinese televisions and coffee markers, Japanese and Korean cars can’t be spent on U.S. made goods and services, unless offset by a comparable amount of exports. Since U.S. imports exceed exports by 3.4 percent of GDP, the trade deficit creates an enormous drag on demand for U.S.-made goods and services. Along with the credit crisis and resulting slowdown in new housing and commercial construction, the banking crisis and trade deficit could push unemployment above 10 percent for a long time.

The trade deficit imposes a significant tax on GDP growth by moving workers from export and import-competing industries to other sectors of the economy. This reduces labor productivity, research and development (R&D) spending, and important investments in human capital.  In 2009 the trade deficit is slicing $400 billion to $600 billion off GDP, and longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.

Cutting the trade deficit in half would pull the country out of recession and get the economy on a stable growth path. A fiscal stimulus package, increasing the federal budget deficit by two or three percent of GDP, will make things much better for a period of time; however, successive stimulus spending and permanently larger federal budget deficits will be needed to sustain the GDP and employment gains. Whereas, cutting the trade deficit in half would yield lasting benefits for U.S. GDP and employment growth, far transcending any fiscal stimulus in its permanent effects. Cutting the trade deficit would substantially increase tax revenues and reduce the federal budget deficit.

Each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment, and shifts workers into activities where productivity is lower. Productivity is at least 50 percent higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into these industries would increase GDP.

Were the trade deficit cut in half, the movement of workers and capital into more productive export and import-competing industries would increase by at least $400 billion or about $2500 for every working American.  Workers’ wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying higher wages and offering decent benefits.

Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost more than 4 million jobs since 2000. Following the pattern of past economic recoveries, the manufacturing sector should have regained at least 2 million of those jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.

Longer-term, persistent U.S. trade deficits are a substantial drag on productivity growth. U.S. import-competing and export industries spend three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor.

Cutting the trade deficit in half would boost U.S. GDP growth by one percentage point a year, and the trade deficits of the last two decades have reduced U.S. growth by one percentage point a year.

Lost growth is cumulative. Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller.  This comes to about $10000 per worker.

Had the Administration and the Congress acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit could be eliminated without cutting spending.

The damage grows larger each month, as the Administration and Congress dally and ignore the corrosive consequences of the trade deficit.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

The latest mutterings from Congress, especially the Republican leadership, indicate that they still don’t have a clue about the seriousness of the economic downturn we are facing. They are saying that they can’t have a stimulus package ready for when President Obama takes office in two weeks, and that a package probably won’t be ready until well into February.

This delay is inexcusable. Remember when the Wall Street boys needed their TARP bailout in the fall? President Bush and his crew, together with the Democratic congressional leadership, with a huge chorus of media cheerleaders, all told us that the economy would collapse without immediate action. That is almost true now in the case of stimulus.

At this point, there should not be much question about the seriousness of the need for stimulus. The $8 trillion housing bubble that our economic leaders somehow could not see is in full collapse, with house prices falling at more than a 20 percent annual rate in the most recent data. The immediate impact of the collapse was to cut the housing sector in half.

More importantly, the lost housing wealth, combined with the loss of $8 trillion in stock market wealth, is causing consumption to plunge. We are going to see the largest set of bankruptcies and store closing in the retail sector ever. More than 10 percent of the workforce is employed in the retail sector. The layoffs will almost certainly top 1 million and could hit 2 million.

And, when those stores go out of business, they are not going to be sending their rent checks to shopping mall owners. The bubble in commercial real estate, which followed on the bubble in residential real estate, is also collapsing. Look for more surprised economists as hundreds of billons of bad loans on commercial properties suddenly appear on the banks’ books in the next few months.

In addition, we have the cutbacks in state and local governments, all of whom are being squeezed by plunging tax revenues. Since these governments are generally forced to balance their budgets, they have no alternative to making cuts and/or raising taxes. This is exactly the worse course for the economy right now.

This is the area that Congress could most easily address right now. Both red states and blue states are subject to budget squeezes. There must be a package of aid to state and local governments that President Bush and the Democrats on right now. President Obama can always add to such a package after he takes office.

This stimulus package should have been approved two months ago, but for whatever reason no action has been taken. As a result, we are seeing painful layoffs and cutbacks in state and local governments that are completely unnecessary.

There is no justification for further delay. Congress should immediately approve whatever assistance President Bush will agree to now, there is no reason that the public should be forced to wait until mid-February for Congress to pass the crisis.

If there is not interest in Congress today for serious action, perhaps the loss of more than 500,000 jobs that the Labor Department will report on Friday will help to focus its attention.

Robert Kutner

By Robert Kutner
Co-Founder and Co-Editor of The American Prospect

Here is a fine example of why a despairing President Truman once said, “Bring me a one-armed economist.” Our quote of the day comes from Martin N. Baily, an economist at the Brookings Institution, who was once on President Bill Clinton Council of Economic Advisers. The quote, incidentally, was the centerpiece of Peter Goodman’s lead article in the Sunday New York Times News of the Week Section, “Printing Money – and its Price” — expressing alarm that President-Elect Obama’s stimulus program will over-spend and over-borrow.
Baily told the Times:

“We got into this mess to a considerable extent by overborrowing. Now, we’re saying, ‘Well, O.K., let’s just borrow a bunch more, and that will help us get out of this mess.’ It’s like a drunk who says, ‘Give me a bottle of Scotch and then I’ll be O.K. and I won’t have to drink anymore.’ Eventually, we have to get off this binge of borrowing.”

But, wait, here comes the predictable “on-the-other-hand” that drove President Truman to look for a one-handed economist. Goodman, in alarmist mode, continues disapprovingly:

“‘This is a dangerous situation,’ says Mr. Baily, essentially arguing that the drunk must be kept in Scotch a little while longer, lest he burn down the neighborhood in the midst of a crisis. ‘The risks of things actually getting worse and us going into a really severe recession are high. We need to get more money out there now.’”

What is totally unhelpful here is the Times’ use of misleading metaphors about drunks, and Baily’s sloppy and promiscuous use of the pronoun, “we.” In fact, “we” did not borrow recklessly. Many financiers speculated with borrowed money to get very rich, and the financial economy is now unraveling as their assets turn out to be worthless. The Bush administration plunged the Treasury deeper into debt so that millionaires could pay lower taxes and a needless war could be waged. The entire economy borrowed from foreign central banks to finance purchases of products that the U.S. economy no longer made at home because of a perverse trade policy. And yes, consumer borrowing increased to make up for wages that were stagnant or declining. But that is not an undifferentiated “we” in the sense of thee and me. Mainly, it is a “we” made up of the rich, the powerful, their political enablers and their perverse policies.

So now that “we” are collectively up a creek, what exactly should we do? First, the rest of us need to take back our democracy from the tiny elite we that got us into this predicament. And in deciding what course to pursue, let’s appreciate that Baily’s left hand is much wiser than his right one: the government needs to spend a lot of money, so that the collapsing private economy does not end up as Great Depression II. When recovery comes, we can get the budget closer to balance. But if we attempt fiscal austerity in a severe recession, depression is all but guaranteed.

However, en route to a sensible stimulus program, President Obama will need to hack his way through a forest of elite nay-sayers like the Times article. Republican Senator Lamar Alexander (TN) said of a proposed stimulus package in the range of a trillion dollars, “I don’t even want to think about a number that big.” The President-Elect will face almost wall-to-wall Republican opposition.

Others contend that government is just not capable of spending large sums efficiently in short order. Infrastructure spending is debunked as taking too long to conceive, plan, and execute. “It’s actually very hard to spend $700 billion quickly,” New York Times columnist David Brooks argued. “If you’ve got a tiddlywinks hall of fame, they’re going to fund that thing.”

In fact, state and local governments and school districts are likely to suffer a revenue shortfall approaching $200 billion by next year. All the federal government has to do is write a check to cover that amount, and not a single policeman, fire-fighter, teacher, or first-responder need be laid off; not a single human service office closed; and not a single public project deferred.

These are not new projects that take time to conceive and plan. This is about preventing layoffs and shutdowns of existing public services. And Washington should also help non-profit social service agencies that are reeling from cuts in charitable giving and foundation losses as well as declining local government aid.

Some housing projects take a while to conceive. But according to Anne Gelbspan, a Boston non-profit community developer, finance for “shovel-ready” affordable housing projects has dried up in the current crisis. That’s because Congress foolishly structured our non-profit housing system to depend on tax credits for private financiers–who are now too traumatized to lend. If Washington substituted direct lending, these projects could move forward.

The federal government could also usefully spend money subsidizing mortgage rates on starter homes and on refinancing mortgages at low interest rates so that people at risk of foreclosure could keep their homes.

And even if universal health insurance is too heavy a lift for Obama’s first hundred days, part of the stimulus could go directly to community health clinics, which are already stretched to their limits.

An emergency infusion of federal cash could make public universities affordable again, and increase the value of Pell Grants. It’s far better to have young people attending classes (and not graduating saddled with huge debts) than to have them clogging unemployment rolls.

Another easy way of raising purchasing power is a temporary cut in the payroll tax. That’s a quick 6.2 percent after-tax raise for all workers. To qualify, businesses would have to resist the temptation to cut wages or employee benefits.

Still other doubters worry about increased deficits rekindling inflation. A loss of confidence in the value of the dollar, warns the same Peter Goodman in the Times, “would force the Treasury to pay higher returns to find takers for its debt, increasing interest rates for home and auto buyers, for businesses and credit-card holders.

Well, in case Goodman doesn’t read the Times’ financial page, the government’s current borrowing cost on 30-year bonds is currently around 2.5 percent. That means private investors here and abroad are willing to lend the federal government money for 30 years at a very low yield. Thirty years! The markets are aware that larger federal borrowing is in the offing. If markets anticipated inflation, they would be demanding far higher rates.

The government should sell lots of these bonds, and lock in a low rate. The national debt is going to have to rise for a time–the alternative is a depression–and the government might as well finance that debt cheaply. A cost of 2.5 percent for thirty years is effectively zero; it’s lower than the likely rate of inflation.

Once recovery comes, more credit will begin flowing to private investments again. There will no longer be a stampede into the safety of Treasury bonds, and government borrowing costs will rise. By then, the government can begin paying down debt, as we did after World War II.

So there is no shortage of good uses for a trillion dollar stimulus package, and no shortage of funds to finance it–and no good alternative. There may, however, be a shortage of political will. And that’s where the exceptional leadership of our new President will face its first big test.

President Obama will need to ignore the nay-sayers, and win over public opinion to the proposition that temporary use of very large deficits is preferable to a great depression. It is bizarre than any educated person thinks otherwise.

Robert Kuttner is co-editor of The American Prospect. His new best-selling book is “Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.”

First Published on The Huffington Post

By Leo W. Gerard
International President

Protestors disrupted a convention of mortgage financers in San Francisco this week, storming the stage as former Bush advisor Karl Rove spoke, heckling bankers with bullhorns, and badgering a panel with demands for a foreclosure moratorium.

Fear and frustration compelled ordinary citizens to harangue the green-visor set at their normally-staid annual meeting. Middle class Americans are losing their jobs and their homes and their hope while watching Ben Bernanke and Hank Paulson spend their tax dollars to bail out the infinitely-wealthy on Wall Street whose reprehensible risk-taking caused the country’s financial crisis. The middle class want their piece of the American pie.

Congress is trying to dish it out in the form of a second stimulus package that would extend unemployment insurance and food stamps and create jobs through programs such as highway construction projects.

Republican candidates John McCain and Sarah Palin oppose it. They’re running around the country with caricatures of Joe the Plumber and Joe Sixpack, pretending the GOP ticket represents the best interests of the working class and small business owners. It’s all false rhetoric and no real action. McCain and Palin object to intervention for anyone other than the wealthy, for whom they plan to enshrine tax cuts; for overfed CEOs, for whom they believe the $700 billion bailout was justified, and for themselves, for whom they believe the Republican National Committee appropriately opened its purse to purchase haute couture wardrobes, hair stylists and makeup artists.

McCain wants to brand a socialist S on Barack Obama although both voted for the bailout plan under which the U.S. government is nationalizing banks.

Unlike McCain, however, Obama is a man of the people and believes not in socialism but in the religious concept of everyone serving as their brothers’ keepers.  This is how he explained it in his acceptance speech at the Democratic National Convention:

“What — what is that American promise? It’s a promise that says each of us has the freedom to make of our own lives what we will, but that we also have obligations to treat each other with dignity and respect.
It’s a promise that says the market should reward drive and innovation and generate growth, but that businesses should live up to their responsibilities to create American jobs, to look out for American workers, and play by the rules of the road.
Ours — ours is a promise that says government cannot solve all our problems, but what it should do is that which we cannot do for ourselves: protect us from harm and provide every child a decent education; keep our water clean and our toys safe; invest in new schools, and new roads, and science, and technology.
Our government should work for us, not against us. It should help us, not hurt us. It should ensure opportunity not just for those with the most money and influence, but for every American who’s willing to work.
That’s the promise of America, the idea that we are responsible for ourselves, but that we also rise or fall as one nation, the fundamental belief that I am my brother’s keeper, I am my sister’s keeper.
That’s the promise we need to keep. That’s the change we need right now.”

That philosophy has great appeal with unemployment at a five-year high of 6.1 percent, with the poverty rate rising to 12.5 percent in what is supposed to be the richest country in the world; with 47 million without health insurance; with 1 million homes lost to foreclosure in the past two years and another 1.5 million in the process, and with the chronically ill across American skipping medications because they can’t afford them, as the NYT reported this week.

Because this philosophy is popular, Palin and McCain are trying to channel it, to steal it just as they did the “change” slogan, to try to make Americans believe that they would best serve the middle class. The problem is that everything they do belies their claims.

Sarah “Sixpack” Palin definitely has an elitist eye for clothing, hair styling and makeup. She spent $150,000 of Republican National Committee money on designer duds for herself and her family since accepting the nomination on Sept. 3. That’s three times the annual income for a typical American family. If she doesn’t shell out another dime, she’ll have spent $2,400 a day on clothing between the convention and the election. The vice presidential candidate’s taste includes a $2,500 Valentino Garavani jacket from Saks Fifth Avenue that she wore to the convention.

In addition, she and McCain decided their most important advisor, the one they would reward with the highest salary in the first two weeks of October as the stock market crashed, was Sarah Palin’s makeup artist. Her earnings for proper Palin powdering were $22,800 for two weeks, nearly twice the salary McCain and Palin gave their second highest paid staffer – their chief foreign policy advisor. They paid him $12,500, just $2,500 more than the $10,000 they ponied up for Palin’s hair stylist, whose compensation was fourth highest. The total for Palin’s hair and makeup in two weeks: $32,800.

While you’re scrimping and saving and shopping at Costco to prevent foreclosure of your home, just remember what Palin told CNN reporter Drew Griffin about providing a stimulus package to help the middle class: “But now that we’re hearing that the Democrats want an additional stimulus package or bailout package for what, hundreds of billions of dollars more, this is not a time to use the economic crisis as an excuse for reckless spending and for greater, bigger government and to move the private sector to the back burner and let government be assumed to be the be all, end all solution to the economic challenges that we have.”

So, for Palin, great big government is okay to bail out Wall Street fat cats, but not to help the middle class. Palin’s knee-jerk Republican “let-the-private-sector-solve-it” attitude shocks the consciousness after the indiscretion of the private sector just landed this country in financial crisis. We’re not inclined to trust them, frankly, Ms. Palin.

McCain said the same, backing the bailout for the reckless on Wall Street, and damning attempts by Democrats to help those on Main Street – of course, all the while dragging up the image of Joe the Plumber and contending he’s the guy’s advocate.

The ticket clearly lacks both introspection and economic expertise. McCain said it himself last year – that he was no authority on the economy.  By contrast, a person with some degree of economic proficiency, Federal Reserve Chairman Ben S. Bernanke, this week endorsed additional fiscal stimulus, saying it was appropriate now because the economy is likely to be weak for several quarters. In addition, economic expert and Nobel Laureate Paul Krugman said this week that additional government spending now – for a stimulus package – is appropriate, particularly for infrastructure improvement, which would provide real value and create jobs.

Though McCain and Palin clearly don’t understand, it’s time for everyday Americans to share in the American pie. At a rally in Florida this week, Obama talked about how the policies of the Bush administration have shrunk the pie and permitted the wealthy to grab the few remaining crumbs. He told he crowd he has no desire to reapportion the pie, as McCain keeps accusing him wanting to do – as a socialist, you know. Also, Obama objects to the McCain-Palin policy of continuing to feed the rich all of the crumbs, which is particularly evident in the GOP tax plan.

Obama told the group his goal is to expand the pie to ensure that all Americans get a piece. The crowd responded with a spontaneous chant of, “We want pie!”

That’s what is going on in America. That’s why protestors accosted mortgage bankers at their California convention. The middle class won’t stand for the rich wolfing down all of the pie anymore.