Wednesday, March 04, 2009

So what will work?

Nilsa raised a legitimate beef yesterday...that I had a lot of criticism and not much in the way of solutions. Here, then, since she asked;-), is a four point plan Economic plan for President Obama.

1) Drastically reduce this most recent stimulus! I know that there is a large feeling that government should be "doing something", but sometimes the best thing to do is very little. This stimulus is really very similar to the one that Bush rolled out last spring...which didn't work in exactly the same way that this one won't. Stop trying to save bad institutions...their shareholders shouldn't be bailed out...just take over Citibank and whoever else can't function, break them up and sell them off in an orderly fashion. But don't just start splashing money all over the place in hopes that it will "prime the pump" or "jump start the economy". It won't. Obama was fond of chiding the opposition to this bill by saying "The American people want action." That is not really true...the people want results, not necessarily action.

2) Fix the financial regulatory infrastructure. Let's remember what the real problem is here...failure of financial markets. Government CAN address that. Once banks are healthy again, let's try to prevent this from happening again. The financial regulatory matrix is totally broken...there are too many regulators and too much wasted energy and not enough oversight that works. Tear it up, and rebuild it for our current environment. And while you are at it...we need to change our anti-trust ideas, too. Forget about monopolies...if a company is "too big to fail" then it is simply too big, period. Capitalism without failure is like Christianity without hell, and we need to be able to let the losers fail.

3) Fix the budget. The governments income statement is so bad it is hard to believe that it is real. Total revenues of $2-2.5 trillion, and total outlays (not even counting the stimulus) of $3.25 or so. Imagine that you make $50,000 a year. Now imagine that you spend $65,000 a year, and borrow the extra $15,000. Every single year. And there you have our Government. In the long run, the economy can not be strong if the Government's finances are that weak. And there are only two ways to do this...raise taxes or cut spending. Yes, it's painful, but there is no easy way out of this.

Here is the best part...and I really, really want one of Obama's acolytes to defend this fact (which comes from the recently proposed budget, page 114): His current plan calls for deficits of at least $500 billion every year through 2018. And, he has NO INTENTION of shrinking the structural deficit, at all. In 2014-2018, he is planning on deficits of 570, 583, 637, 636, 634 and 712 BILLION dollars. This is his "new era of responsibility"?

4) Fix entitlements. See #3 up there? Now imagine that you have promised to spend $70,000 next year, $75,000 the year after and so forth. Now you really have our Government. There is no such thing as "fiscal responsibility" with a permanent re-structuring of the inflows and outflows of Social Security and Medicare. And again...there is no magic bullet: we either have to cut benefits or raise taxes.

We have to stop thinking about "The Government" as if it is not a collection of the people. Relieving personal debt in favor of Government debt doesn't help the Country. It benefits some individuals in the short-term, but it harms all taxpayers in the long-term.

Here is the thing...there is no quick solution to this. We are, as a nation, over-leveraged (i.e., too much debt). De-leveraging is a painful process, and while you can put the pain off, you can't make it go away, and in fact can only make it worse by postponing it. My problem with Obama's plan so far is that he is proposing that we fight over-leverage with even more leverage. It doesn't really require a PhD in Economics to see why that is a bad idea...

Now, a couple of people have said "Oh, but most economists think this is a good idea." First of all, there is absolutely nothing that "most" economists agree on. Ever hear the old expression...if you put two economists in a room, you get at least three opinions? You find three people that call themselves "economists" who love this idea, and I will find ten who hate it. But none of them will be able to cite an example of this type or program having the effect that this one is aiming for.

OK, this is already too long. Short version? There is no easy solution...we are going to have to suffer some pain to get through this, and while we can shift that pain around, we can not avoid it.

If you would really like, I could tell you about how Baby Boomers have ruined capitalism, imperiled democracy and why they are a scourge on Humanity...maybe tomorrow;-)

OK...have at me.


SoMi's Nilsa said...

Bravo! Very well put, my dear! Now, about that grad school degree. Ever considered public policy? =)

erin said...

Very, very good. I was like you, voted for the other guy, but was still hopeful when Obama took over. This plan is essentially bailing out "crooks" (as my grandfather says hehe) who weren't running their companies properly. And he says he's not going to raise taxes for everyone? How is that even possible when he's putting such a huge financial deficit over this country? It seems like he's digging himself into a hole that the next president is going to have to deal with.

I've enjoyed today's and yesterday's posts!

Aaron said...

Rock it.

I still maintain you're fiscally retarded if you believe you can spend your way out of debt.

W T G said...

Intresting. Very interesting and I agree that there is no quick solution - that is to say none quick enough for this society of Veruca Salts. In general, we are Darwinism in Reverse .... the general population is becoming dumber by the day by accepting anything the mass media spoon feeds. ~CHERRS !

laurwilk said...

If you are quoting me with the economists quote, then you have misquoted! Haha.

It will be interesting to see how this all plays out. As with everything about this whole debacle, I think blame can only be placed on the country - Americans. We (not you and I - but as a whole) lived completely out of our means. And technically, our government delivers what we want to have delivered. (Or else the majority raises all sorts of heck and individuals aren't re-elected.)

So, I place the blame on us - not Obama, not the government and not corporate America.

Scotty said...

Agree wholeheartedly :)

Ys said...

I'm not sure how it works in the US so maybe it's different but over here in the UK it's not really thought of as a great idea to let the government have full control of the banks. So I'm not sure I'd agree with that point you made but everything else sounded plausible ;) To be honest I find it hard enough to keep track on what is and isn't happening here to really get to grips with what's happening elsewhere so I find these posts really insightful.

One question... what are Baby Boomers? Am I to take it literally and think they're people who have lots of children?

Accidentally Me said...

Laurwilk - Nope, not quoting you:-) Other commenters!

Ys - Not a total takeover of Banks, just the ones that it has already basically started. Since the government insures deposits, they have to make good on the deposits of failed banks and therefore have to step in when they really struggle. My point is that they need to stop pretending that some of these banks need "some help" and recognize that they are beyond rescue and take them over to dismantle them.

Baby boomers are people born from 1945-1963, in the post War baby boom. They are evil!