The Trouble with An Innovation Economy, The Entitlement Drag

Innovations Are Great, But the Jobs are in China

I was reading a magazine article the other day on Chinese manufacturing giant Foxconn. You may know Foxconn as the company that manufactures the iPhone, as well as many other high tech electronic devices. You may also know Foxconn as a place that famously had a rash of worker suicides last year, that prompted reforms in pay and work practices. Or you may never have heard of them. I don't have a view on Foxconn as a company one way or another, but the article struck a cord with me for a different reason. It mentioned, in passing, that number of people that Foxconn employs.

Think about this - Apple and Foxconn are approximately the same size as measured by revenues or profits. Apple develops unbelievable innovations - iPods and iPads, smart phones, computers, etc. It is a crown jewel that politicians talk about when the mention American ingenuity and the innovation economy. Foxconn is nobody's idea of an innovator, it's simply a manufacturing firm that leverages cheap labor in China at a lower cost than competitors in other countries can.

Here is the problem...Apple employs 30,000 people, Foxconn employs 1,000,000. Granted, the 30,000 people at Apple by and large do very well. Senior management has made themselves very rich. Even middle management and the programmers that build the innovation make excellent livings and get great benefits. It's a heck of a lot better to work at Apple than Foxconn, no doubt. But only 30,000 people get to live an Apple-sponsored lifestyle.

It's hard to build a middle class economy this way. Apple is a giant technology company. At 30,000 per company, you'd 493 new Apples to employ all the unemployed in this country. Never mind the fact that most of the unemployed would be vastly unqualified for a job at Apple.

My point is that we need to be more than an "innovation economy" to be sustainable. Innovation is great, but if we export the manufacturing to China and the customer service to India, then a small group of people in the US will get rich on the innovation, but the rest of the country won't benefit.

We would be wise to steal a page from Germany's playbook and invest in some real industrial policy. Germany has done an outstanding job growing high-dollar manufacturing jobs by investing in its industry and its trade education. Alas, I fear in the current Washington gridlock, that ideas like this are a complete non-starter.

Would you like fries with that?

The Entitlement Drag
If we spend all our money on Social Security, Medicare, Medicaid and Unemployment Benefits, how will we ever invest in the infrastructure and the education needed to build a full employment economy?

Our mass transit systems are far inferior to Europe and much of Asia. Our air traffic control system is from the 1950s. Our power grid is still largely powered by coal plants built 100 years ago. Funding for education at all levels is being cut.

We used to find ways to invest in big things - the Apollo missions, the Eisenhower Interstate system, the precursor to the internet. Now, I fear, we are spending too much money just on social programs which have no long term payback. No, I don't favor slashing and burning the social safety net - it's part of the values of a modern society. I'm just saying we need some balance. And probably some higher taxes to pay for it. Another non-starter these days.

Gingrich Falls, Weiner Tweets, The Economy Sputters

Just to Reiterate, Newt Doesn't Have a Chance
Last week, I had him third in a very weak field of declared candidates, a distant third to the close-to-insurmountable Mitt Romney and the far behind but highly credible Tim Pawlenty. Apparently his closest advisers agree that things are not going particularly well for the one-time Speaker of the House in his bid to become the GOP nominee as 7 of his top guys all resigned on the same day this week. A few are presumed to be going to work for Tim Pawlenty, a few others are rumored to be in talks with Rick Perry if he decides to mount a run. Either way, those closest to the Gingrich campaign appear to want nothing to do with it. And why should they? In national polls, Gingrich is not only getting trounced by declared-candidate Romney, he's getting trounced by unannounced candidates Palin and Guliani, and even getting beat by sideshows Herman Cain and Ron Paul. Gingrich will likely not win a single nominating contest and should be gone after South Carolina, if he doesn't pitch in the towel sooner.

Anthony Weiner, The Sad Clown
Call it the curse of technology. Call it the oldest fault in men since time began. Either way, once well-respected Rep. Anthony Weiner (D-NY) is now a sideshow. His sexting with at least 6 women over the past 3 years, including sending explicit photos has everybody and their brother calling for his resignation, including virtually all high profile Republicans and high profile Democrats such as House Minority Leader Nancy Pelosi (D-NY.)

What Weiner did was incredibly stupid. I always say that the internet is written in ink and you'd best not do anything on there that you wouldn't want your mother to see. Pictures of your erection certainly qualify there. Having said that, I'm not sure I'm on board with the Weiner resignation brigade.

It is not clear to me that Weiner has done anything even remotely illegal. It does not appear that he used government resources in his sexcapades. So at the end of the day, if all he did was send dirty photos, are his actions really so much worse than what the likes of Bill Clinton, Newt Gingrich, and a whole host of other politicians did, who actually had sex with women while in office and stuck around? And how exactly does this effect if Weiner is a good congressman?

I guess we still have a strong puritan streak in this country.

Unemployment and Slow Growth - Not a Good Recipe for Obama
The President has to be fearful about the economic news of late. 1.8% GDP growth last quarter. Unemployment at a virtual flatline for the last several months right around the 9% line (9.1% last month, according to the BLS), nearly 2x what a healthy economy would be. Even the stock market, which had been the bright spot, has started to sputter with all the bad news.

If the election is going to come down to the economy, as I firmly believe it will, President Obama is going to need for things to be better a year from now than they are today, or he may find himself designing a Presidential library in Chicago.

A Real Discussion About the Economy, Obama the Comeback Kid?

Note: While much media attention has been paid to the aftermath of the shootings in Tucson over the past week, I do not intend to devote further digital ink to the topic unless issues of policy warrant further discussion. I do not consider the shootings or their aftermath a political issue and condemn unequivocally those on both sides of the aisle who have attempted to make it one. My thoughts are with the victims of the shooting and may Jared Loughner rot in hell.

Our Long Term Economic Future? Look to Our Infrastructure, Science and Education
In the sound-bite world of politics, serious economic discussion rarely takes place. Democrats speak of the need for government intervention to stabilize the economy and get Americans back to work. Republicans talk of the need to reduce government intrusion into private industry and let capitalism drive growth. Both sides largely miss the point most of the time.

Truth be told government intervention is neither inherently bad nor inherently good for an economy. It all depends on the nature of the investment.

Let's start by understanding what drives long-term economic growth. The size of an economy is determined by its Gross Domestic Product, the value of goods and service produced by that country. This is the all-important figure. It determines the value of goods and services that can be divided up amongst the citizens of the country. It is the measure of the wealth of a nation.

So what generates GDP? The simple way that I like to break down the equation is as follows:
GDP = Productivity * # of Workers * # of Hours Worked per Worker

Productivity is the value of what the average worker produces in one hour of work.

But GDP itself is not terribly instructive. The GDP of China exceeds the GDP of both Japan and Germany at this point. But no sane person that has visited all 3 places would call the average Chinese person more wealthy than the average person in Japan or Germany...it isn't even close. The reason China's GDP is so much larger is simply because it has so many more people, simply from the equation above, there are more workers even though the workers are less productive.

So to estimate how the average American is doing, or the average Chinese person or wherever, we usually use a term called Per Capita GDP, which is simply total GDP divided by the size of the population. This gives a good proxy for the average wealth of a citizen within each country. This changes our equation slightly:
Per Capita GDP = Productivity * Workforce Participation Rate * # of Hours Worked per Worker

So how wealthy the average person in country is can be described by three factors, how productive the workforce is, what proportion of the population works and how many hours each worker works.

So let's talk about how we "grow the pie" and increase Per Capita GDP.

In a typical recession, the last two terms of the equation shrink significantly...that is, you have a lot less people participating in the workforce and a lot less hours worked because you have a lot of unemployed and underemployed individuals. This can hurt. Workforce participation has dropped by over 5% in this recession and hours worked by at least 2%. This leaves a 7% hole in our wealth from where we started.

This is why, in times of recession, politicians spend a lot of time talking about getting people back to work. But the truth is, while this is an important short-term issue, simply employing more people will not spur long-term per capita GDP growth.

The reason is simple -- we hit the practical maximum pretty quickly. The unemployment rate in the US is presently 9.4%. Employing every single unemployed person (a feat that is not practical as unemployment rarely goes below 5% and never falls below 2%) would grow the economy only 10%.

Similarly, increasing hours hits a practical maximum pretty quickly. Hours could increase some now as people who have been forced into part-time work resume full-time work. But returning to pre-recession levels would only increase hours by 2%. Beyond that, who wants to start working 80 or 90 hour weeks routinely? That might spur economic growth, but we'd never be off work to enjoy our wealth. If anything, the social trend is in the opposite direction, with the generation presently coming of age preferring less work at lower pay rather than more work at higher pay.

So taking the last two terms of the Per Capita GDP equation to their practical maximum might yield 10% or even 12% growth if you really stretch it. That is about 2 to 3 years worth of growth in a healthy economy. Then what?

The answer lies in the first term of the equation - productivity. Unemployment and hours trend up and down with financial cycles, but productivity growth is the engine of long-term wealth generation.

So what influences productivity? A lot of things obviously influence how productive various workers in various industries are, but I believe that almost all of those factors can be distilled down to three basic categories:
Infrastructure, Education and Science

Think about what makes you productive in a job. If you are a truck driver, having efficient roads and bridges do. If you are an office worker, productivity tools such as the internet do. Your knowledge and skills, gained through education, most certainly do.

Also think about the game-changers of the past century in the economy and in society. The television. The internet. The microwave oven. Modern plastics. The GPS. You know what these things have in common? They were all technological game-changers that remade the economy and society. And they were all commercializations of basic scientific research carried out by the federal government.

Think about where the country would be without the Eisenhower Interstate System. How about without airports in major metropolitan centers? How about without a universal power grid? All infrastructure investments by the federal government (sometimes in cooperation with state governments.)

Now...think where our economy would be if there were no public schools. I imagine our workers wouldn't be the most productive in the world, as they are now.

Now, think about the major scientific, infrastructure and educational investments the government is making today and how they will spur the growth of tomorrow? NASA? Cut way back. Basic research investment? Its lowest level in decades. Infrastructure spending? Our power grid, air traffic control system and interstate were built in the 1950s. And China has better mass transit infrastructure than we do, to say nothing of Europe.

Education? Subsidies to public universities are falling across the country. Primary and secondary schools are getting squeezed as states and localities face budget shortfalls.

The real debate that we need to be having about the economy is how we can free up funds to invest in infrastructure, science and education. It isn't about the size of government, it's about WHAT it does. The federal government did a world of good in the 1940s and 1950s to set-up 6 decades of prosperity, despite facing down a massive debt following the end of World War 2. I would hope our politicians would look for ways to do the same.

Obama - On the Comeback Trail?
I will publish a full update next week, but President Obama's numbers have moved back to being solidly positive (that is, his approval minus disapproval is significantly greater than 0) for the first time in several months. The spin in the media is that this is due to the lame duck Congress and its productivity.

While I'd like to believe that the American public is rewarding bi-partisanship and is happy about the end of Don't Ask, Don't Tell and a nuclear arms treaty with Russia, as I said before, I find it hard to believe that they a. have been paying close attention and b. care much how many warheads Russia is going to reduce over the next decade.

A far more plausible scenario, in my mind, is that, as it usually is, this is all about the economy. Unemployment is finally starting to fall, the economy has been growing for some time, those who stuck with their investments through the crash are close to being back to even (those who sold at the bottom out of fear have no one to blame but themselves) and fear and panic have been replaced by some combination of hope and greed. In other words, the economy is in full recovery. An economic recoveries lead to popular Presidents.

The link below shows the study I've been promising to link to that demonstrates just how strongly economic conditions dictate results. The incumbent party does well when incomes are growing, poorly when they are not.

The Washington Post article highlighting this study is located here.

All told, if income growth in the election year is 1.5% or greater, the incumbent party generally wins, otherwise they generally lose. You can see that the predictive powers aren't perfect: an incredibly popular former General named Dwight Eisenhower caused the GOP to outperform in 1952 and seize the Presidency from Truman's Dems. The incredible unpopularity of the Vietnam War sank the Democrats in 1968, despite economic conditions at the time (it was so bad, LBJ didn't even bother running for re-election.) A charismatic Bill Clinton dramatically outperformed in 1996 against a lackluster Bob Dole. 2000, while technically correct (Gore indisputably won the popular vote), was a bit of an outlier in terms of the electoral outcome.

But most races are pretty tight to the line. Barry Goldwater's awful campaign in 1964? Turns out he finished right about where he should have, given the economic prosperity. The Reagan Democrat coalition in 1980 and 1984 that supposedly changed the political equation? Turns out he finished right about where he should have both years. John Kerry's 2004 disaster? Right on the line. Obama's Hope and Change in 2008? Right where it should be.

The point is that much as we like to think every election cycle is unique, the odds are that 2012 will play out somewhere close to the line as well. Which means that if incomes grow 1.5% or more in 2012, Barack Obama will likely win a second term. If they don't increase by that much, he will likely lose. If I'm the President, given the track of the recovery, I feel pretty good about that line.

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On The Economy: 162,000 Reasons to Celebrate, Millions More Reasons to Stay Concerned, Looking Ahead to the Rest of the 111th Congress

We Are Generating Jobs...But We Have a Long Way to Go
Throughout the first part of 2010, each month when the Bureau of Labor Statistics has released employment statistics, I've found reasons to be optimistic, but also perspective on how far we have to go to get to a more tolerable level of unemployment. This month's release very much follows that vein.

As we've discussed in the past, the monthly release is actually two releases, one that surveys employers to look at job creation and one that targets workers to understand unemployment rate and participation rates in the workforce. The second survey, in my opinion, is the most critical, as it hits all workers, whereas the employer or "establishment" survey tends to miss small business hiring and firing, but both give clues to where the employment market is headed.

In the employer survey for March, there was a lot of good news. Total payrolls grew by 162,000. Of this, 48,000 where hires by the Census Bureau to facilitate execution of the 2010 census. That is a form of unintentional government stimulus, but it does still help get people back to work. But even excluding this number, private payrolls grew by 114,000, this first substantial gain since December 2007 and included gains in manufacturing, health care and temporary services. Construction employment was stable for the first time the recession began and the only major area to lose jobs was financial services. The average workweek, an indicator of future hiring and firing, was also positive, posting a 0.3% gain in the month. In short, this month was a real turning point in the establishment survey data.

In the more critical unemployment survey, the unemployment rate held steady at 9.7%, holding on to the modest gains that have brought the rate down from its peak of 10.1%. That would be modestly good news by itself, but there are more data just below the surface that provide reasons to be hopeful. The population of "underemployed", those working part time but seeking full time work increased from 8.8 million to 9.0 million but this was actually good news, because the "marginally attached" those not counted in the unemployed rate because they have stopped actively trying to find a job was down, from 2.5 million to 2.3 million, meaning that you likely had people who were previously discouraged who are now working, albeit part time, with the entire change coming from discouraged workers, who fell from 1.2 million to 0.9 million, an almost 25% decrease.

So, looking at the extended data, the "underemployment rate" was steady at 16.8%, but more of those 16.8% had jobs.

Now, for the bad news. Using 5% unemployment and 8% "underemployment" as a benchmark for a "normal" rate of unemployment, at the rate of job creation in March, it would take almost 7 years to get back to these "normal" rates. This is clearly unacceptable and if it happens, Obama and the Democrats would find themselves on the sidelines both in 2010 and 2012. But the momentum is positive and there is good reason to believe that the job gains will continue to accelerate in the coming months.

The other good news is that there is still plenty of umph left in the economic stimulus program, which was really a 3-year economic plan. The latest expenditures to date are as follows:

Tax Cuts: $99.1 billion out of $288 billion paid (34.4% spent)
Spending: $208.8 billion out of $499 billion paid (42.8% spent)
Total: $307.9 billion out of $787 billion paid (39.1% spent)

So, over three fifths of the impact of the stimulus is yet to come and to a large extent it is the portion of the expenditure that is likely to be most job-creating. A lot of the earlier spending did things like stabilize state governments to prevent layoffs of state workers and provide emergency entitlements to those in economic distress. Those things were necessary, but didn't create many new jobs. Now that we are into the phase of the bill, which essentially runs through 2011, which involves construction and infrastructure projects, we are likely to see a pick-up in the job-creating impact. The pace of spending has picked up as the cries over unemployment have become louder (note that the spending is now far outpacing the tax cuts, which was not the case earlier), but I would still argue that the money has gone out too slowly.

In other economic news, the government is continuing to retract the broad-reaching intervention in the economy that began with the financial crisis. As of now (April 1st), the Federal Reserve program of buying up mortgage-backed securities has ended. This program was artificially keeping mortgage rates low to stabilize home prices. Rates will now be allowed to drift to their natural market price, which will likely be higher. The Fed has also recently hiked its emergency lending rates to banks, which were essentially acting as a subsidy to provide liquidity to distressed banks.

The government still owns large stakes in 3 Fortune 500 corporations. It has substantial stakes in Citigroup and AIG and is the majority owner of General Motors, all three are products of conversion of debt the companies incurred on TARP money into equity positions.

On Citigroup, it appears the government is going to sell off its stake this year, and appears poised to make a good profit on its investment, as Citigroup shares have recovered a great deal as the economic criss has waned. With GM, the government is looking to make an Initial Public Offering of some of its shares as early as the end of the year, and there is optimism that the government will at least break even on this position. AIG is the most thorny and the most likely that the government will take a loss as well as the least clear as to how the government would exit, as unlike Citigroup and GM, AIG has not yet re-established a profitable business model.

But, AIG aside, the socialization of major institutions appears to be winding down and the economy largely returning to the way ti was.

What Happens When Congress Gets Back April 12th
Congress is on Easter break right now, but returns to business a week from Monday. The 111th Congress is set to adjourn October 8th and unlike last year, they will do everything that they can to stick to that date, being that it is an election year and incumbents will want to be back in their districts campaigning for re-election. So, with a little under 6 months to do work, what can we expect?

(1) The Fiscal 2011 Budgets
The appropriations process can be long and cumbersome, especially with sky-high deficits still persisting. Expect the bulk of the debate to focus on this essential function for the rest of the year.

(2) Financial Reform
Aside from the budgets, this is the only major piece of legislation that is likely to see floor votes in both houses of congress. There is chatter about willingness to work in a bi-partisan fashion on this bill, but don't count on a lot of GOP support, even if the Democrats incorporate a lot of their suggestions and ideas. The best-case scenario for the White House is probably to get a bill through with broad Democratic support and a few moderate GOP members, again targeting Olympia Snowe, Susan Collins and Scott Brown to try to establish a 60th vote against a GOP filibuster attempt (when does the GOP not filibuster at this point?)

But even building a liberal/moderate coalition will be tough as the liberals want a bill that goes much farther than the proposal that Sen. Chris Dodd (D-CT) took out of committee and the moderates still believe it went to far. Finding that "just right" compromise to keep all parties on board will be difficult and will likely lead to a pretty modest reform bill.

(3) Immigration
Don't even worry about it...won't make it to a vote this year.

(4) Cap and Trade
There is still a House-passed bill, but this won't make it through the Senate. Erstwhile bipartisan Sen. Lindsay Graham (R-SC) has sounded increasingly partisan since the health care vote and the DEMs really need him on board to push a bill through the Senate. This one will have to wait until 2011, or never, depending on how many seats the GOP gains.

(5) Don't Ask, Don't Tell
In an election year? Ha! Forget it.

(6) Jobs Bills
Probably some more little bills with hiring incentives and tax credits, but nothing that will have a major impact. The stimulus package will continue to be the economic program of 2010 and 2011.

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5.7% Economic Growth and What It Means, Time to Watch Wisconsin?

The Recovery Becomes Official, What's Next?
The Bureau of Economic Analysis on Friday released it's quarterly report on the performance of the United States Gross Domestic product, which included the preliminary estimate of economic growth in the 4th quarter of 2009. The US Economy grew at an annualized rate of 5.7% in the 4th quarter of 2009, the fastest rate in over 6 years. This, following the revised 2.2% growth rate for the third quarter of 2009, marks two consecutive quarters of positive economic growth. For all intents and purposes, we can declare that the "Great Recession" ended in the summer or fall of 2009, although an official pronouncement won't be made until long after the fact.

So what exactly does this mean and how does this jive with the current 10.0% unemployment rate and the even more scary "underemployment rate" which counts those who are unemployed, those who are no longer classified as unemployment because they have given up looking for work and those who are working part-time but are seeking full-time work, of 18.3%?

First, let's take a step back and remember what these numbers mean.

The Gross Domestic Product of the United States is the value of all goods and services produced in the United States within a year. This is a very important bottom-line economic number as the the value of all the goods and services produced directly correlates to the standard of living people have as all goods and services produced here are either consumed here or exported, with the value of the exports used to buy other goods. A very good metric for the overall standard of living in a country is its Per Capita GDP, that is the Gross Domestic Product divided by the population. This is how many goods and services the average person can expect to receive. This explanation is a little over-simplified, but generally true.

The US population is not static. It is growing at a rate of about 2% per year. Therefore, the GDP has to grow at a rate of 2% per year just to maintain the existing standard of living. When growth falls below 2%, even if it does not go negative, living standards decline. When it exceeds 2%, living standards increase.

The chart below shows the quarterly GDP growth rates since 2007. The green line is the actual GDP growth rate. The blue line is the "gap to 2%", that is the amount by which the standard of living in the United States is below where it was before the recession started.



There are two key lessons that I believe that you can glean from this graph.

(1) Economic performance under President Obama has been remarkable good
It's an odd thing to say with unemployment extremely high, but if you look at the growth curve, the economy was in utter free-fall in the 4th quarter of 2008 (before the President took office) and in the 1st quarter of 2009 (after the President took office, but before any reasonable impact from his economic policies could take effect.)

Of course, giving him full credit for the recovery would be silly. The actions to stabilize the financial system taken by the Bush administration in its last days, as lacking as they may have been in terms of proper accountability, was critical in preventing an even greater slide. The natural economic cycle obviously also plays into this -- economies go up and down to a certain extent irrespective of government policy. The Fed has also been critical, slashing interest rates to their lowest levels ever and providing large amounts of liquidity by taking on a large balance sheet.

Still, it's hard to deny the impact of President Obama's policies. Cash for Clunkers and the First Time Homebuyer credit spurred auto sales and arrested the free fall of home prices. Tax credits stabilized consumer spending. Infrastructure spending spurred construction employment, albeit not at a fast enough pace.

The bottom line is, in just three quarters, the rate of economic growth went from a pace of 6.4% contraction to a pace of 5.7% growth, over a 12% swing.

(2) How Far We Still Have to Go
If you look at the gap to 2% growth, the economy is still 5.8% smaller than it needs to be just to restore the standard of living prior to the recession. That may not sound like a lot relative to a 5.7% growth rate, but it is. Let me explain.

Keep in mind that going forward, the economy will continue to have to grow at 2% just to hold its ground, so a year of 5.8% growth wouldn't restore the standard, it would require a year of 7.8% growth, 5.8% to fill the hole and 2.0% to account for population growth. Nobody thinks 7.8% growth is going to happen.

So, based on more realistic scenarios, how long before we get back to where we were?
At 5% growth, it would take 2 years to get back to where we were at the start of the recession -- in other words we wouldn't be back to where we were until the end of 2011.

At 4% growth, it would take 3 years, or the end of 2012.

At 3% growth, it would take 5.75 years, or the fall of 2015.

And the 5.7% growth number includes a lot of inventory recovery - businesses restocking inventories following holding them at historic lows during the recession, growth that is not repeatable. 4% is probably a pretty rosy scenario. Which means that we are going to see elevated unemployment for some time to come.

So, in the end, the news is good, but we have a long way to go. The Fed will have to balance growth with controlling inflation and will ultimately need to increase interest rates to more normal levels if economic growth continues. There is still anxiety and depressed consumer spending thanks to high unemployment. But it's hard not to feel a lot better than we did a year or nine months ago.

Stimulus Spending and the Proposed "Jobs Bill"
The latest government report shows that stimulus money continues to slowly go out the door. The latest figures:
Tax Cuts: $92.8 billion spent out of $288 billion (32.2%)
Spending: $195.6 billion spent out of $499 billion (39.2%)
Total: $288.4 billion spent out of $787 billion (36.6%)

Given that 63.4% of the stimulus money remains unspent, why is President Obama saying that a "jobs bill", also known to those of us paying attention, as another stimulus bill, should be the top priority of congress this year?

Clearly part of it is political, the President is trying to pivot to an economic focus after the bloody fight over health care sapped his public approval. This is understandable. The Democrats want to be seen as doing something with people still hurting under the scourge of unemployment.

But authorizing more spending may not be the best course to chart. The best course is probably to focus on effectively deploying the almost half a trillion dollar already available under the stimulus package, working to close out TARP and collect remaining outstanding loans to the financial services industry, chart a course back to private enterprise for GM, which may well earn a profit this year and chart a plan to deficit reduction that will prevent future economic growth from being impaired by massive amounts of investment capital being absorbed through government bonds.

That work isn't as sexy, but is probably what is needed. Hopefully that will all happen in the background. But we are probably going to get at least a token jobs bill in the meantime.

Feingold at Risk?
A theoretical Rasmussen poll matching incumbent Senator Russ Feingold (D-WI) against popular former Republican Governor and former Secretary of Health and Human Services Tommy Thompson, shows Thompson leading Feingold by 3%. This is a theoretical poll as Thompson has not indicated that he is going to run. Still, it is a worrisome number for Feingold, as it shows that he IS vulnerable this November. It is enough to move Wisconsin from a Likely Democratic Hold to a Lean Democratic Hold.

Other polls released this week showed the GOP continuing to lead in North Carolina and the DEM's continuing to lead in California, but neither was significant enough to move the rating of the races, which were both already listed as leaning in those respective directions.

The GOP is slowly chipping into one Democratic seat after another. Is this just a low point for the DEM's and will the ultimately recover or hold on and win Wisconsin, Indiana, California, New York, Pennsylvania, etc.? Or is this the start of a GOP November rout, where the GOP finds an improbable way to secure 10 seats and control of the Senate.

No one can know at this point. We'll see what the polls do in the next few days in the aftermath of the State of the Union speech.

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An 11th Hour Deal?, Plodding Along With the Recovery Act

Health Care Deal, Part 2?

Senator Charles Schumer (D-NY) has announced that a deal has been struck between Senator Ben Nelson (D-NE) and Majority Leader Harry Reid (D-NV) to secure Nelson's vote to invoke cloture on the health care bill. Now, it's understandable if we are all a little skeptical, given that this comes a week after the first "deal" between liberals and moderates was announced, and then promptly criticized by Sen. Joe Liebermand (I-CT) and Nelson as unacceptable.

I get the sense that this time things are different. First of all, Senator Nelson himself was the person with whom the negotiations took place. Secondly the deal appears to deal with the abortion issue, whereas the first "deal" dealt only with a compromise on the public option. I think this deal is the real deal.

Which is not to say that passage is assured. The Democrats could still lose another Senator from the center (Jim Webb being an unofficially undecided vote who apparently was not involved in these negotiations) or from the left (Roland Burris, for instance, has indicated that he might vote down a bill that doesn't have a strong enough public option, although he has moderated his tone in recent weeks.) And the Democrats still have a calendar problem -- it is razor thin to try to even get to a cloture vote by December 24th, and you have to believe that Republicans will continue to use every tactic available to them to slow things down. Today, the Senate is working through the Defense Appropriations Bill (the last regular appropriations bill of the year, at long last), hamstrung by the fact that the previous continuing resolution expired at midnight and non-essentially Defense operations are technically unfunded at the moment (which is okay on a Saturday, but pretty bad come Monday if a bill isn't signed.)

Finally, even assuming Senate passage of the bill, there is still the whole conference process....how much will liberals in the House be willing to give ground to keep Nelson on board?

But, despite the remaining obstacles, Democrats are far closer to passage than I expected them to get this year, assuming this deal is real.

What exactly the deal contains is not yet clear. The Reid "manager's amendment" that makes all these changes is posted online at the link below:

http://www.politico.com/static/PPM145_chris.html

It is almost 400 pages long, so I haven't had time to digest it yet, but I'l provide full analysis as soon as I can.

How Much Does H.R. 1 Matter?

It is the crowning political achievement for the still-young (although looking older) President Barack Obama -- the American Recovery and Reinvestment Act. The $787 billion stimulus bill, the heart of a brutal political fight last winter and spring and the largest economic stimulus ever passed in absolute dollar terms (although certainly FDR had a larger stimulus program relative to the size of the economy), this bill is certainly the most significant legislation signed into law of the 115 bills the President Obama has signed in the past 334 days.

But, does it matter? It was (unwisely) advertised as keeping unemployment below 8% (unemployment stands at 10.0% today, down slightly from last month's high of 10.2%). The number of jobs even its strongest advocates claim to "save" or create is dwarfed by the overall job losses in the economy. And in many ways, the actions under TARP and the massive expansion of the Fed's balance sheet, gobbling up everything from bonds to mortgage-backed securities to keep easy money flowing in the economy, contributed far more money to stabilizing the economy (TARP was $700 billion, the Fed's balance sheet has ballooned to over $2 trillion.)

Finally, the stimulus is now pretty unpopular. People don't tend to be particularly patient where unemployment is concerned (ask George Herbert-Walker Bush, who went from 91% to 38% approval in about a year, thanks to an unemployment rate nowhere near as bad as this one.)

Actions under the stimulus bill have been slow as well. The government will miss my benchmark of having 40% of the funds distributed in the 2009 calendar year. The latest government report, as of December 11th:
Tax Cuts: $92.8 billion paid out of $288 billion authorized (32.2% spent)
Spending: $152.6 billion paid out of $499 billion authorized (30.6% spent)
Total: $245.4 billion spent out of $787 billion authorized (31.2% spent)

A quarter of a trillion dollars is a lot of money to have spent this year, but is a small piece of the $3 trillion or so that all of the sources above add up to that has been pumped into the economy since the start of the financial crisis.

So was the stimulus even worth doing?

Absolutely. As amazed as you might be by this, I actually think the bill looks better in retrospect. The coordinated actions of the federal government, while imperfect, have had a huge impact in staving off a massive depression and spurring positive economic growth in the third quarter (and almost surely the fourth quarter as well.)

Consider:
(1) TARP for Banks
Without TARP (credit goes to President George W. Bush on this one for alienating the base of his party to do what needed to be done), it is very likely that Citigroup and Bank of America would have gone bankrupt, causing such a severe contraction of credit that we would likely be mired in depression for years. The banks are paying back the money with interest, meaning that on top of saving the economy, the bank-funding portion of TARP is actually turning out to be a good financial investment for the government.

Yes, the final plan looked nothing like what Hank Paulson described to congress when the bill was passed, whereby the government was supposed to buy the bad assets, not invest in the banks and certainly the original approach was better in many ways, but the government quickly determined it was not feasible in the timeline with which they needed to act.

(2) TARP for AIG
This was a bad deal. A big chunk of money was poured into insurance giant AIG ($180 billion in total) and short of a miracle, I see no path to recovering all that money. I have also been highly critical of this funding in the past -- you don't need to bail out the guy insuring the loan if you bail out the guy making the loan. There was a legitimate interest in protecting the stakeholders in other divisions of AIG (seniors who depending on a fixed annuity from AIG for retirement income, for instance), but this could have been accomplished by severing those portions of AIG and providing much smaller levels of funding to keep them afloat.

(3) TARP for the Auto Industry
Okay, so President Bush got this wrong initially, pumping more money into a losing business model. President Obama initially made the same mistake, before realizing that bankruptcy was the ONLY path to survival for GM and Chrysler. These bankruptcies should have come months earlier without the thrown-away federal money, but the structure of providing bridge capital to these companies in exchange for large equity stakes was ultimately the right way to go. Without these actions, two industrial giants would have collapsed entirely, sending manufacturing into a deadly tailspin (you think 20% unemployment in Detroit is bad, try 50%!)

(4) Ben Bernake's Management
Federal Funds rates of 0.25%, the lowest in history have spurred short-term borrowing rates as low as 4% for many consumers and even lower short-term borrowing rates for businesses. Money has been made historically extremely cheap. You think the credit crunch is bad now, try to the same environment with interest rates at 1.5x or 2x this level.

The Fed sopping up other securities to the tune of $2 trillion is another mechanism to inject liquidity into the monetary system. In essence, it amounts to the government printing money and using it to suck up debt. This would be a really bad move in an economy with even moderate inflation, but inflation risk has been extremely low to date.

(5) The Stimulus
While it doesn't look like a ton of money in the grand scheme of 1-4, the stimulus has done several very important things. First, it stabilized state governments, who can't deficit spend in a recession, avoiding massive layoffs of government workers. Second, it has started to provide infrastructure employment, which has a halo effect on economic growth beyond the immediate employment impact of those projects. Third, it has provided support for two key industries, the auto industry and the home-building industry through cleverly designed, highly effective tax subsidizes. Fourth, lest we forget, for the most part, the infrastructure spend is by and large things that NEED to be done anyway. In fact, I would argue that there wasn't ENOUGH investment in roads, bridges, rail and green energy in the bill.

The stimulus is structured to be a slow-burn: stabilizing state governments and providing the tax subsidizes immediately, but putting out the infrastructure spending on a much slower calendar. This is a politically-losing structure, at least in the short-term, but may be the right move in the long-term.

Working together, all these things have staved off disaster. I freely admit that looking out over the abyss, I did not see the magnitude of this crisis. Fortunately, Bernake, Paulson, Geithner and company did and the coordinated effort of the federal government is an example of government actually doing a massive program well.

There is a ton of mess to clean up:
(1) Unwinding all the TARP investments in banks. This has started, but getting all that money back is a slow process.
(2) Unwinding the AIG investment. This could take years as AIG is still in no position to pay.
(3) Unwinding the auto industry investment. GM owns a huge stake in GM (as the controlling owner) and a smaller stake in Chrysler. Unwinding this will take a stock offering that fetches a price enabler the government to recover its money.
(4) Unwinding the Fed balance sheet. This should start immediately, but in a measured way. The risk of inflation is starting to return as the economy sputters back to life. Acting too late on this could have terrible effects on our currency and the value of savings. The indications from the Fed so far is that it may take too long to act.
(5) Returning interest rates to normal levels. When the fourth quarter GDP figures come out, if they continue in the 2-3% growth range, I would argue that slowly bumping up rates should begin immediately. The currently low rates are great for borrowers, but are killing savers and people living off interest income, mostly seniors. They also risk allowing a surge in inflation, which would further destroy individual assets Historical norms put this rate around 3%. Bumping it to 0.5% in the spring wouldn't be so bad, would it? Alas, the Fed seems unlikely to touch rates until at least early 2011, at which point, the risk of inflation may be significant.

I was overcritical of men like Bernake and Geithner. Bernake deserves a second term at the Fed, having, on balance, made mostly the right moves. Geithner, for all his flaws, has done important work to stabilize the economy and deserves to stay on the job.

Here's to a better economy in 2010.

The Sort of Health Care Deal, Dirty Tricks and Bad Government, The Closely Divided Nation, A Tale of Two Tales

Democrats Strike a "Broad Agreement"

You have to give Senator Reid this...he is trying like hell to keep his caucus united behind health care reform. The announcement this week of a "broad agreement" between liberal and moderate Democrats on the public option potentially paves the way for passage of a health care bill from the Senate this year...maybe. Assuming Sen's Lieberman, Webb, Landrieu, Lincoln and Nelson are all on board with the agreement (Lieberman and Nelson being by far the most staunch critic of the public option, Webb and Nelson being the two Senators who have mostly voted with the GOP on recommit motions thus far and Senator Lincoln being among the most vulnerable to attack from the right on this issue in 2010), it settles one of the two key issues that has divided the Democratic caucus.

The agreement, in essence, would dissolve the public option in its present form and replace it with a hybrid system, whereby those 55 to 64 would be able to buy into the Medicare system (in essence, creating a "public option" for them, complete with the accompanying cost controls), while those 54 and under would be able to buy into a program that is managed by the government but provided by a private provider or private providers, similar to the government employees insurance program. It gives the public option liberals the 55 to 64 year old population on the public rolls and gives public option opponents the fact that no new government-run program is created.

The compromise is actually better in my eyes than the original legislation. The public option as originally designed in the Senate bill did little to curb costs as it would only allow the government to negotiate with providers, the same as any insurance company and would likely include only a pool of high-risk individuals, those who couldn't find a deal in the private market. The Medicare compromise allows the government to leverage its power to legislate compensation levels for people in the program and is a much more powerful carrier, since the program already contains basically everyone 65 and up. Providers could, as always refuse to treat people on Medicare, but rejecting providing care for all seniors is worlds different from rejecting providing care for a relatively smaller group of high-risk individuals. As has been the case with Medicare so far, I would guess most providers would play ball, which would mean favorable pricing and therefore cost containment. None of this helps the 54 and under crowd, but I'll take something over nothing.

But, the public option is not the only source of division in the Democratic caucus. The Senate also rejected the amendment offered by Senator Nelson this week that would have strengthened the prohibition of the inclusion of abortion coverage in the health care bill.

The bill, as presently written, prohibits use of government subsidies to pay for abortion coverage, but allows for abortion to be in the overall coverage schemes provided by private insurers, provided the portion of the coverage that covers abortion is funded through the out-of-pocket portion of the premium. In other words, if there is a $500/month health policy and the individual pays $100/month of that premium with the government picking up the rest of the tab, the policy could provide abortion coverage as long as the cost of that coverage is not more than $100/month. Nelson and other anti-abortion advocates (as well as some that favor abortion rights but are wary of funding abortions with federal dollars) object to the provision as currently written, since virtually all policies would have an individual contribution sufficient to fund abortion coverage, meaning that virtually all federally subsidized policies would be free to offer coverage for abortion services.

Senator Nelson's amendment would have expressly prohibited providing abortion coverage for subsidized policies. Essentially, it would require someone wanting abortion coverage to pay for a separate policy to insure abortions, although that could, theoretically come from the same company. It is very similar in language to the House amendment that Bart Stupak successfully pushed through in the House version of the bill. The senate rejected the amendment 54-45, with Republican Senators Susan Collins and Olympia Snowe joining the majority of Democrats to defeat the amendment, which won the support of the remaining Republicans plus 7 Democrats.

Senator Nelson has said that he will not support the final bill with the abortion amendment, so assuming that Reid has agreement with all the Democrats on the public option, he will still need to win over either Nelson or one Republican (presumably Olympia Snowe) to carry the day and get his 60 votes.

Victory is in sight for Reid, but is still not assured. The Democrats would be wise to give ground on the abortion issue...it is unlikely that the bill could get back through the House without the provision anyway.

Which brings me to one more point...if the Democrats do get a bill through the Senate, why not vote on that bill in the House unamended and skip the conference committee process? Let me explain...ordinarily when the House and Senate pass differing versions of legislation, a conference committee from the two bodies melds the two bills into a final bill that is then revoted on by both houses. But that is not how it HAS to work. Given that any final bill would have to look essentially the same as the Senate bill, if one passes, why not just have the House adopt the Senate bill as is? It would shorten the process, dodge another tough fight in the Senate and get a bill to the President by year's end (assuming the Senate is able to move something by then, which is far from assured.)

The Senate is taking a break from health care for a few days while the CBO scores the Reid compromise. In the meantime, they are going to take up a truly awful example of:

Bad Government, Plain and Simple

I've written extensively on how fouled up the appropriations process has been this year and ever year in recent memory. It is the middle of December and the majority of agencies still don't have a budget for the fiscal year that started in October, but rather, have been operating on a series of continuing resolutions, which provide short-term extensions of last years budget into this year. So, basically, the departments have been operating tactically, unsure of what longer term projects will be approved and which will not. Not a great practice.

Enter the Minibus. A bill was shoved through the House this week by a 221-202 vote (all Republicans voting "no", joined by 28 Democrats) that would cover appropriations for the Departments of Transportation, Housing and Urban Development, Commerce, Justice, Labor, Health and Human Services, Veterans Affairs and State in one fell swoop, leaving only the Department of Defense budget to be dealt with at a later date. The Senate will likely vote next week, before the present continuing resolution expires on December 18th.

So shouldn't I be happy that Congress is finally moving the ball on appropriations? Hell no! This massive bill was shoved through with almost no debate, with some of the departments not even having an initial bill that was debated in both houses of congress with an opportunity for amendment. The bill was voted on less than 24 hours after it was printed, leaving zero time for public examination of the legislation, which probably contains poor provisions and irresponsible earmarks that we may never even hear about until after it is law.

Yes, finally passing a budget is good. Doing it in the dark rather than in the sunlight is not. There are plenty of working days for congress to do its job before the fiscal year starts. This type of mess happens when they fail to show any type of discipline with the calendar. And one has to wonder if some members don't like it better this way....rammed through bills are easier to cram in pet provisions.

Democrats should be ashamed. Unfortunately, this issue is complex and mundane enough that it will likely garner little coverage or public outcry, as the whole budgeting process as failed to do, just like every year.

On the President, a Closely Divided Nation

It's obvious that they love President Obama in Europe still. The latest Nobel Peace Prize winner (nope, not going to rehash that debate) is a rock star overseas. He used to be a rockstar here. Now he seems all too human. On the question of whether the President is doing well, Americans are sharply divided, and getting closer and closer to even.

President Obama's aggregate approve minus disapprove numbers have tracked below his 7.2% November vote margin every day since November 29th, his first days below this benchmark threshold. This means that his coalition has shrunk since November. He has yet to have a day where his disapproves exceed his approves yet, but judging by the pattern, if he doesn't start getting some good news, it may be just a matter of time.



His monthly averages, with smooth out the bumps, show a decline of almost 4% from his November numbers to December, which would put him on track to have his worst month since August, when angry town halls and tea party protests dominated the news.



The Rest Is Still Unwritten...

The President's declining poll numbers bring me to my central thought about the Obama Presidency thus far...the road has not yet forked. What I mean by that is I can clearly imagine two distinct narratives being told at the mid-terms in November 2010. Here they are:

"A brutal night for the Democrats as the drag of unpopular President Barack Obama leads the Republicans to retake the House of Representatives and make significant inroads into the Democratic majority in the Senate. The President, who has been plagued by persistent double digit unemployment following his failed stimulus package as well as attacks on his ineffectiveness as a leader as he failed to get either health care reform or environmental legislation passed. His foreign policy is seen as an extension of the policy failures of the Bush administration as casualties mount in Afghanistan and Iraq slips back into civil unrest. Many Democrats are now wondering aloud how they elected a man of such little executive experience and what this will all mean for the future of the party."

or

"A discouraging night for Republicans as they not only fail to make inroads in the House, but lose key seats in the Senate with Democratic wins in Ohio and Missouri. Buoyed by a dropping unemployment rate and a victory on health care, the Democrats now hold the seats to pass legislation virtually at will. President Obama's popularity, at its height, is bolstered by the sense that he is the among the most accomplished first year Presidents in history, having passed not only the most sweeping Health Care reform policy since Lyndon Johnson, but having pulled the country out of the worst economic conditions since the Great Depression, as unemployment falls below 8%. President Obama is also bolstered by strong international support for his policies, which have ended the Iraq war while stabilizing Afghanistan and driving the Taliban into hiding."

Which narrative will we tell? Probably somewhere in between. The point is, we don't really know yet whether the President will get his way on key legislation or whether what he has done on the economy and in the foreign policy arena will work. But the stakes for the performance of the economy, the success of the President's Afghanistan strategy and the fate of Health Care legislation are immense. And not just for the Democrats.

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The Great Recession Ends with Great Damage, Headwinds and Tailwinds, Is the Stimulus Enough?

The Recession is Over, But What Has it Left Us With?
While the "official" declaration of the start and end of a recession comes months later after economic analysts have poured over reams of data on economic performance, the 3.5% growth in Real Gross Domestic Product in the 3rd quarter of this year is sufficient to declare with a very high probability that the so-called "great recession" has ended in the United States.

As a reminder, Gross Domestic Product is a measure of the value of all goods and services produced in the United States in a given time period. It is the most comprehensive measure of the health of the economy essentially because the value of everything produced equates to the value of goods and services that Americans will receive in that quarter -- in other words, we get something for the value that we generate. You can see the last 3 years of GDP growth in the chart below, with the negative quarters, where the economy was actually shrinking, in red.


With a total economic contraction of 3.8%, this ranks right up there with the worst recessions of the Post-World War II era, trailing only the Great Depression, but trailing it by a massive margin (we are talking greater than a 5:1 ratio.) There is a legitimate debate about whether this recession was worse than the double-dipper in 1981-1982 that saw unemployment surge above 10% and mass inflation to go with the economic stagnation (something that we fortunately do not see today, at least yet.)

So if the recession is over, when do things get back to normal? Depends what normal is and what happens going forward.

Keep in mind that the chart above talks about TOTAL GDP. The wealth-generation that people feel in their wallets relates to PER CAPITA GDP, or the total GDP divided by the number of people in this country.

Our population grows by about 1% per year. Therefore, just to keep the same standard of living, the total GDP has to grow by 1%. Any less and our standard of living is slipping. Any more and it is improving, as it historically has.

Think of it this way: if there were 2 people in the country and we made 2 cars in a year, that's 1 new car per person per year. If the population grows to 3 people, we now have to make 3 cars in a year for those 3 people to maintain the same standard of living that the 2 people previously had.

The recession, with all its quarters of negative growth have driven a significant gap in per capita GDP versus its high in the 4th quarter of 2007, when the recession began. The chart below shows the trend in Per Capita GDP.


If we were to maintain the 3.5% annual GDP growth rate that we had last quarter (which is a tall order in and of itself -- more on that later), it would take until the 3rd quarter of 2011 just for per capita GDP to get back to where it was before the recession.

That's a long time to suffer through high unemployment and declining wages. And there is no assurance that this growth rate will continue. The economy faces significant short-term headwinds, although also some long-term reasons to be optimistic.

Head and Tail Winds
There are many reasons to be concerned in the short-term:

• A large portion of the growth in the third quarter was created by government stimulus. Cash for clunkers is now gone, the first-time home buyer tax credit may or may not get extended and other stimulus spending and tax cuts will end eventually. Essentially we've grown through government leverage, but that can't last forever
• Unemployment is still very high, at 9.8% and predicted to rise further (although it feels like we are nearing the peak.) High unemployment squashes consumer spending, which in terms impacts growth in the near-term.
• Consumer confidence is still sagging. After recovering from downright scary levels in the winter, when it was 20% of the 1985 benchmark it is measured against, it rose throughout the spring, but still now stands at just 47.7% of its 1985 level, having declined each of the past two months. If consumers aren't confident, they aren't likely to spend.

Tailwinds

• Productivity is surging -- worker productivity rose 6.6% in the 2nd quarter of 2009. Productivity is the single best indicator of long-term economic growth, because the more an individual outputs per hour of work, the more that there is to go around, once you get people working.
• Stimulus is not over -- we have a lot of stimulus money left to spend -- more on that later
• History is on our side -- double-dip recessions are actually very rare -- 1981/1982 was the exception not the rule. In the modern era, Americans have shown the capability to buckle down and grow the economy after a recession. Consider the boom that followed the 1990/1991 recession, where we saw some of the best economic growth in the countries history.
• Innovation could be the key -- just as the internet unlocked productivity and output in the past decade, new technology will be the key if we are going to launch into a new era of prosperity. We have still not fully leveraged the internet. Green energy could be a whole new economic boom segment. Upgrading and rebuilding the nation's infrastructure could be a growth industry.

In total, I admit I underestimated the severity and the impact of this recession from the output. I'm still very optimistic about the long-term economic prospects in this country. We still have a highly educated, talented, productive workforce, we still have a spirit of innovation and experimentation and we still have natural resources and infrastructure to benefit us long term.

The short-term is a little more dicey and harder to call. Will the economy sink back down as stimulus pulls out? Will consumer confidence drag on the economy for some time to come? Economists are split. I think we will continue to grow, but the question is how fast -- will it be enough to solve massive unemployment and consumer confidence or just enough to maintain our now-reduced standard of living?

More Stimulus? Too Much Stimulus?
The second quarter growth numbers have ended debate among serious economists about whether the stimulus had an impact on the US economy -- every credible financial news source cites stimulus funding as one of the major factors behind the return to growth in the second quarter. Clearly, programs like Cash for Clunkers and the Home Buyer Credit helped spur spending and growth.

Critics on the right argue that this a short-term bump up and that we will face negative longer-term consequences as government debt rises and the stimulus abates. They say that any benefit from the stimulus is not worth the long-term cost.

Critics on the left, on the other hand, argue that this simply proves that we didn't do enough stimulus, that the original bill should have been larger, that we probably need a second stimulus shot in the arm.

The White House won't dare to propose that we do something called a second "stimulus" bill, but as I noted a few weeks ago, has been quietly moving to make some small moves, such as extending unemployment benefits and the first-time home-buyer credit.

But there is still a lot of juice left in the first stimulus bill too. As of the latest reports:
Spending -- $123.5 billion of the $499 billion allocated has been paid out as of last week or 24.7%
Tax Cuts -- $83.8 billion of the $288 billion in tax cuts have been paid out or 29.1%
In total of the $787 billion stimulus package, about $207.3 billion has been paid out or 26.3% of the bill's total.

While I had argued that the money needed to go out faster to give the economy a quick shot in the arm, the good news in these numbers is that there are a lot of legs left in the existing stimulus package. If we spent about 26.3% of the bill's allocation and we managed to achieve 3.5% GDP growth for a quarter, it stands to reason that if that money is spent appropriately, we should be able to maintain that growth rate for several more quarters as the balance of the funds are paid out of the course of this year and next year.

The risk is that the most "stimulative" programs, such as Cash for Clunkers may have past and whether the bill continues to drive economic progress will depend on the effectiveness of the remaining programs.

All in all, not only would it be political suicide, it would seem to me to be fool-hardy to propose another stimulus when there is so much left to go on the existing bill.

The economy is a complex beast and if anyone understood all the twists and turns that it takes, that person would probably be able to get very wealthy and might not share that information with the rest of us.

However, the recent news is, on balance encouraging. We aren't on the verge of financial collapse anymore, the economy is growing and unemployment will eventually peak. But there will be more pain along the way.

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Is the Stimulus Still Necessary?, Sloppiness on Capital Hill, Addressing Access but Not Cost

As we approach the end of the government's fiscal year (which runs from October 1st to September 30th), it seemed like an appropriate time to review fiscal priorities and policies.

If the Economy is Growing Again, Do We Still Need the Stimulus?
As I'd been predicting for some time and the consensus of the political and economic world has now confirmed, the economy appears to have resumed a modest level of growth in the third quarter of this year (the quarter than began July.) Consumer spending and industrial production are up. Capital investment is back. The stock market has rebounded. And new unemployment claims are falling.

So, do we still need a stimulus?

First, let's review where we are.
As of the latest report from the government, here is where the provisions of the stimulus bill stand:
(1) Appropriations -- $499 billion total allocated
Authorized: $237.7 billion (47.6%)
Spent: $98.0 billion (19.6%)

(2) Tax Cuts -- $288 billion total allocated
Tax Relief Provided -- $62.5 billion (21.75)

In total, between the tax cuts and the outlays, $160.5 billion of the stimulus funds have been paid out, representing 20.4% of the amount authorized in the bill.

So, if the economy is recovering, do we really need to spend the other $626.5 billion? Would the money be better unspent to attempt to reduce the deficit.

Unequivocally, I believe that we must continue down the current path, for several reasons.
(1) Government Commitments
Projects which have been authorized but not spent would have a chilling impact if canceled. Private contractors have made hiring and investment decisions on the basis of these decisions and the government is obliged to honor them.

Similarly with the tax cuts, people have made decisions to buy homes, upgrade the energy efficiency of their homes, purchase automobiles and made financial decisions on the basis of the tax cuts in 2009 and 2010. Repealing them now would be operating in bad faith.

(2) Not Yet V-Shaped
Yes, growth has returned. But it is tenuous growth. The economy is clearly not booming and is in fragile shape. Pulling spending out of the stimulus is not the way to ensure that the economy finds firm footing.

(3) We Need to Do a Lot of This Anyway
The "emergency" provisions of the stimulus such as direct payments to states to cover shortfalls are already spent. Most of what is left is infrastructure spending including upgrading roads and bridges, green investment in government building and schools, computerizing government record-keeping systems and other investments, which, on balance are extremely good and needed things to do. Part of the complexity of the stimulus is that it wasn't just a direct infusion into the economy, it was kind of a roadmap for how we would upgrade productivity over the next decade. Not a bad thing to keep doing.

(4) It's Unemployment, Stupid
Unemployment still languishes at 9.7%, it's highest level since 1982. On of the major charges behind the stimulus bill was to contain unemployment. Sustained high unemployment damages consumer spending and confidence, and perhaps, just as importantly, is a major political problem for Democrats.

The American Recovery and Reinvestment Act was a massive expenditure at a time when the deficit was already projected to be at unsustainable levels. But it was a necessary short-term choice. In the near-term, the federal debt is not a big concern, Treasury Yields (the rate of interest the government has to pay to borrow) are at historical lows, meaning there is still plenty of liquidity to fund government operations.

We desperately need to get the deficit under control during President Obama's first term. But let's finish fixing the economy first -- ultimately economic growth leads to tax receipts, so if we don't fix the economy, nothing that we will do to fix the deficit will work.

Why Can't Congress Meet a Deadline?
In a continuation of a horrible legislative practice, it appears that we will likely see none of the major appropriations bills hit the President's desk by the time the new government fiscal year starts on October 1st. The cumbersome legislative process involved in annual appropriations involves both houses of congress passing a version of each appropriations bill, then a conference committee of Representatives and Senators compromising on the differences in the bills, a "conference report" that contains these agreements then being passed by both houses and the final appropriations bill signed by the President.

Over the past couple decades, the habit has been to pass budgets later and later in the fiscal year, using "continuing resolutions", partial funding for the functions of government for a short period of time, to bridge the gap.

This is understandable when power in Washington is split and Republicans and Democrats have to have tough negotiations to agree to spending priorities. In fact, for the fiscal year we are finishing, President Bush never signed budget bills -- this was left to the messy omnibus bill that President Obama signed that was widely criticized for being laden with pork.

There is no excuse with one party in control. It is simply dereliction of duty not to get budgeting done on time. Use of continuing resolutions is a poor practice because it leaves government agencies without spending priorities or an understanding of what programs will have continuing funding throughout the year. Below is the status of the bills. The Senate is really just getting into the debate, with the Transportation bill next on the docket. Looks like we will miss all the deadlines again.



Improved Access? Maybe. Improved Cost? Not So Much.
The very compromised Baucus Health Care Bill, which still appears to have zero GOP support, despite giving in on what looks to me like every major point (public option -- gone, protections against illegal immigrants -- in, spending -- reduced), will likely still help improve access to health care for Americans most at risk.

Eliminating exclusions for pre-existing conditions, prohibiting dropping insured people who are current on their premiums simply because they become sick and providing subsidies for those not poor enough for Medicaid but not rich enough to buy insurance on their own are all good things that will help improve access to our system.

But there is really very little in this bill that addresses the most dangerous part of health care in this country, it's very high and rising cost. There are many contributing factors to this, but here are what I consider to be the key ones:
(1) Perscription Drug Costs
No allowance to import drugs from Canada. No "most favored nation" clause, as I have suggested, for drug pricing. This looks like a giveaway to big Pharma -- more insured patients but no controls on what they can charge, even if it is many multiples of what they charge other industrialized nations that have government-run health insurance.

(2) Insurance Company Overhead and Profit
One in three healthcare dollars pays for insurance company overhead and profit. This spending adds zero value to the health care system. Medicare and Medicaid has less than a third of that overhead, as do nationalized healthcare systems. Without some provision to control the amount of money sucked out by insurance companies, we will continue to suffer from higher costs for care. Co-operatives may help some, but I doubt they are the full solution.

(3) Defensive Medicine
The GOP has this one right -- we need tort reform not just to reduce the cost of tort, but to reduce the prevalence of "defensive medicine" -- procedures that are likely unnecssary that are performed just to prevent a future law suit. Baucus is silent on this.

We may make a step forward on access, but I fear we are not going to make much progress on cost with this bill. Without reforms to cost, Medicare and Medicaid spending will cripple the government over the next 20 years. We will have to take it up eventually, but it looks increasingly unlikely that it will happen this year.

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