I hate Tom Daschle.

You will recall that he was the administration's original nominee to fill the post of Secretary of Health and Human Services. He was to be charged with shepherding health care reform through Congress.

He has made serious health care reform harder by his failure to pay his taxes and lying about it and by taking money from the health care industry. His self-centered narrow-minded actions have the potential to really hurt America by making health care reform much harder.



I was really happy when he was announced, after getting over it not being Hillary tasked to run the health care reform effort. He was Senate Majority Leader, so he knows the Senate and Senators well. He wrote a book about health care reform, his views were sensible and he seemed serious about it all. In short, a wildly excellent pick.



This all went to hell in a hand basket several weeks ago. As you probably know, Daschle realized several months ago that he owed back taxes as a result of not having declared that he received a car and driver. He knew for certain he owed the taxes in the middle of 2008, but he didn't pay the taxes until months later. Daschle's not real rich, but he's made good money since he left the Senate. Assuming he had the cash to scrape together, and he surely did, his not paying his taxes immediately would be disappointing if he were merely a private citizen. Once he realized he was being considered for a cabinet position, he should, of course, have paid the taxes THAT DAY.


Worse than all of the tax follies is his taking money from the health care industry. This made Obama's defending him all the harder. Thanks, Tom. Thanks heaps.

I was wrong.

In my December 5, 2008 post, I predicted the recession will end in June. I was wrong. It won't end quite that quickly. I didn't realize that the banks were as horribly terribly badly off as they are. Don't get me wrong, I obviously knew that big banks were in huge trouble. I just didn't realize that it would be this bad.

Later this week there will be an anticlimactic announcement on how the Obama Treasury Department will spend the $350 billion remaining from the big Congressionally passed $700 billion bailout for the financial industry. I say anticlimactic because $350 billion is fairly small in comparison to the amount of money which will in the end likely be necessary to pump into the banks and other financial institutions going forward, taking no notice of the huge amount of money which has already been pumped in.

So with the banks still in terrible shape, and likely months away from being cleaned up, I simply have no idea when the recession will end. I'll let you know when I know.

The Stimulus package: Flawed but well worth doing

As it passed the House, its badly flawed. Still worth doing if push came to shove, but it could be seriously improved. The Senate is in the process of improving it, fortunately.

As you all likely know, the House recently approved the $820 billion + stimulus package. Sadly, it did so without a single Republican vote. The Senate vote is expected to be somewhat more bipartisan, but clearly, this is a democratic affair.

The house vote was 244-188. All but 11 democrats voted for it.

Here are some of the highlights of the package as passed by the house:

$145 billion goes to Obama's signature "Making Work Pay" tax cut, which he campaigned on. Individuals receive up to $500 and families up to $1,000 through a cut in payroll taxes, by reducing social security withholding. This will be around $15/week for most American workers.

This sort of tax cut is not very stimulative, to say the least. Most economists say that people will spend around 30-40% of it, and save the rest. Now savings is generally a good and wonderful thing, but not in the very short term. Right now consumer spending is hugely depressed, and we need to do everything imaginable, and much not imaginable to increase it over the next 2 years. And a tax cut which will be saved is not very stimulative at all. The lower down the economic ladder a tax cut is, the more of it will be spent.

Unemployment checks will have an extra $25/week in them, and people will be eligible for unemployment for a longer period of time. This sort of spending is highly stimulative. Most people on unemployment are spending 100% of their checks, and will quickly spend the additional money.

$37 billion for high tech items, like expanding broadband access and converting medical records to electronic form. This spending is in fact somewhat stimulative, in that people will have to be hired and companies paid money to do the work.

$40 billion to allow people on unemployment to qualify for Medicaid. This entitlement is regardless of income and assets. This spending is less stimulative than other spending. It may improve people's health, and I support the idea in general, but let's not pretend its the kind of spending that multiplies itself, like building a bridge. If you build a bridge, you have to hire construction workers, who buy more boots and tvs and what have you. And the company, very possibly struggling, will make more profits/less losses, which gives the owners of the company more money. Cement has to be sold. Stores near the construction site make more.

$150 billion in additional spending on Universities, schools and child care centers. Not the most stimulative spending I can envision!! May be a good idea, may not, but the GOP is right that the primary purpose of this spending is not short term economic stimulus.

$87 billion to states to increase the federal contribution for Medicaid. This is a reasonably good idea, because it will save states from crippling layoffs, which will make the downturn worse. On the other hand, it rewards the states for highly imprudent budgeting. Given that all states (except one, I believe it is Vermont) have state constitutional provisions requiring a balanced budget, the states have been wildly imprudent in their budgeting process and rainy day funds. I hate the fact that there will be Republican governors who can say, "see, I balanced the state budget without raising taxes, and I'll do the same thing in Washington" when it will have been federal money that allowed the balanced budgets. The country desperately needs to be taught the lesson that there is no such thing as a free lunch. To balance a budget you must raise taxes, cut spending, or some combination of the two. Magic, will and GOP principles will not do it.

$79 billion for a state fiscal stabilization fund, disbursing half the money in late 2009, and half in late 2010. Most of that money would apparently be spent next year.

$30 billion in highway construction funds, and "tens of billions more" for other transportation projects, water projects, park renovation, military construction, local housing and more. This is the spending I most favor, as this is the most stimulative kind of spending, with what economists call the biggest multiplier effect. And, as an added big bonus, America's infrastructure is woefully inadequate, and surely most of this infrastructure really needs to be built anyway.

$63 billion on additional money for food stamps and on increased and extended unemployment benefits.

The initial proposal by Obama had godawful business tax cuts, designed not to stimulate the economy a jot, but to win GOP support. Fortunately those seem to have gone by the wayside. Sad to say, but in order to win GOP support these days, you need badly designed tax cuts which don't much stimulate the economy, and aren't good for the Republic. Needless to say, the GOP is out to lunch.

Speaking for the Republican party, Jim Demint, Senator from South Carolina said the following on a Sunday morning talk show:

1) We all support the need to do something. But "the way to move our economy forward and to protect jobs is to infuse more money so that consumers have more to spend and businesses have more to invest. . . ." Two ways to do this: (a) Government spending through 'political manipulation.' The other way is tax cuts. "That is the American way."

So government spending is un-American. Typical GOP horsecrap.

The Senator continued, "This plan is a spending plan, not a stimulus plan . . . its wasteful and a lot of the spending will be permanent." We have to decide if we want to be a "free market economy or government controlled economy.

"This is a government managed economy which doesn't work."

Um, Jim, it was the REGULATION which didn't work. If you want to blame (GOP) government, fine. But to imply that too heavy a regulatory burden is what has us in the state we are in is truly rich.

HEY JIM: The point is that right now people are terrified of losing their job, health care, etc. They are (wisely) saving rather than spending. They saved the great majority of the last tax cut, in 2008. Economists believe they will save most of any 2009 tax cut. Spending is much more effective in stimulating a moribund economy. Much more. The Good Senator's statement is a simple regurgitation of ideology, rather than one involving a shred of thought.

Barney Frank, key Congressman from Massachusetts, Chairman of the House Financial Services Committee gave off the democratic talking points. He also, as is his wont, went far beyond these talking points, explaining in some detail why he was saying what he was saying. He may not be an intellectual GIANT, but he's a smart serious guy that clearly wants the right thing for his district and the country.

Anyway, this isn't the very best stimulus package I could imagine. Not by a long long shot. Too much of its spending is too slow in coming, and there isn't anywhere near enough spending. Still, it looks like the Senate will add spending, including especially infrastructure spending. Roads, bridges, etc. Incredibly, some GOP Senators have called for increased tax cuts on the lowest paid and middle class workers, which tax cuts would in many cases be spent. I'm as surprised as you are.

In summary, pay attention to to what the Senate does. The final bill will probably look a lot more like what passes the Senate than what passed the House.

The House went a little hog wild throwing spending in that wasn't real stimulative. Understandable, but not ideal.

PRESIDENT Obama

We have a new Commander in Chief. Bush is really gone. Goodbye, thanks for nothing, don't let the door hit you on the way out, and good riddance. Bush played gracious for weeks, I'm sure even he got tired of it. And now he's gone.

I find it a bit funny that Obama flubbed his lines in the actual swearing in. It looked like either he was terrified (understandable) or he hadn't rehearsed with John Roberts. Obama's not a real spontaneous kind of guy, so I'm assuming he was just scared. Fine.

Anyway, I did watch a fair bit of the day's ceremonies. Not really my cup of tea, a big old parade and all. Watching Bush fly away in the helicopter was just about as satisfying really as watching Obama take the oath of office.

Now the hard part begins. Israel-Gaza, big stimulus package, enormous money needed to save the banking system again (more on that in a post coming up), an economy deep in recession, a health care system hugely in need of root and branch reform, Afghanistan heading south, a broken immigration system. Bush left the country far, far worse than he found it, and Obama has the most full in-box since WW II, by a lot. But you all know this already.

Today is ceremony day. And it was quite a show! And we swore in the 44th President.

OH-BA-MA!! OH-BA-MA!! OH-BA-MA!

I was right and the ECB was wrong.

I was right. Again. This time it had to do with the interest rates set by the European Central Bank (ECB). Again, the ECB sets interest rates for all of the countries which use the Euro as their currency, much as the Federal Reserve sets interest rates.

In my post of June 6, 2008, I mocked the leaked news that the ECB was to raise interest rates soon.

http://flyingpinkunicorns.blogspot.com/2008/06/i-hate-european-central-bank.html

The announcement caused the dollar, then moving downward, to really tank (It has since rebounded strongly against the Euro as investors flee to the "safe" US in these godawful scary times). In addition, the move was wholly unnecessary, as I argued at the time. I argued that the ECB would harm to the dollar vs. Euro exchange rate and that inflation in the Euro zone was not a problem.

Well, shortly thereafter, as we all know, the world financial system, led by the US, went to hell in a hand basket, dragging the real economy down with it. And, to its credit, the ECB lowered rates by half a point in October, another half a point in November, and 3/4 of a point in December. It lowered rates by an additional half a point today. In short, although it has moved radically slower than the federal reserve to get interest rates down, it immediately stopped increasing rates.

Now I'm not going to sit here and tell you I predicted that the financial crisis (or the real economy) were going to get anywhere remotely near as bad as they did. I didn't. I'm not going to argue that the ECB's blunder in signalling higher interest rates and then following through with them made any real difference. Because in the end it didn't.

But I will sit here and tell you that I argued, (for months) in this blog and in private e-mails with Andrew, that inflation was not a problem here or in Europe, and worrying about it was absolutely silly. And I was right, right, right!! So yes, I was doing a better job running Europe's interest rate policy than the board charged with doing it. Which, given that Jean Claude Trichet is its head, isn't real surprising. Trichet had rocks in his head; still does. European interest rates in Euro-land aren't being lowered anywhere near fast enough. European inflation will drop darn near as fast as here. While Europe's economy isn't anywhere near as bad as ours (yet) it is almost as dependent on oil and thus will benefit hugely as we will from oil's dizzying price declines. And while Europe's economy doesn't adjust as fast as ours (one of the great strengths of the United States) it does adjust. European inflation has already dropped sharply, down to 1.6 % year on year vs. 2.1% in November and 4% in July (shortly after I wrote the above post arguing that there would not be an inflation problem in Europe)!

I was right and the ECB was wrong.

New York Times Muddleheaded thinking

I can't begin to think of a better example of why the world is so muddle-headed on Israel than this NYT editorial about Gaza. Read the NYT piece before you read the rest of this post. Andrew, this means you too.

http://www.nytimes.com/2009/01/06/opinion/06tue1.html?_r=1&ref=opinion

*Time passes while loyal readers swamp the New York Times Website.**

Spot the muddle headed "thinking?"

Israel, aided by the United States, Europe and moderate Arab states, must try to end this conflict as soon as possible and in a way that increases the chances for negotiating a broad regional peace.

That means ensuring at a minimum that Hamas — a proxy of Iran — is not seen as gaining from the war, that the rocket fire is halted permanently and that the terrorist group can no longer restock its arsenal with more deadly weapons via hundreds of tunnels dug under the Egypt-Gaza border.

Ok, let me see if I have this straight. The primary goal must be to "end this conflict as soon as possible." In short, a shriek to stop the killing! Well, I don't think that should be Israel's sole goal to be sure (otherwise why start fighting in the first place) but at least I understand this point.

But in the very next paragraph, without a hint of irony, the Times insists that the rocket fire (from Hamas) be halted permanently, and, to boot, that it cannot get more weapons through the Egypt border.

In short the New York Times agrees with the stated war aims of both Israel (END THE ROCKET THREAT FROM HAMAS) and Hamas STOP THE KILLING OF THE PALESTINIAN PEOPLE). If supporting the war aims of two diametrically opposed parties strikes you as a bit odd and hypocritical, that's because it is.

How this magic solution of an end to the conflict "as soon as possible" is to be married with the goal of ending the Hamas rocket threat the Times neglects to inform us. Unless "as soon as possible" really means "as soon as Hamas is utterly destroyed. That I would support. But the tone of the New York Times piece means that it really means that the military operation end quickly. Which makes no sense; the New York Times knows perfectly well that if Israel ends the operation soon Hamas will rearm and the rocket threat will remain. Either you support the Israeli effort to reduce/eliminate the Hamas rocket threat, or at least show that rockets into Israel have consequences, or you don't. In this instance, you simply can't have it both ways.

In conclusion, as so many do regarding Israel, the New York Times wills the ends but not the means. Given that the Times is such an important paper and cares a lot about Israel, this lame effort to describe the Gaza situation is particularly pathetic.

I am disappointed with the news today regarding Obama's stimulus plan.

http://www.nytimes.com/2009/01/05/us/politics/05spend.html?th&emc=th

First, the leaks indicate that the economic package is to cost between $675 and $775 billion. Although clearly substantial enough to do a lot of good, this is less than I would like, and have advocated. The US GDP is about $14 trillion. Assuming this money is spent evenly over only 2 years (which is not accurate, but I'm simplifying) that means that assuming a $700 billion package, that would be $350 billion each year, or 2.5% of GDP. Now that's not nothing to be damn sure, but with the economy shrinking at about a 5% rate, it isn't quite enough to ensure a return to growth. However, coupled with the enormous amount of stimulus already in the pipeline, as I discussed in my December 5, 2008 post, this package may well be sufficient to lift the economy out of recession. If it packs enough stimulative punch. Which brings me to my real problem with the leaks about the package.

According to the above-mentioned New York Times article, Obama plans for his stimulus package to include "about $300 billion in tax cuts for workers and businesses."

The current plan is to devote about 40% of the cost of the stimulus plan to tax cuts, "including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion."

I suppose given that it was an often repeated campaign pledge, and will not go to the wealthy, I really can't squawk too badly about this $150 billion.

However, the remainder of the tax cuts I am really not happy about, especially in the context of a somewhat smaller package than I would have liked.

First, why am I not jazzed about tax cuts as part of the stimulus package? Well, consumers are tapped out and heavily in debt, and will tend to save this money or pay down debt. I could live with this amount of tax cuts as part of a larger overall package, but the leaked plan leaves "only" approximately $400 billion in spending over two years, or $200 billion per year. This represents only approximately 1.5% of GDP for each of those two years, not nearly enough spending to have the impact I was looking for.

Second, the tax cuts other than the aforementioned tax credits for each worker earning less than $200,000 per year will likely be particularly ineffective.

The first major business tax credit I am unhappy about is one which, "[t]o encourage businesses to expand their work forces and operations, Mr. Obama wants a tax credit for each job created. During the campaign, he proposed $3,000 for each job." This is just silly. Most of the jobs thus created would have been created anyway. This is a wasteful business tax giveaway, and lousy policy to boot, as any marginal jobs created which would not have been create otherwise are, by definition, marginal (barely needed if at all), thus economically inefficient, and relatively less like to survive as jobs over a period of years.

The second tax credit referenced is not yet specific. The Times article stated, "Advisers said [Obama] was now also trying to figure out a way to give incentives to businesses to resist cutting jobs, as so many have been doing."

Tax incentives for businesses not to cut jobs is probably even worse than incentives to create jobs! Businesses need to cut back their workforces in order to maintain a sustainable size going forward. This is a hugely painful process, trust me, I know from painful personal experience, but is entirely necessary. Thankfully, this tax incentives probably won't make too much difference-- if a company needs to lay of 500 people, it really needs to lay them off, and a few tens of thousands of dollars won't make much difference.

Still, it would have been much better for the government to dole out money which would be spent, driving business and consumer demand. Then some of these businesses would in fact need the marginal worker created by the tax incentives to create jobs, and (although in fewer cases) the businesses set on cutting jobs would no longer need to do so.

Finally, and I suppose this doesn't at all surprise me, "The economic plan will also include other tax breaks intended to stir capital investment." It is my opinion that many of these tax breaks merely encourage investment which would have occurred anyway, and thus are primarily a giveaway to businesses. However, the money involved in these tax breaks is unlikely to be particularly huge, so the relative harm is somewhat limited.

I had been hugely optimistic based about the economic stimulus package based upon on what I heard from Team Obama. I am not prone to bouts of wild optimism! But the details which are now emerging about the stimulus package are disappointing. It will still be big and still be very much worth doing, but it won't have anywhere near the impact it could have.

I have no way of knowing, but I suspect that the large amount of tax cuts is done so as to secure moderate democratic and republican support, that is for political reasons not policy reasons. Sadly, any attempt to attract even moderate Republicans generally means making policy worse. But in the scheme of things, increasing the chances of passage, coupled with the huge momentum boost that would create towards the rest of Obama's agenda probably make $100 billion of wasteful tax cuts well worth it. And if the package were $100 billion larger I'd pipe down. But in a $700 billion or so package, $100 billion of almost entirely non-stimulative tax cuts, and $150 billion in only partially stimulative tax cuts constitutes a gigantic wasted opportunity. Still, when I first read the Times article I was hugely disappointed. The more I think about it, the more I am merely disappointed.

Paul Krugman's wrong.

http://www.nytimes.com/2009/01/05/opinion/05krugman.html?_r=1&ref=opinion

I largely disagree with his statement of current economic conditions, as is clear from my recent blog posts.

First, he says, "The fact is that recent economic numbers have been terrifying not just in the United States but around the world. . . . Let's not mince words: This looks an awful lot like the beginning of a second Great Depression."

No Dr. Krugman, it doesn't. Not as of yet, anyway. I am focusing exclusively here on the US and not the world economy, as Krugman does in his opinion piece. If you look closely at the US economic numbers in recent months you will find an economy clearly suffering just about its worst stretch in decades, but, contrary to what Krugman said, you will find highly similar numbers from the 1981-82 recession and the almost equally severe 1974-75 recession.

Specifically, if you look at the economic numbers which have been released (and not credit or financial market conditions, which do look uncomfortably like the beginning of a second Great Depression) you would be pretty much forced to agree that while the US economy is doing quite badly, it is well within post World War II norms for a steep recession, as opposed to a second Great Depression (which I will loosely define as at least several years of both massive unemployment, and economic output well below what the economy is capable of).

There are many economic statistics I could use to make my case. I will pick two, Christmas season retail sales figures for 2008 (because they are both recent and comprehensive) and the recent November employment report (which I chose because it was particularly awful, and was very widely (and correctly) reported as having been particularly awful. I believe other statistics would support my case equally well.

Item 1: Christmas season retail sales:

As you have likely heard, the retail sales figures over the holiday season were awful. But if you look closely, they appear to be standard recession level figures rather than something worse. I think.

According to MasterCard, a statistic that nearly everyone uses, "total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve."

http://online.wsj.com/article/SB123025036865134309.html?mod=rss_whats_news_us

Now those headline numbers are godawful, and support Krugman's case more than they do mine. However, look more closely.

"When gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December. A 40% drop in gasoline prices over the year-earlier period contributed to the sharp decline in total sales."

Does a decline of 2.5%, or 4%, sound like a second Great Depression to you? I think not, although I haven't done the research to be sure. There is no doubt the numbers were awful, but not historically awful. And that should be the standard if you are saying, as Krugman did, that, "recent economic numbers have been terrifying," and that the numbers look like the beginning of a second Great Depression.

I note that simply excluding autos altogether may give a misleadingly positive picture. I am 100% sure that if you included autos the numbers would be significantly worse. But auto sales were artificially high for years and are now artificially low. While clearly relevant in determining whether we are headed for a second Great Depression, I wouldn't put too too much stock in autos as a leading indicator about now. I think using retail sales excluding autos and gasoline is in fact the appropriate measure.

In summary, the various quotes I read when googling this matter were similar to the one in this article, "This will go down as one of the worst holiday sales seasons on record." No doubt it will. But I read, "worst in many years," "probably the worst since 1970" and the like. I did not read, "Much worse than anything we've ever seen," "worse than anyone's worst nightmares" or anything like that. In short, bad but not historically awful.

Item 2: Employment numbers:

December's numbers come out this Friday, and everyone is expecting a whopping job loss, somewhere north of 500,000 jobs, possibly as many as 650,000; a huge monthly loss to be sure. But let's look at November's numbers.

According to the New York Times, the 533,000 jobs lost in November were the most since December 1974. "Not since December 1974, toward the end of a severe recession, have so many jobs disappeared in a single month — and the current recession, far from ending, appears to be just gathering steam."

http://www.nytimes.com/2008/12/06/business/economy/06jobs.html

The Times piece then argues that whereas the 1974 numbers came at the end of a severe recession, this recession is just gathering steam. I point this out, but don't address it, because I don't know for sure if this recession is just gathering steam, and neither do you. I do note a crucial point that the New York Times and most other media outlets miss when throwing history around:

The number of jobs lost in December 1974 was a massively higher percentage of the overall labor force than the 533,000 lost in November 2008.

As the Heritage Foundation put it, "In percentage terms, the number of establishment jobs declined by 0.4 percent. In comparison, the December 1974 job losses of 602,000 were twice that number—a 0.8 percent decline from the previous month. The size of the decline in percentages is the same as the peak job losses in the 1981-82 recession but twice that as compared to peak job losses in the 1990-91 and 2001 recessions."

http://www.heritage.org/research/economy/wm2157.cfm

In short, looking solely at November's employment report, and ignoring all other economic indicators, one would conclude that we are in a bad recession, but nothing more. Well, I don't doubt for a second that we are in a bad recession. Hell, the stock market has crashed, unemployment is zooming upward and huge famous companies have failed or been rescued as they were about to fall into the abyss. That's not the question. The question instead is whether this is anything more systemically severe than a bad recession. And the clear answer, based on the data currently available, is no.

In fact, given the fact that the credit markets are easily at their worst since WWII, that the other financial markets have suffered the biggest losses since WWII, the shattering loss of confidence by consumers, financial institutions, and non financial businesses, the fact that as of now we have only seen really bad numbers, as opposed to historically terrible numbers, strongly supports my argument, and not Krugman's, in my opinion..

Two more points before I shut up:

First, I think Krugman's piece was meant as much for advocacy as to describe current conditions. He concludes the piece, "So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?" I certainly have no problems with this advocacy! Even I would agree that the risk of a Great Depression II is the highest since 1945, probably by a significant amount. I don't think that can actually be seriously debated! So a huge stimulus package, which I have advocated for weeks (see my companion post on my big disappointment with the details Obama has released recently about his plans for the upcoming stimulus package) is a fine idea, and I'm glad Krugman is lending his Nobel prize name to the effort again.

Second, everything I have said here is backward looking. That is, I have concluded that the risk of a second Great Depression is minimal based upon the data already released (and the huge government response, which I have discussed in earlier posts). Should data over the next 3-4 months come be substantially worse than the date released in recent months, I could be forced to revise my view. However, even if this occurs, it would likely point to a steeper recession than I and others expect (which I freely concede is possible) rather than a years-long slump, where recovery doesn't occur for years, and then is massively too weak to get the country back to near full employment. I still believe that in order for a bad recession to turn into a second Great Depression, government policy response must be inapt, inadequate, or both. And given that Obama takes office shortly, future policy is likely to be neither. And federal reserve policy under Bernanke is quite certain to be neither.

I agree with the conclusions reached by Ben Bernanke and others: bad federal reserve and fiscal policy caused the slump of the late 1920s to turn into the Great Depression. Despite huge problems with the Treasury Department's response, the federal government has made an absolutely massive response this time around, and it is precisely this response which I think will both prevent this recession from spiraling into a truly terrible state, where unemployment say reached 15%, and also will prevent a many-years long slump that would constitute a second Great Depression.

2009 Legislative Predictions:

18 days till inauguration. Get excited. Get really excited!

Some predictions on the legislative front with a sprinkling of foreign policy thrown in.

Congress and Obama have an unbelievably full in-box as Obama awaits inauguration on January 20th. Doesn't it seem like he's already president? Hasn't the nightmare ended yet?

1) A massive stimulus package will be enacted before the end of February. This prediction isn't really tough. Its been all over the news. I predict that the total amount of all stimulus packages (there may be more than one) will be less than $800 billion. While that is a staggeringly large number, I will likely be a little disappointed in the final number, as I would prefer an even bigger number, both to ensure that the recession isn't needlessly deep, and because I think a large percentage of the money is likely to be reasonably well spent. Go ahead, laugh. That's a reasonable response to the bit about well spent. But a lot of it will.

2) Health care reform. The big enchilada. I don't know when health care reform will pass, but I predict it will. It will be some form of messy compromise, designed to peel of 10 Republican votes in the Senate and 30 in the House. It will allow anyone who wants to to buy into either Medicare (my choice) the Federal Employees' health plan (better than nothing) or perhaps both. It will reform the way insurance companies work. It will forbid discrimination based on pre-existing conditions. It will not, however, require insurance companies to insure patients. And it most certainly will not be a radical reform, like single payer, unfortunately. It will be a messy compromise.

3) Immigration: I predict that no significant action will be taken on immigration in 2009. Perhaps 2010.

4) Energy: I predict that the amount of new spending on alternative fuels and regulations on emissions will be surprisingly high. Cap and Trade, Carbon swaps, fuel cells, batteries, solar panels. You will be hearing a lot about these in 2009. I don't know enough to make a truly detailed prediction, but as between more energy reform and less, I predict more. The shock of $4 a gallon gasoline was profound, and will be useful to Obama when he tries to sell serious energy reform.

5) Iraq: Iraq will worsen slightly, at times, but not enough to throw the planned slow motion withdrawal off track. We will in fact begin withdrawing meaningful numbers later in 2009.

6) Afghanistan: We will, as has been stated, add more troops into Afghanistan.

7) Trade: The sounds of silence. New trade deals are off the table in 2009. Obama needs all the help he can get for his legislative agenda, and pissing off organized labor will have to wait until 2010, or beyond.

Some predictions for 2009

Since my 2008 election predictions were a monster success, I figured I'd take a stab at some 2009 economic and other predictions. I'll come back at the mid-year mark, and in very early 2010 and see how I did. Be gentle, some of these are sure to be embarrassingly wrong.

1. The economy:

As I explained in my earlier post, I expect the economic recovery to begin in about June, 2009. I do not expect it to be vigorous at first, although the economy may show surprising vigor by the very end of this year. Or it could go yet to hell in a hand basket if the credit markets truly seize up again. I'm guessing that the worst will be over by March and growth will resume by June. By the end of the year it will be real, although whether the job market will be improving I'm not sure.


2. The stock market:

The Dow Jones is currently at 8,776.39. I expect it to move up 25% from here, closing the year at around 11,408, give or take 500. I know that sounds like a huge move, but it all it would really do is undo a portion of the losses of the crash-year of 2008. The Dow Jones closed 2007 at 13,364.16. So I'm only predicting it gets partway back. Historically, the markets move prior to changes in the real economy. Since I'm predicting an economic recovery starting in June and picking up steam towards the end of the year, I therefore predict a solid market move starting circa March. I can't tell what month-- that would just be making stuff up as opposed to an educated guess/prediction.

The conditions for a huge year in the market are practically perfect. Ridiculously low interest rates and an economy that has been in recession for a year, and which recession has greatly increased in severity in recent months. That may sound funny, but the market bottom should precede the economic bottom, and that is coming soon. If the credit markets improve, as I predict, and credit begins flowing, this will light a fire under the markets.

The Dow Jones isn't the whole market obviously, but as a market overview prediction it will do nicely.

3. Interest rates: The Fed Funds Rate:

As of now, the Federal Funds rate is set at a target of between 0 and 1/4th of 1 %. Effectively zero. I predict it will move up to 1% by the end of the year, with all of that move coming after August, and possibly even in November/December.

The fed has lowered interest rates truly to the floor. They will want to begin gently easing as soon as they are confident that the credit markets have largely or entirely returned to normal, and the economy is recovering. That should be by the end of next year. They may, in an abundance of caution, leave rates at zero several months into 2010, which would make this prediction wrong, but then they may not. Obviously a lot will depend on the overall economy, and whether inflation is sharply negative, as it may be early in 2009. If inflation numbers come in negative month after month, the fed will be seriously spooked, and will leave interest rates at zero regardless of what happens in the real economy. The fed simply does not want to risk a bad deflation!

4) Interest Rates: The 10 year bond:

These days, the benchmark interest rate set by the credit markets is the 10-year bond. This is currently at 2.24 % after taking a bath late last week. Still, 2.24% is just about the lowest in 40 years. I predict that at the end of 2009, the 10-year bond will be at 4.5%. This is of course a huge move! There are two main reasons for my prediction:

First, I think the rate is somewhat artificially low (or, put another way, the price of the bond is artificially high) as a result of a flight to quality. Investors are terrified of investing in most anything; stocks, bonds, etc, for fear of mass bankruptcies. Uncle Sam is safe (at least from bankruptcy), so investors have rushed to accept historically low yields so as to park their money safely and at least earn something.

Second, Since I predict a fragile economic recovery, that would imply that the markets would no longer fear a big deflation, and I think that deflation fears have really brought down the rates on the 10-year bond, big time. Think about it-- if inflation is negative 2% (deflation), a 2% return is actually 4% after inflation, which isn't bad at all. However, if inflation is 1%, to maintain that same 4% post-inflation yield, interest rates would have to move up to 5%.

5) Oil:

As I write this early in the morning on January 2nd, oil is at $41.65 a barrel. I predict that oil closes 2009 at $52 a barrel. The futures markets are predicting a bigger move up than that. OPEC has moved fairly aggressively to attempt to cut production. They will surely make further attempts. Whether they succeed, I have no idea. Congress is likely to pass major legislation requiring massive increases in fuel economy in future years, and investing huge amounts of money in alternative energy. Given that the US uses 25% of the world's oil, this will register in the markets. But the big oil-market story of 2009 will be that economic Armageddon is avoided. Once the oil markets realize that this is the case, oil should move up quite a bit. My prediction here is actually fairly conservative.

Thinking about Gaza.

This post is about what I think Israel's goals should be for this offensive against Gaza: What should Israel be trying to accomplish. The short answer is the removal of the Hamas government, the destruction of Hamas as an organization, and a very significant reduction in the amount of capability of people inside Gaza to hit Israel with rockets or in any other fashion.

As all of you already know, Israel is 3-days into a significant series of air strikes against Gaza, that have already apparently killed approximately 300 people and wrought some destruction.

As I write this, the New York Times lead story on-line is headlined, "Israeli troops mass along border; Arab anger rises." Well, Arab anger always rises when Israel defends itself. If rockets are launched against Israel, not so much. If Saddam launches Scuds against Israel without Israel having done anything to Iraq, that is cheered in the Arab world (and was in fact cheered at the time both by Palestinians in the West Bank and Gaza and, disgracefully, by well more than a few Israeli Arabs (who are citizens of Israel)).

With that sidelight out of the way, where should Israel go from here?

An article that my friend Andrew sent me,

http://www.tnr.com/politics/story.html?id=b80c860d-dca8-4d79-9cc4-05d91b6d4721

got me to thinking: What should Israel's goals be as it prosecutes this significant offensive against Gaza?

My short answer is that Israel should continue its military occupation in Gaza until each of the following conditions are met: (1) the eviction of the Hamas regime in Gaza, and its replacement by Fatah (the Party founded by Yasser Arafat, currently headed by Mahmoud Abbas, that is in power in the West Bank), (2) that Fatah be required to act to stamp out Hamas and its imitators once and for all on pain of its being replaced by leaders of Israel's choosing, (3) the capture or killing of Hamas' leaders; (4) leaving behind any military and security infrastructure needed to ensure that the rocket threat poses by Hamas does not reemerge; and (5) the permanent occupation of a narrow strip along the Egyptian border, to prevent the smuggling of weapons, including but not limited to rockets, into Gaza. No civilian settlers for heaven's sake! If I could be convinced that this is simply unworkable, that the Israeli soldiers there would simply be easy prey for Hamas or other groups, and you can't just leave them sitting there for decades, I would be open to alternative security arrangements that would reasonably ensure that the flow of weaponry into Gaza turns into a mere trickle.

These are, make no mistake, ambitious goals. They will require Israeli blood, many Palestinian civilian deaths, entangle Israel in Gaza politics, reliance on an unreliable Fatah "ally," and will only reduce and not eliminate the threat. But it is the best series of goals that I believe is achievable for Israel at any reasonable cost. There are problems, including one serious problem, with the goals I have set forth, as I will discuss below,.

Is Israel going to go anywhere near this far? I doubt it, but there is room for debate. Any attempt to predict Israeli behavior has to begin with the Lebanon War of 2006. Then, you will recall, Israel engaged in a weeks' long series of air-strikes designed in part, as I remember one Israeli saying, to show that "the bossman has gone crazy." Well, designed in part to reestablish Israeli deterrence. Israel had more or less accepted small military actions against it for quite some time and had had enough. Anyway, at the time Prime Minister Olmert talked very tough, saying that the goals were to "destroy" Hezzbullah, or to destroy it as a military threat. Andrew and I were thrilled to hear about Israel seeming to act decisively to defend itself for the first time in many years, and we were thrilled. Alas, Israel then declared peace with precisely none of its objectives satisfied, with Hezzbullah having fired well more than 10,000 rockets into Israel and having emerged victorious in the eyes of everyone in the region.

This shadow, in some ways similar to how Americans look at Vietnam, looms over the current operation in Gaza. Once again, we have air strikes against a well armed ragtag military group that fires rockets into Israel. When I say well armed, they are, for a group of militants, as opposed to a modern army. Make no mistake, the Israelis have a small but very real modern military and could, if it wished, crush Hamas, and leave total devastation in its wake, and suffer relatively few casualties while doing so. This would require a level of death and destruction that Israel is simply unwilling to consider. I don't want to leave the impression that by saying "well armed" that means they are in any way shape or form comparable to Israel.

Some in Israel have talked about resuming deterrence. Let the Palestinians and others in the region fear Israel, and then they will stop attacking it. This is most unlikely to work. Whatever the flaws of the Palestinians may be they, and their leaders, are tough and determined. Despite facing down a modern military, with aircraft, precision guided bombs, tanks and satellites, they fire rockets into their massively superior opponent and talk openly of its destruction. Hardships are simply blamed on Israel, or the US. Hamas is particularly tough, courageous and determined. The idea that a massive show of force, capture of some of its leaders, destruction of buildings and infrastructure and killing of a few hundred civilians is going to change the behavior of those that run Hamas is ludicrous. Time and again, Palestinian leaders have shown their basic inability to be deterred by that level of force which Israel is willing to dish out. Would they be deterred in the future by the kind of much more significant operation that I outline? Israel's never tried it, so I don't know for sure, but my best guess is no, they would not. I am in no way relying on deterrence.

In the meantime, the Bush administration has talked about Hamas being at fault (fine) and calling on it to "renew the ceasefire." I don't want a ceasefire with Hamas, while it (a) fails to recognize Israel; (b) Remains committed to the destruction of Israel; and (c) arms towards doing harm to Israel, including but not limited to acquiring rockets with a longer range into Israel, and, of course, using those rockets. I might support allowing Hamas to stay in power if it:

1) Agrees to a coalition with Fatah and to turn over all military assets;
2) Recognizes Israel; and
3) Publicly and irrevocably commits to working towards a 2-state solution.

I do not believe that Hamas can possibly accept these terms, it is meant as a poison pill they can't possibly accept. In reality I do not support any sort of resumption of a truce with Hamas. They represent an intolerable threat to Israel, which could grow in time into a mortal threat. Israel's citizens having to live under the constant threat of rocket attack is simply unacceptable. Hamas could possibly ensure a few months of quiet (possibly) but the resumption of the threat of living under rocket attack would then resume at Hamas' leisure. This is intolerable.

What are the main problems with the set of goals I have outlined? The biggest problem by far is the assumption that Fatah can somehow be forced to stamp out any future threat posed by Palestinian militants. Since the beginning of the peace process of the 1990s, a constant source of tension between Israel and Fatah has been the attempts (or lack thereof) by Fatah to disarm Palestinian militants/prevent their emergence in the first place. Arafat at times actually did crack down on the militants (in part because they were a threat to his power, wealth and life), but mostly let them alone because (a) he wasn't always strong enough to crush them; and (b) they served his ends in a negotiation with Israel; they represented the leverage he had-- suicide bombers and other attacks on Israel.

What if Fatah "promises" to stamp out the remnants of Hamas, and not to let it reemerge. Then, time goes by, and, mysteriously, new militant groups form, new groups are lobbing rockets at Israel, and Fatah says, "gee, we're sorry. Where did they come from?" This is, to say the least, a likely series of events. I have not fully worked out how Israel would deal with this eventuality, in part because there just isn't a good answer. Or at least I haven't worked one out. Caroline Glick, of the Jerusalem Post, constantly reinforces the point that Fatah cannot be trusted. She has not set forth an answer of how to deal with this problem either. The Palestinians represent an enormously difficult series of security problems for Israel to deal with. But short of simply killing them all, which Israel has not and should not consider (we did not carpet bomb Fallujah during the worst of the Iraqi Sunni insurgency, even though that would have killed hundreds or thousands of militants and arguably saved many American and Iraqi lives), Israel has to make a series of choices vis-a-vis the Palestinians. And rocket attacks, or even the fear of them, is to me on the side of unacceptable. Israel should pay any price, bear any burden, inflict any harm necessary to avoid the risk of rocket attacks.

The fall of the Japanese markets

The Nikkei 225 Index, Japan's defining stock market index, very much analogous to the Dow Jones Industrial Average that you see every day in the news, closed today at 8,747, up a tiny fraction. By coincidence, the Nikkei is extremely close in raw numbers to the Dow Jones, which closed on Friday at 8,515.

Why on earth am I telling you this? Because on December 29, 1989, the Nikkei closed at its all time closing high of high of 38,916!! Thus 19 years after the Japanese market hit its all time high, it is down 77.5% from its high!

http://en.wikipedia.org/wiki/Nikkei_225

http://finance.yahoo.com/echarts?s=%5En225

Its incredible how far the Japanese market has fallen from its peak. It fell throughout much of the 1990s, and has been cut in half again in this decade.

I was 19 in 1989, when the Nikkei closed at its high, and I well remember all the talk about how the Japanese model was superior, how the Japanese would own America (Japanese individuals and companies went on a hugely publicized shopping spree in the US, buying movie studios, theme parks, buildings and businesses. Most of these were sold in the 1990s at absolutely titanic losses).

This history of Japan bears remembering whenever anyone wants to assume anything about our future.

Elie Wiesel Foundation Loses Everything to Madoff

http://www.newsmax.com/insidecover/wiesel_losses_madoff/2008/12/24/165157.html?s=al&promo_code=7656-1

The Elie Wiesel Foundation For Humanity lost "substantially all" of its modest $15.2 million assets to the Bernie Madoff pyramid scheme. I know I'm supposed to be very angry at Madoff (and I am, furious-- he obviously should never be a free man again, and he makes me hope/wish there is a hell) and very sympathetic to the charity and those that it helps that now may have to do without (and I am), but I'm also pretty ticked at the imbecile(s) who put all of their money into one person's hands. Why on earth would you do that? Now look, its a small charity, so I don't expect them to spread their money to 8 different people. And there's only so much due diligence that a small charity can do. But 3 different people? So if one's a crook you have 2/3 of your money?

Am I being too harsh here? This isn't the United Way losing billions, or anything remotely like that. Still, didn't your momma teach you never to put all your eggs into one basket?

Clinton: 22.5 million jobs created; Bush 3.7 million.

Under 8 years of Clinton: 22.5 million!

Under 8 years of Bush: 3.7 million!

Under Bush BEFORE the recession began 4.6 million.

This doesn't count December and January, which will subtract at least 500,000 from the already paltry Bush totals.

There are many caveats, to be sure. After the very strong job creation record under Clinton even a successful Bush presidency would have created many fewer. But not nearly this many fewer.

Folks, we all know failure when we see it. But sometimes in life numbers have the power to just boggle the mind. Sometimes numbers crystallize things for you.

I wanted to share a statement made in a recent column by Caroline Glick, in the Jerusalem Post.

She is a right-winger, dead set against a Palestinian state or any giveback of land by Israel in the West Bank (she was also against the Gaza pullout) because she is of the opinion that the Palestinians would simply use any new land or especially a new state as a launching point from which to increase their capacity to attack Israel and kill Israelis. She sometimes is a bit, well, frothing at the mouth about these things, and, I think, has not fully thought through where Israel's settlement policy has taken it.

She also called on the Olmert government to resign before the Lebanon War was even over, and was as furious at Olmert's conduct of the war as I was (which is very furious indeed).

Anyway, she recently summed up why I am against a resumption of peace talks with the Palestinians far better than I have or could. In a just world, the following words would be remembered for the ages as a perfect summary of our times:

"But Fatah (the main Palestinian governing party, once headed by Arafat, now headed by Abbas) is a dead horse. Even if it were to sign a peace deal with Israel - and really meant to keep it - the deal would be a dead letter because the Palestinian people themselves want neither peace with Israel nor Fatah."

http://www.jpost.com/servlet/Satellite?cid=1228728255154&pagename=JPost%2FJPArticle%2FShowFull

She is lock down right. It pains me to write this, because I want to believe in what's best in people. And many Palestinians DO want some form of peace. But not the people with the guns, and not a huge majority of the people, who could try and shout down the people with the guns (at least in some parts of the world). And I've hated Israeli occupation and settlement policies for 25 years. But not only are serious talks with Abbas profoundly unwise for precisely the reasons stated by Caroline Glick, but its difficult for me to see how that changes in coming years.

My friends (to borrow a phrase from a defeated presidential candidate) the middle east is much more likely to end up in conflagration in the next 5-10 years than a global peace settlement. Israel has to line up for its share of the blame, but the Palestinians have painted themselves into such a corner at this point that even if Israel wanted to adopt my policies (give back all the damn land, pull out all the settlers and be done with it), the Palestinians wouldn't be in any position to accept it and become tolerable neighbors.

Its a very sad situation for all concerned, and likely to grow sadder and sadder as Iran arms.

This post is designed to explain precisely why an absolutely titanic government stimulus package is necessary, and where the economy should and will go in the next 5 years. I don't mean to be predicting, I mean to explain instead. Predicting is more fun (especially when I'm successful, as with the elections) but in the end far less useful).

I. Definition of GDP

First some background. The GDP, or gross domestic product, is the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

http://www.investorwords.com/2153/GDP.html

http://en.wikipedia.org/wiki/Gross_domestic_product

Knowing what makes up GDP is really important if you want to understand how to get it growing again, so take a minute to really understand the component parts.

1. Consumer spending (sometimes called consumption)- you buy it and use it-- food, a tv, sneakers, whatever.

2. Investment: Education. Housing. Railways. Ports. Something that is not consumed, but is instead used for future production of goods and services. Obviously there can be gray area. A computer is both.

Importantly, both non-residential investment (such as factories) and residential investment (new houses) combine to make up Investment. Residential housing is a key part of investment. This has dropped off the cliff, as you might imagine. Off the cliff.

3. Government spending. As I understand it, if the government buys it it comes under this category, period.

4. Exports - Imports. The value goods exported, minus the value of imports. I will not discuss trade at all in this post, because it is very difficult to control and predict.

II. Consumer Spending is in the Tank, and Likely to Remain There For a While

Now let's see where these categories of spending are these days. Consumer spending has plummeted. You may not be able to see that quite now as you finish up your Christmas shopping, but it has. Retailers are going bust, the car companies are obviously in a world of hurt, and US domestic sales of automobiles have dropped further than at any time since World War II. Big discounts are available on electronics, clothes, etc. Basically, consumers are afraid for their jobs/homes, or have lost them. When you're really concerned about losing your job, the Plasma screen TV or new dress can wait.

This is most most unlikely to reverse itself anytime soon. American consumers are famous shoppers. After 9-11 retail sales REALLY plummeted, as people were both riveted to the tvs and nervous. But a few weeks later it rebounded sharply. Bush literally urged us to go shopping. Small, small man.

Anyway, there are two excellent reasons to think that consumer spending won't rebound sharply anytime soon, which I boldly predict it will not.

First, Americans understand that the economy is truly awful. Most of the readers of this blog are highly educated people born and raised in the northeast. I am very confident that people like us badly underestimate the shock that people not like us feel when a Lehman Bros. goes under, or a Citigroup needs dozens of billions in cash and hundreds of billions in loan guarantees to stay afloat, and, especially, when GM is driven to the wall, and needs money by the end of the year to avoid bankruptcy. These things, by themselves, could be enough to badly depress or shut down economic growth. Couple that with the fact that the local Target closed, local businesses are cutting back and your boss tells you that the company needs to save money, and presto, you have a recession mindset. Multiply that by the entire nation, and you have probably the worst recession since 1945. The absolutely frantic government response has in some ways exacerbated this problem. The frequent statements by Bernanke and Paulson earlier this year that the crisis was contained proved most ill-founded. To their credit, they're not saying that anymore. But people that watch the news remember. It seeps in. Of course, the response is still necessary, as I've said in posts before.

Second and more important, is where are people going to get the $$ to spend? From 2002-2007, a key source of money that people used to shop was from appreciating home values (and stock portfolio values). As people were wealthier on paper they spent more and, importantly, borrowed more and saved much less. Home equity loans and credit card receivables went up sharply, and people spent like drunken sailors (as did the government).

Well, the stock market has crashed and the housing market has tanked, so these temporary boosts to wealth will be out of action for a while. Incomes aren't rising fast (obviously). So ladies and gentlemen, its really simple. With incomes down, and insecurity and debt up, those with jobs are saving more and spending less. Those without jobs or having lost their house are spending way less. Presto-- consumer spending is down.

And even though it may not go down radically from here, it is really hard to see a sharp rebound. The stock market could go up quickly, who knows, but the housing market really can't. There's just too many houses on foreclosure and unsold inventory for housing to rebound much until at a bare minimum mid to late 2009, and probably not until at least Spring 2010 at a guess.

Having said all this, I refer back to my post on Friday, December 05, where I pointed out that there is already a lot of "stimulus" in the pipeline, including lower oil prices, lower interest rates which are causing a lot of refinancing, and all of the money that the fed and the treasury has been throwing around. So there's more uncertainty than usual right about now, because there are such extreme headwinds and tailwinds at the same time.

Referring back to the beginning of this post then, GDP is consumer spending + investment + government spending (I'm leaving exports - exports out of this post, because it is very difficult for the government or anyone else to control exports). If consumer spending is unlikely to rebound strongly (to say the least) anytime soon, and investment is as well (residential housing is a big part of investment) you simply have to have government spending grow, or there is no way the economy will in the near future. Government spending (deficit spending) is the only game in town.

III. The Attempt to Stimulate Consumer Spending in 2008 Largely Failed, and its Failure was Both Predictable and Predicted

Earlier in 2008, the rebate checks were mailed out. This is an attempt to increase consumer spending by increasing the deficit and simply putting more money in people's pockets. It worked to an extent, but only so much, both because it was much too small to have a serious impact and, more importantly, because scared consumers tended to save the money and not spend it. All of this was predicted by many mainstream economists.

Savings is good too, for a myriad of reasons, but these reasons are mostly long term. In the short term, spending is far, far better than saving.

IV. The Federal Government Can, Should, and Will Increase Government Spending to Stimulate the Economy

Don't let anyone tell you, as some conservatives are, that government cannot stimulate the economy by running larger deficits and spending the money on bridges, roads, ports, health care, etc. It most certainly can. This is Keynesian economics 101, and is not controversial among serious economists. Now the government can't increase the size of the economy this way over the long term but in the short term it absolutely can, should and will. Team Obama has leaked this week that the economy is in much worse shape than they thought, and have not acted to quash speculation that the upcoming stimulus package will be bigger than anyone thought a few weeks ago, north of $700 billion over two years, with a trillion dollars over the 2 years being considered not out of the question. This is such a good idea that I am at a loss for words. It could be the difference between unemployment topping out at say 8.5-9%, or at 11-13%. It could mean the difference between a decent job and homelessness for millions of Americans. Its a hugely good idea as I've said in several posts before and will in several posts in the future.

V. Where will the Economy Go From Here?

Now its prediction time. Where will the economy go from here. Or, put another way, where will growth come from when the economy does recover?

Now that I think of it, this belonged in my last post, when I predicted that the recovery will begin on June 19, 2009. LOL.

At the very end of the day, the only way the standard of living of a nation grows is through productivity. That is, you can grow GDP by putting more people to work (for example, granting women and minorities the right to compete on equal terms for jobs, which is good economics as well as morally right), running a budget deficit, or doing myriad other things, but these things by and large do not, in the long run, increase per capita GDP. The only thing that does that is productivity. Basically, allowing Labor to work more efficiently, or allowing the interaction of labor and capital to work more efficiently.

How to increase productivity in the long run has been the subject of entire books and is beyond what I can contribute. To increase GDP, which I'll happily settle for, you need increases in (exports - imports), consumer spending (which is 2/3 of the economy, and I've discussed at length), investment or government spending. Increasing government spending is an excellent short term solution, and a poor long term solution, as taxes need to be raised to pay for this spending, and that will short circuit consumer spending. The key, in my opinion, is investment. We've had about enough residential housing for now, and that's a huge part of investment. So increased investment isn't easy!

So one wonders where growth will come from in the medium run. It would appear that after 2010 more growth than usual will have to come from investment than usual, and less from government spending (which will have skyrocketed from an already high base). People and businesses need money to invest, and that money, by definition, is either borrowed or comes from savings.

It is a central tenant in economics that government borrowing plus private investment = private savings plus foreign investment. So private investment and private savings are closely related. If you're going to build a railroad, or bridge, or new factory, or the like, the money for the investment must come from somewhere. That somewhere is generally either savings or borrowed, either from the government (to build a school) or abroad (A new Toyota factory funded by the parent company perhaps). So to increase investment you (as a practical matter) need to increase savings. Which can often decrease consumer spending-- private citizens savings = their income minus their consumption, minus THEIR investment. Anyway, raising savings (which in the US have been abysmal for years) has been a big issue in the US for years and the savings rate has only declined. So raising investment is going to be tricky.

It may well be that government spending will have to be elevated longer than I had thought. If I'm right, and consumer spending is slow to recover, the only things left are trade, government spending and investment. Can't raise investment without (a) raising savings; or (b) going into more debt. And one thing I'm certain the United States has about now is too much debt. Too much credit card debt, too much mortgage debt, too much government debt (at the moment). So I'm not for a strategy that relies upon increasing debt.

I am arguing for a government investment program that is real, and sustained, even after the stimulus package I have long advocated has run its course. By investment program I mean spending which can benefit economic growth later on, like schools, mass transit and other infrastructure, and possibly alternative sources of energy. Health care is also an excellent place to begin this investment. It is sorely needed (50 million or so people are uninsured, and that number is sure to rise in the steep recession we are in), government can do it (Medicare works), and it can be continued long after the recession is over. Whether it raises long term economic growth, however, is trickier. It might, but not as clearly as a much needed rail link.

Other areas for long term increases in government spending that are useful for the economy need to be considered. And taxes will need to be increased to pay for this spending (obviously diminishing any stimulative effect!) But as of now, and my mind isn't fixed on this, I don't see any other way forward. For the last 25 years, growth in the economy has been fueled primarily by increases in debt. The national debt has absolutely skyrocketed, mortgage debt has soared, consumer debt has soared, business debt has increased somewhat. A strategy for growth that allows for growth alongside a decrease in debt is now needed. And that will likely require more investment, by both the private sector and state and local governments.

I endorse Likud in the Israeli elections which will occur in February 2009.

I have to start by saying that as of now I am against any serious long-term negotiations with the Palestinians over the borders of a Palestinian state or any other long term issue. I take this position because the Palestinians are so badly split, between Hamas, which does not recognize Israel at all, runs Gaza, and has quite a bit of support, and Fatah (once Arafat's movement) which is "led" by Abbas, "runs" the West Bank, and has almost no real support among the Palestinian people as I understand it.

I never ever thought I'd live to endorse Likud in an election. They have always stood, and still stand for everything I hate about Israeli foreign policy. Likud was founded by a merger of several Israeli right wing parties, and was effectively run by Menachem Begin who for me is the most hated figure in Israeli political history. Begin was the mastermind of Israel's crazy settlement policies, by which Israeli citizens were dropped, hither and fro, into lands captured by Israel in the 1967 war. Begin conceived these policies in order to ensure that Israel could never give the West Bank back to the Palestinians (or anyone else). That was the stated position behind the creation of the settlements, at the time. That so many American Jews mindlessly repeat, "the settlements are necessary for security" is simply not thinking things through. Begin did, and that's where his views led first Likud, and later Israel, though he had tons of help in growing the numbers of settlers.

I have hated the Israeli settlement policies since I was 13. So how on earth can I endorse my hated political enemy? Well, Israeli politics is a mess.

The ruling Kadima party of Olmert (a party originally led by Ariel Sharon, which broke away from the right-wing Likud party) has, imho, done a terrible job for Israel's security. I just can't forgive these bozos for the 2006 Lebanon war fiasco. You'll recall that: (a) Israel essentially declared war on Hezbullah in Lebanon; (b) announced a series of (perfectly reasonable and appropriate) goals for the war; and (c) declared peace with literally none of these goals accomplished.

Olmert, the Prime Minister throughout this fiasco, clung to his job like grim death. He has been investigated for corruption for quite a while, and in September Israeli police recommended that criminal charges be brought against him.

He did not run for the leadership of the Kadima party, and that position was won by Tzipi Livni, Israel's hapless Foreign Minister. Livni reminds me a lot of Condi Rice. Theoretically capable, but mindlessly followed brainless leaders through brain-dead foreign policies for years and years. At least Condi had the good sense not to run for President to continue these brain dead policies. I wouldn't vote for Condi for dog catcher, and I think more of her than I do of Livni. Livni is a sad, sad woman who views Israel not as it is, or rather not as one might see it, but as she wishes it were. Not unlike Condi and Iraq, or Israel-Palestine, or many other foreign policy matters. Livni, from what I know of her, has no business running a community bank, let alone a country. She has repeatedly defended the Lebanon war fiasco, and has advocated final status talks with the Palestinians, which makes no sense given that Hamas, which denies Israel's right to exist, controls the West Bank. Either of these policy positions are so bad, so stupid, so counter to Israel's vital national security interests, that they disqualify her from serious office. But holding both of these positions is heroically incompetent and idiotic. She must go.

As if one needed another reason to despise Kadima, there is always that controversial prisoner trade made earlier this year. I ripped Olmert & Co. a new one in my post of July 16, 2008. I have nothing to add to that post, so I refer you to it for details on the awful exchange of a live murderer and other goodies for the bodies of two Israeli soldiers killed in Hezzbullah captivity.

So supporting Kadima is out, if I can find an even vaguely reasonable alternative (no Andrew, the "tooth fairy" won't do). I note that I supported Sharon for Prime Minister when he ran, so despondent and disgusted was I by the behavior of the Palestinians, and so little was I interested in a resumption of peace talks just then. I was reasonably happy with Sharon's leadership (more words I never dreamt I'd think, let alone write), and was comfortable with supporting his protoge, Olmert. Well, I was ignorant. I'm knowledgeable about American national politics. Israeli not so much, except in very broad outline.

Anyway, Olmert took Israel out for a spin, and in my view he dinged up the car really good. I suppose he didn't wreck it, but he ran it into a tree, blew out 2 or 3 tires, did thousands of dollars of damage in body work, destroyed the clutch, and never bothered to change the oil, damaging the engine mildly. So I'm not giving the car back to him! Livni was his passenger, and is convincingly promising to drive and care for the car in precisely the same way he did, negotiating with the Palestinians when Hamas runs Gaza and Abbas has very very little power and no influence. So I am certainly not lending her the car! I wouldn't give her a picture of the car.

Normally I would look to Labor. Labor is the mainstream party of the Israeli left, and a natural home for people like me who want to make a final peace deal with the Palestinians and Israel's other neighbors, and is willing to give up land/settlements to do it.

And I would consider Labor if I heard sensible things from Ehud Barak, its leader. Barak, you'll recall, was Labor's leader when the talks which got hot and heavy between Clinton and Yassar Arafat were ongoing. He pulled Israeli troops out of southern Lebanon, a move which I strongly supported. Alas, Barak promised that Olmert's troubles would not derail talks with the Palestinians. Talks which he wants a second chance as Prime Minister to see through. Well, that's fine Ehud, really, but who are you going to talk to? Abbas? He has about as much sway over the Palestinian people as the Bum who slept at 57th street and Lexington avenue last night. He couldn't make a deal stick among Fatah supporters! Let alone his blood enemy, Hamas. If the talks don't include Hamas, I don't support them. And since Hamas doesn't recognize Israel, that becomes rather difficult. I would much rather Israel talk to Hamas now, without preconditions, than engage in serious, endgame negotiations with Fatah. Better to talk to people who you know hate your very existance but could possibly make a deal stick if they struck one than to people who have resigned themselves to your existance, but could not make a deal stick. (I think Israel should adopt my plans for a final proposal and simply unilaterally implement them, but that's for another post another day).

In addition, the Israeli left has apparently splintered into various sub-parties. I have not troubled myself to learn about this.

So I look to Likud. Its head, Netanyahu, (Bibi) is a too-slick used car salesman type. He's obviously competent, however, which is more than I can say for Livni. And he's against negotiations with the Palestinians at this time, which is more than I can say for Barak and Labor.

So unless and until I hear reasonable things from Barak, I am, very reluctantly, with nose pinched firmly shut, supporting Likud in the upcoming Israeli elections.

Choices like these make a choice between McCain and Obama seem like a wellspring of fantastic options.

Federal Reserve to cut rates this week

The Fed is meeting this week to set short term interest rates. They will cut interest rates by half of a point, to .5%, from 1%. I support this cut.

Several months ago, I worried about the fed running out of room to cut rates, that is running out of bullets. Given that the economy is in a very deep recession (see my previous post) financial markets are still very deeply troubled (I have heard that the markets are pricing in a huge record number of defaults by investment grade companies, and an absurd 75% default rate in junk bonds (even a depression lasting 3 years probably wouldn't result in that bad of a default rate)) I'm not worried about holding ammunition in reserve anymore.

A better argument against a big interest rate cut now is that it won't do any good now, while credit markets are frozen, but might do some good in the future, when credit markets have again reopened. And there is merit in this argument. But a better argument is that low, or even zero short term interest rates, allow banks to cheaply build up their balance sheet by borrowing at short term rates, from other banks, and lending out money risk free to Uncle Sam. Even though long term rates are also very low, they are not zero, or 1%. Instead, the 10-year treasury bond is at 2.52 as of now. Borrowing short and lending long is what banks do in general, and allowing them to profit sharply from doing so is good policy right about now.

There is open talk of the fed simply cutting short term rates to zero (literally free money). My guess is they'll only cut to .50 %, but the difference is really only one in degree.

Blagojevich tries to sell an appointment to the Senate

As you have all likely heard, Illinois Governor Rod Blagojevich, already publicly under federal investigation, was arrested and charged with trying to personally profit from his right to appoint the successor to Barack Obama as Senator from Illinois.

Given that he and everyone else knew he was being investigated, that he would say what he is alleged to have said on phone calls he absolutely knew may have been tapped, is just insane. It shows how disconnected from common sense people can become. I hope they throw the book at him.

Still, an argument can be made that this is no big deal. As Andrew said, is this sort of corruption really godawful? If he and Rahm Emanuel had agreed that in exchange for his nominating who Obama wanted to fill the seat the Obama administration would push for 25 new schools and hospitals in Illinois, that would be perfectly legal. Normal, ordinary political horsetrading. But if the Governor seeks a $500,000 a year job for himself, its bribery. I note that $500,000 a year is a whole lot less, to say the least, than 25 new schools and hospitals would cost! Yet the one is normal politics and the other is the worst form of bribery, suitcases of cash in essence. Is one really that much morally worse than the other? More harmful to the Republic? A serious argument could be made, but I don't feel like making it now.

Cholera in Zimbabwe

Hundreds of people have died in the recent (entirely preventable) outbreak of cholera in Zimbabwe.

http://en.wikipedia.org/wiki/2008_Zimbabwean_cholera_outbreak

Cholera is spread by a bacteria through eating contaminated food or water. Due to the unstable political situation, Zimbabwe's previously tolerable (for a poor country) supply of safe water has gone downhill. The outbreak has now spread to towns in Botswana, Mozambique, South Africa and Zambia. Proving yet again that a badly unstable neighbor on your doorstep is just not a hot idea.

The Zimbabwe government has taken turns denying the outbreak and blaming it on a "calculated, racist, terrorist attack on Zimbabwe by the unrepentant former colonial power (the UK), which has enlisted support from its American and Western allies so that they can invade the country."

Yeah, that's it. Gordon Brown, PM Britain, has infected the Zimbabwe water supply with Cholera to make it easier for the UK to invade and re-subjugate the people of Zimbabwe. This is typical of the government there. Absolutely typical.

Mugabe has to rank as one of the most disappointing leaders in the last 50 years. He spent 11 years in prison for advocating for a free Zimbabwe as a colony it was known as Rhodesia and had white minority rule similar in very broad outline to the apartheid government in South Africa. After his release from prison he joined a rebel movement which ended in universal suffrage, and left him a hero in the eyes of many, and not just locally.

He took power in 1980. For many years he was widely regarded around the world as a fine leader by African standards. Infant mortality and young child mortality plummeted, immunization increased radically, child malnutrition fell, literacy boomed, the economy soared, education improved. In short, he appeared to be doing many of the right things for precisely the right reasons. There were certainly blips in this good story. He was intolerant of dissent and would kill to enforce that. He is violently anti-homosexual, and has used the courts to enforce that from time to time. Still, taking his record as a whole he was one of the best, if not the best of the revolutionary leaders. (I think of Mandela as a prisoner of conscience, not a revolutionary leader).

Then, starting in the mid 1990s, Mugabe moved, step-by-step, into the monster he is today. I remember I met an African woman, Nigerian I believe, at a law conference in the late 1990s. At a break I got talking to her and the topic turned to Mugabe. I was railing against his latest outrages (nothing compared to what was coming in this decade) and I remember she ended the conversation by walking away from me saying in an exasperated and angry voice, "Mugabe's not a monster." Well, she was basically correct when she said it, but in time I got much the better of the argument.

In recent years he has resorted to mass violence and mass use of food as a weapon, to maintain his iron grip on the country. As a result, Zimbabwe, once a clear post-colonial success, has gone to hell in a handbasket. It has suffered a mass inflation, gigantic food shortages, many thousands of arrests and government sponsored murders, and many other markers of a badly failed state. Mugabe apparently lost his bid for reelection, but ignored the results and imprisoned, on and off, the leaders of the opposition. He is now in the process (unsurprisingly) of shredding a power sharing agreement.

What a bitter disappointment from a man who obviously once cared deeply about the people of his country. Maybe in the fullness of time we'll learn that he has Syphilis, which has been rumored for years. That certainly wouldn't excuse any of his military and other supporters and sycophants.

What a parting gift to the world it would be for Bush to take him out before he turns over power. Mugabe IS a monster, and needs to be killed. He's in his 80s, but probably has 10 years left in him to misrule Zimbabwe and infect it and its neighbors. He must go.