The Obama boom has begun; Part I: the economic ramifications.


This is a 2-part post. This post is Part I, in which I will discuss the ECONOMIC ramifications of the coming Obama boom. The coming boom is a monster, and thus the ramifications are highly significant! Even just my basic predictions have huge, HUGE ramifications. The Dow will, conservatively, I think be at about 17,000 in 2012, up almost 45% from where it is now. Even the highly likely economic ramifications from my predictions make this post well worth reading. In Part II, the companion post, I'll discuss the likely POLITICAL ramifications. If I'm even close to being right the political ramifications have the potential to be sweeping, reshaping American politics for a generation, as the depression did, in a coalition favoring the democrats in a very big way. Unfortunately, at least in the short run, this won't have much practical effect. As the health care debate has shown all too clearly, Obama is a compromiser, unwilling to go to the mat for most anything, and the barons in Congress are a heck of a lot more concerned about their pet projects then about solving America's problems.


In my post on July 9, I predicted a strong recovery. The shape of that recovery is becoming crystal clear to me, and it will blow your mind. Yes, it will be V shaped, for those who have followed discussion about the shape of the recovery in terms of a letter of the alphabet. Like the letter V, the economy went down sharply, and its going to go up sharply. In fact, it has already not merely hit bottom, but began growing fairly strongly. The initial estimate for 3rd quarter (July-September) GDP comes out at the end of October, and I'm looking for a number north of 3%, and possibly around 4. The 4th quarter will be over 2.5% as well. Not yet a boom, but definitely growth. 2010 will be the BIG year, the year the economy really takes off.

Jobs are what everyone is (rightly) worrying about. Job loss will stop quickly, before the end of the year. Job growth will start out slow and then, as I discuss later, shoot up very suddenly and very very sharply, in the early to middle part of next year.

I'm not prone to excessive optimism, I'm really not. But the American economy is about to roar back to life, haul Europe's along with it, and shock the world. Put on your party hats, peoples, the good times are about to ROLL!


In my July 9th post I explained a bit about why I think economic growth will be so strong over the next few years. Let's try some hard number predictions (guesses, really).


A) The short term:


For the second half of this year, which has begun, growth will be fairly strong. I'm thinking 3% or so for the 3rd quarter, and about the same, to perhaps as high as 4% for the final quarter. This Christmas will be a strong holiday season, with sales up more than 10% from last year's poor levels. Even though these are strong predictions, they aren't the stuff of legend, given the economic free fall of late 2008/early 2009. In fact, jobs will most likely continue to be shed, and unemployment will tick up to 10.3% give or take a few tenths. But 10.3% should be the high water mark for unemployment for this cycle. From there the unemployment rate will decrease, very slowly (if at all) for a few months, then pretty rapidly for a long time thereafter.

In short, the $64,000 question is the job market. When will the economy begin creating jobs, and lowering the monster 9.8% unemployment rate? The very short term news on this front is awful. The average number of hours each working American works each week is the lowest on record. This means that as company order books begin to increase (this has already begun) companies can easily work current employees a little harder before even thinking of hiring new employees. And companies will be VERY cautious in hiring new people.

To explain what will happen next, a brief look back is required. Between September 2008 (Lehman) and about March 2009, businesses in America were in full out panic mode! The financial system teetered on the edge of collapse, a collapse which would very likely have resulted in unemployment over 15% nationally, bread lines reminiscent of the 1930s, and all sorts of other awful outcomes. In this environment, with sales of things like refrigerators, tvs, CARS, and other consumer durables falling faster (by far in some cases) than at any time since 1945, business understandably lost its nerve, panicked, and laid off, en masse, millions of workers. What's weird about the Great Recession of 2008-2009 (I like the name Great Recession, it really captures the moment -- I didn't make it up) was that FAR more jobs were shed than should have been based on the GDP numbers, as I said earlier. Given the sharp decline in GDP, unemployment should be around 8.3-8.5% now. Instead, its 9.8. A 1% + difference in unemployment is a big deal, its about 1.5 million job. So we're basically short about 1.5 million jobs from where we "should" be based only on the GDP decline. In broad brush, those 1.5 million jobs are "panic" jobs. Jobs that were destroyed not because they couldn't be supported by the companies that had them, but because companies were hugely fearful. Now this was perfectly rational, don't misunderstand my point. But now that the financial crisis is over (yes, its OVER), American business has fewer workers than it needs RIGHT NOW by at least 1.5 million. As GDP picks up, that shortage is going to grow, fast. Real fast. So does this mean businesses are a few months from a hiring boom that will will take the job market in 3 big steps from godawful to weak to mediocre to good? Nope. Businesses will project the recent past into the near future (perhaps the most common human mistake-- if on my epitaph it is said that I cautioned against making the mistake of projecting the recent past into the near future, I will have accomplished something, as it is one of my two basic motifs in life) and businesses will be very cautious in expanding payroll, particularly with the crushing costs of health care added onto the cost of hiring most workers. Thank you GOP and weak-kneed democrats. More on health care coming to a post near you.

In any event, sometime late this year or early next year, probably in January or February 2010, a funny thing is going to happen to American business, in a fairly short time frame, circa 2 weeks. Businesses from the redwood forest, to the gulf stream waters, from California (yes, even California) to the New York islands, are going to be caught short. Their order books, down so sharply, will begin to revive. Nothing too dramatic, but instead of having orders for 100 units as we projected, we've got orders for 108. Now we can get out 108 with current payroll, but its a strain. And our customers are telling us they might want 115 over the next period. Wow, we need to hire new workers! Well, let's DO IT. This will happen, literally in a few weeks, all over the country. And so begins robust job growth.

Beginning early next year, Bernanke and the fed will see that my predicted Boom is really here, and begin draining money out of the system, and raising interest rates, in short undoing the huge stimulus efforts undertaken in recent years.

I predict that job growth is on the verge of turning positive, and that for September-December job loss will be very small, less than 100k/month on average, and that by February there will be net new jobs. Even manufacturing employment, which has been just decimated, is going to increase. In the most recent national report on manufacturing, for August, the purchasing managers' index registered 52.9, indicating slight growth in the manufacturing sector overall. This is the first month of growth in 18 months, and surprised me somewhat. Its not a strong report per se, but for manufacturing of late it is strong indeed.


http://www.ism.ws/ismreport/mfgrob.cfm


This report implies, based on past correlation, that the economy is already growing at an ok clip, 2-3%. Given that the recession has just ended, this isn't bad. Given that businesses inventories are way down, there is thus an immediate need for more manufactured items. Now of course some of this will come from overseas, but a fair bit will come from the good old US of A. So the manufacturing recovery has already begun! This will alas come as news to Ohio, Michigan, etc, which have been so hard hit in recent years, but if order books are growing employment will grow too. In the short term at least.


Since inventories are low, and there is pent up consumer demand for cars (some of which was satisfied by cash for clunkers) electronics, and other items, economic growth should be fairly strong in the coming months, as it usually is after a recession. Recovery from the last 2 recessions (2001-03, 1991-2) was painfully slow. Most commentators are predicting a similarly slow recovery this time, in particular because of the huge problems in the financial sector. These predictions are reasonable and understandable. And dead wrong!


These predictions by others ignore the huge actions by the fed, treasury, and the congress, as outlined in my July 9th post, which I take so very seriously. In short, there is a totally unprecedented amount of stimulus in the pipeline, and now that the financial system isn't a total mess, that stimulus will work its magic.


To conclude predictions for the near term:


2nd half 2009: 3.5%.


1st half 2010: 5% (that's not as shocking as it sounds after such a steep recession).


2nd half 2010: 3.5%



Not bad at all, I'd say!

B) The next few years:

As I've said, starting late this year or early next year the economy will take off like a rocket, and one of the great booms in American history will begin. Figure on better than 4% growth for 2010 and at least 3% for 2011.

Because the economy is so weak now, and has been for a while, it can grow for quite some time without increasing the types of inflationary pressures that come from a strong economy, namely a wage-price cycle where emboldened workers demand and receive higher and higher salaries and other forms of compensation, and then spend that money chasing a relative shortage of goods and services.

Will inflation kick up and become a serious problem, as many suggest? No. Why? Because I have nearly unlimited faith in Bernanke's ability to manage the money supply and other factors within the control of the fed. The recovery will be faltering at first, and Bernanke will be cautious in undoing the massive amount of stimulus that he has injected. But the GDP growth that I have predicted is so strong that he will by the middle of next year begin fairly aggressively raising interest rates, selling back treasury bonds that the fed has bought, thereby reducing the money supply, and slowly begin eliminating the other extraordinary stimulus measures which took place in 2008 and early 2009. This will have the desired effect of clamping down on inflationary pressures caused by very very easy money, and, I predict, cause the dollar to soar. These two things in conjunction will be enough to prevent inflation from increasing more than modestly.

Once the markets become convinced that I am correct, and that a strong noninflationary recovery/boom is underway, the markets will take off like a rocket! My advice on buying stocks? If it isn't nailed down, buy it. If it is nailed down, get the nail off the damn stock and then buy it! The conditions I outline are ideal for a long sustained stock market boom (which will, by 2012, be creating its own problems, but more on that in a few months). My 17,000 prediction on the Dow Jones by 2012 could prove conservative.

C) The ramifications:

Much has been written about how American consumer behavior has really changed this time. And it has, for a while. There is MUCH less conspicuous consumption. Frugality is in. Had the hard times lingered, this change may have lingered. But since a boom, and prosperity is really right around the corner this time, old habits will reassert themselves. Debt will again be in. Even a housing boom wouldn't surprise me, but that's several years away at least.

The federal budget deficit will close much more rapidly than the CBO or congress is predicting. It won't be balanced anytime soon, that's just not in the cards, but it will shrink and shrink dramatically. In fact, if reelected, it wouldn't surprise me that much if Obama duplicates Clinton's feat of the federal budget balance moving in the correct direction for 8 years in a row! In any event, the Boom will be strong enough to fundamentally rewrite the budget picture for the next several years, but not anything like strong enough to solve the long term budgetary problems, of course. These require a significant cut in the rate of growth of Medicare, AND significant tax increases, as well as modest cuts elsewhere in the federal budget.

Today is the most important day in the health care reform effort, and likely one of the most important days of Obama's Presidency. Here's why.

As you have all likely heard, Ted Kennedy died last night after a battle with brain cancer. As you also likely know, Ted Kennedy had always considered national health care reform and universal coverage as a crucial battle to be won in order to make America a better place, and the next logical step in the great liberal reform efforts from Teddy Roosevelt, to Social Security, to the civil rights laws, medicare and medicaid, in the 1960s.

We're going to learn an awful lot about Obama's presidency today, and unfortunately I don't think we're going to like it.

If LBJ were president right now, he would shamelessly exploit Teddy's death in order to pass health care reform in his name. His speech would go something like this: "America lost a Senate legend today when Ted Kennedy passed away. I got to know him over the last few years, and grew to really appreciate what a giant he was. He will be missed, and I hereby declare today a day of national mourning in his honor. Health care reform was his life's work. He said on many occasions that he hoped to live long enough to see America pass a real national health care system, one which would cover everybody. So we would have an America in which people could no longer go bankrupt because they got sick, or have their health insurance taken away. I demand that Congress act quickly after its recess to pass comprehensive health care reform legislation that would make Ted Kennedy proud. And I assure each and every member of congress that he is watching from on high, and will take careful note of what goes on in this debate.

Health care reform was Ted Kennedy's life's work, his great goal. I call on Congress to pass, without delay, a health care reform bill, entitled the 'Ted Kennedy Health Reform Act of 2009.' I have been discussing for months now the details which must be in that bill. The ball is now in Congress' court. Teddy is watching. Thank you and goodnight."

Something like that. Despite the fact that its the end of August, and despite the fact that Obama has been talking ENDLESSLY about health care, he should take 5-10 minutes of prime time tv tonight, and make a speech along these lines. Then, Kennedy's name should be repeatedly and shamelessly mentioned in the press, in order to pass the act. His family won't mind, I strongly assume, and no one could DARE accuse him of taking advantage, because the media won't allow it; as they know that he would have been the first to approve of his name being exploited for THIS cause. LBJ would do it. FDR would do it. Lincoln might well. Nixon certainly would. But its not in Obama's nature to so shamelessly use a man's death for the cause. So he won't. He'll issue kind words, and mention health care reform, but not in the very direct and clear way I outline. And it will be a missed opportunity, perhaps even a missed golden opportunity, to reclaim the debate.

Oh, one other thing. We're going to learn whether Obama or Rahm Emanuel is running the White House. Rahm Emanuel, as I understand him, would exploit the death of his own mother in order to accomplish a relatively minor goal. He CERTAINLY would endorse a strong program along the lines I mention, and, I humbly submit, doesn't need flyingpinkunicorns to suggest it to him. So in addition to learning how much Obama is willing to exploit Kennedy's death, we're going to learn a lot, I think, about Emanuel's power to shape the agenda. The next 24-48 hours are going to be both crucial and fascinating for those paying close attention. So pay close attention.

The economy will recover strongly in 2010. Nearly every economist on record is predicting a very slow recovery. Nearly every economist is wrong.

First, its not at all unusual for the huge majority of economists to be fundamentally wrong on the course of the national economy. Very few predicted the vigor of the recovery starting in 1994, following a very slow start to the recovery after the recession of 1991. Very very few predicted a steep recession following the bursting of the housing bubble in 2007-2008. And now, most economists, seeing the truly dreadful economic numbers that are coming out this year, are predicting a very slow recover, if any at all. A lot of ordinary people are wondering if the economy will ever recover strongly.

It will. Betting against America has been a losing bet for 400 years. It continues to be, particularly since we have reasonably competent leadership in the White House.

Anyway, all of the economists and ordinary people I have alluded to above are making the same fundamental mistake. They are projecting the recent past into the near future! It is my belief that this error is very common among people of all stripes, is deep in human nature, and in fact is one of the key obstacles people face regarding trying to get an idea of what will happen in the future.

Housing prices went up recently? They will continue to do so. The stock market? Ditto.

It takes vision (and guts, and insight) to predict a radical break from the recent past. After all, the recent past often DOES indicate the course of the near future. But sometimes it doesn't, and recognizing those times is crucial if you're going to be worth a crap as an analyst of any sort.

Let's see if I'm worth a crap as an analyst of the economy about now.

The reason I am predicting a strong recovery is simple; there are so many huge efforts in place to stimulate the economy. These are, in order of importance:

First, and most importantly, Hank Paulson and Tim Geithner have apparently stabilized the banking system. When's the last time you heard truly awful news about a major bank/financial institution? Been a while, hasn't it. We've progressed through a stimulus package, health care reform, Iranian elections, Michael Jackson, and so on. Its easy to forget that from September to early February the financial system was at various times teetering on the edge of the abyss. With the help of (eventually) good leadership from Paulson, under Bush, and (reasonably) good leadership under Geithner, the banking system has apparently stabilized. This was absolutely necessary for economic recovery to take root. If I am reading the treasury department website correctly, and I think I am, a total of slightly over $70 billion dollars has been repaid to the treasury, from various banks, out of $203 billion the government put in.

http://www.financialstability.gov/docs/transaction-reports/transactions-report_070609.pdf

Given where we were just a few months ago, that's an incredibly good sign for the health of the banking system.

Second, the Federal Reserve has created an absolute boatload of money. M2 is the aggregate total of all physical currency, amount in demand accounts, savings accounts and a few other areas. This is the measure that the fed currently uses to determine the broad money supply. Between September 2008 and July 2009, the fed (wisely in my opinion) increased M2 from
$7.65 trillion to $8.3 trillion, a nearly 10% increase. This 10% increase is a fairly large increase historically, and is highly likely to stimulate the economy in the short run. In so doing, the fed dramatically increased the amount of reserves held by banks. This change allows banks to make more loans. This process has begun, but not yet in a big way.

Third, interest rates have been cut by the fed, to the floor. This hasn't really mattered yet, due to the banking/credit market crisis, but as these areas continue to return to normalcy (I predict) interest rates will regain their potency to stimulate the economy, as businesses and individuals will again want to borrow to grow/expand their business, buy cars and houses (more on that later in this post) etc. With banks increasingly able and willing to lend (there has been progress already in this area, and I predict much more in the next 6 months) the low cost of capital will stimulate, as it always has.

Fourth, the Obama stimulus. It has been criticized (correctly) for being slow to really get moving. Much of the actual government spending will occur between this October and next October. This fact will turn out to be a blessing in disguise, as the spending will likely have far more knock-on effects than it would have earlier this year, because the banking system will be healthier. In any event, the stimulus will add somewhere around 1.5 points to GDP growth for the next fiscal year (beginning October 1st).

Fifth, businesses have already cut so very many workers. This, perversely, should indicate that the rate of job loss should slow, very very soon. It already has slowed, but only from frightfully high levels, to high levels. This should progress, in turn, to fairly high levels, little job loss, and then a little job gain. The sectors that have been hardest high (finance, construction, especially residential housing construction and manufacturing) have had absolutely savage, depression-like job cuts. I admit to not knowing the details at all on this point, but it seems to me that further serious job cuts in these areas are highly unlikely. Many of the weak businesses in these areas have gone out of business, the survivors have already cut to the bone. Businesses have cut jobs in many cases even faster and further than the demand for their goods/services have fallen. When demand stabilizes (which may have happened already, and in any event should happen quite soon), businesses will quickly stop cutting jobs, and then tentatively start adding a few. This process tends to build on itself in normal recoveries.

Sixth, there is beginning to be pent-up consumer demand. The sales of cars in particular dropped so steeply in 2008-2009, that the average age of vehicles in America has soared to the point where in the past car sales really picked up. This may take a little while this time around because of the credit crunch and particular worries about GM and Chrysler, but with the government bailouts in place, I predict these worries will soon be overcome. 2010 should represent a big percentage increase in car sales off of the truly godawful levels of 2009. This will boost the economy.

The same is true to a lesser extent for other consumer goods. Demand fell so far so fast, that it will likely rise soon.

With housing, I doubt this is the case. Housing prices still probably have further to fall, and I can't see a housing recovery of any kind until at least 2011. In past recoveries housing has usually led the economy out of recession, as lower interest rates entice buyers. That is most unlikely to happen this time, which is why the recession has gone on for so long (18 months and counting assuming it is not quite over yet).

However, the other elements of recovery that I have outlined should be so vigorous that a very weak housing market is overcome, and a reasonably strong economic recovery should take root sometime late this year or early next year. The naysayers, who are predicting a double dip recession, with unemployment eventually reaching north of 12%, are wrong.

Having said all this, job losses should continue for several more months, and unemployment will top 10% for certain. Its possible that everything I predict in this post could come to pass except for job growth, and that unemployment could still rise through next Spring, topping out at around 11.5%. I doubt it, but its possible. That would merely set the stage for a delayed, and thus stronger recovery, as the job market catches up to the other underlying forces in the economy.

I know I seem ridiculously optimistic to many of you, but what I am doing is not simply projecting the recent past into the near future, but instead trying to understand the forces that will shape the near future. And what I see is an array of forces constituting wind at the back of the economy, and only housing as a strong headwind. There are many, many more tailwinds than headwinds.

By all means, judge me favorably or harshly over the next year, depending on what happens. But this is, in broad outline, how I see the economy.

Panic, despair, health care

These words now go together.

The effort to reform health care is in real trouble. Here's one recent article among many.

http://www.washingtonpost.com/wp-dyn/content/article/2009/07/08/AR2009070804184.html?hpid%3Dtopnews&sub=AR

The dems are badly floundering because of intra-party disagreement (not surprising) coupled with the entirely expected nearly uniform GOP opposition. Anyone who thought the GOP would participate in actually trying to solve a crucial national problem must have spent the last 8 years on Neptune. Well, prescription drugs for seniors. Anyway, we KNEW the GOP wouldn't work with President Obama on health care. After all, can't give the democrat a victory! Although there is a lot of talking by Chuck Grassley, the ranking Republican on the crucial Senate Finance Committee, he has few GOP followers. As Jon Kyl, the # 2 Republican in the Senate recently said, Grassley has no authority to represent Republicans.

http://www.latimes.com/news/nationworld/nation/la-na-baucus-grassley9-2009jul09,0,5713295.story?page=2

So the democrats have put in a HUGE effort to be bipartisan in the Senate, only to be predictably disappointed. Sure, the dems may pick off 3 or 4 Republican Senators, at most, but that's it. And more likely they'll get only 1 or 2. And that's worth fundamentally watering down health care reform?

In any event, the Obama administration realizes that their signature issue, health care, is in big trouble. To its credit, the administration has awakened, big time. The early strategy was to give congress their head, let them work out the trade-offs with minimal supervision/input, and weigh in where necessary. After all, the Congressional committee chair people are really feeling their power these days because of the huge democratic majorities, and a top-down approach from the White House might really have not worked any better than it did for Hillary in 1994. Alas, that particular plan has run into the iceberg of democratic disunity, and, like the Titanic, the leave-it-to-Congress ship is taking on water fast. Oops.

The administration has now realized that the democrats in Congress can't agree amongst themselves and, as Andrew put it, are like petulant children, requiring careful adult supervision. Well fortunately, adults, from Obama to Emanuel and on down, run the White House. The adults are now in the game, and are pushing, pulling, arm twisting, begging, threatening, cajoling, convincing, negotiating and other adjectives I can't think of at the moment, with congress, mainly the Senate. All is negotiable, but the noises coming out of the White House recently have been hugely encouraging; more willingness to negotiate over how to pay for it (I couldn't possibly care any less), while less negotiation on a public option (I couldn't possibly care any more). All to the good, as far as it goes.

The (really) bad news is that with the clock ticking towards Obama's (meaningless) August deadline, the Senate isn't close to agreeing on the big issues. The Senate HELP Committee (Health, Education, Labor and Pensions, Kennedy, Chairman), put out a reform bill tentatively scored at $600 Billion over 10 years. Chump change, in other words, given that we will spend more than $40 Trillion over that stretch. If Kennedy put it out, I'm for it (on Health Care). If we can't pass this reasonable bill, the sky has fallen. Obama will be shown to be totally impotent. Like the Emperor in the Wizard of Oz.

To be defeated by Max Baucus and the other compromisers when you hold 60 seats (57 or so is the real number-- there are a few dems that really aren't, but Snowe and one or two Repubs are listening) is just sad.

Based on what I know now, and I have been following of late, I'd say that its no better than 50-50 that a serious reform bill is signed into law. The House will do what its told, and Nancy will pass a strong bill with a PUBLIC OPTION (insert steroids here), but the Senate???? And even if the Senate does pass a real bill, that conference committee will be one whale of a monster-fight. Will Nancy and Steny Hoyer in the House just cave to the Senate, after being told we can't get to 50 in the Senate without doing it the Senate's way? I predict yes, they will. If they didn't, the thing could die. I don't think red state dems like Nelson of Nebraska, the two dems from Arkansas (Pryor and Blanche Lincoln), Landrieu of Louisiana, etc. are afraid of bucking Obama. They think it will HELP them politically in their states, and they're almost certainly correct. Since they're not running for president, what do they care if health care reform whithers on the vine?

I advocate the democrats in the Senate writing a reasonable bill, compromising within the party, ignoring the GOP, and going from there. I truly hate to try and do such a massive reform effort in a partisan fashion, its far from optimal. But alas the GOP just isn't willing to deal on any terms except their own, and they're not willing to really try and dig in and help solve America's huge problems. So we'll have to do it without them, and let the chips fall where they may.

I urge everyone to contact their house member and Senators on this. www.house.gov, and www.senate.gov. Finding links to send your rep/Senator a message on-line is a piece of cake on the main web sites. This issue is so huge that its worth the few minutes to send your comment.

Iran:


Here's my take on what's going on in the Islamic Republic.


As I see it, what you and the world are witnessing is a game of multidimensional chess, with various forces pulling this way and that. Fundamentally, there are four forces operating within Iran:


1) The clerical supporters of the regime. Led by, of course, Ayatollah Khameni. These are fairly radical to very radical folks that truly believe in the religious destiny of the regime, and the odd (to western ears) tenants of Shia Islam. These folks are willing to countenance a totalitarian state if need be to preserve a regime they largely believe in. There is also some genuine popular support for the Islamic nature of the regime, albeit less than a few weeks ago....


2) The military/paramilitary supporters of the regime. Their most public face is President Ahmadinejad who won the Presidency (fair and square, by Iranian rules and standards, which include required approval from the regime to run for president!) four years ago, and has been declared the "winner" amidst such controversy recently.


#s 1 and 2 are in a pretty strong coalition. Should this coalition break down, a revolution is quite likely.


3) Clerical opponents of the regime. It is of course simplistic to simply label them opponents, but right now, at a time of maximum uncertainty, these people are calling the recent election fraudulent. Since Khameni has repeatedly said otherwise, and threw down the gauntlet in a defiant fist-banging, and somewhat threatening speech on Friday, it is fair to call these clerics opponents. The most visible person representing this faction, by far, is former president Rafsanjani. He is currently the Chairman of the Assembly of Experts, a fairly important behind-the scenes body which, among other things, elects the Supreme Leader. There are several Grand Ayatollahs that also fit within this description, many of whom have far superior religious credentials to Khameni.


The most interesting aspect of the the current Iranian crisis (and a crisis it is!) is that there is such a public split amongst clerical elements within the regime. Previous disagreements, with a few odd exceptions, have been papered over, and in the past, such as 1999, when there were visible splits within the regime, the Supreme Leader put his foot down, and everyone basically jumped back in line. This time, not so much.


Another key thing to keep in mind as the Iran situation unfolds. Rafsanjani was once a crucial supporter of Supreme Leader Khameni, and was the key person involved in elevating him to that status when former Ayatollah Khomeni died in 1989. He has been rumored, however, to have turned somewhat on his former protege, and acted within the Iranian government to maneuver against Kahmeni. Rafsanjani was once considered a moderate, and compared to Kahmeni and Ahmadinejad he really is. He does NOT believe in the overthrow of the regime or (god-forbid from his perspective) western democracy. He does, however, think the regime has led the country into a ditch . He apparently opposes the harsher clerical controls over people's daily lives, and has been a critic of the economic decisions made by recent governments, especially that of Ahmadinejad. His focus is on economics.


4) Pro Civil society (and in some cases far less anti-western than the regime, or even pro-Western democracy in rare cases). This group is represented by former President Khatami and to a lesser extent, of course, "defeated" presidential candidate Mir-Hossein Mousavi and many of the masses in the streets. Mousavi was perhaps better described really as an internal critic of the regime than some anti-regime outsider. However, he has recently stated that he is willing to "be a martyr," which paints him more as a regime opponent.

In order to run for president, you must be approved by the Guardian Council, a body appointed by the Supreme Leader of and 6 jurisits. These are crucial pillars of the regime, and not about to let a real rabble rouser run for the somewhat important job of president. I say somewhat important, because ultimate power rests with the Supreme Leader.


My take is that a lot of the public is unsure about whether they truly support a full overthrow of the regime. Many would probably blanch at the violence and uncertainty this would entail. They are united, however, in their loathing of the manner in which Ahmadinejad and his ilk have run the Iranian economy into the ground. Remember when oil prices were sky high? You'd think Iran, with the 3rd largest amount of proven oil reserves (Saudi Arabia, Canada, Iran, Iraq) would have had a rip roaring economy. Not so much! Instead, Ahmadinejad's blatant misrule has left the Iranian economy in a sad state. Kahmeni has obviously lost some influence in the eyes of the Iranian people.


In addition, Ahmadinejad is blamed by people in this group for foreign policy misadventures. Not that these people like Israel, by a damn long shot. Many are, however, neutral to slightly favorable about the US. But what they DO think is that Ahmadinejad has brought a world of negative attention onto Iran with his various diatribes, and that this has done no good and some harm to these people's day-to-day lives.

Predicting what will happen next is a fool's errand. But make no mistake; the regime is clearly threatened, and could fall, with Kahmeni likely winding up in exile in Iraq. More likely, unfortunately, is a Tianenmen like crackdown, where Kahmeni calls out the army for real, kills a few hundred or more, and makes crystal clear that its all over, time to pack up and go home. I fear this outcome greatly.

I was recently asked to comment on an op ed piece by David Brooks. Here's the piece:

http://www.nytimes.com/2009/06/02/opinion/02brooks.html?_r=1&ref=opinion

For those who don't know, Brooks is a conservative that sometimes uses his brain, making him a rare bird indeed on the conservative side. He's really a moderate conservative, a northeastern "conservative" of the kind that dominated the GOP once upon a time, when it was by and large to the left of the democrats. He became fairly critical of Bush towards the end of the second term, disillusioned with what happened when the GOP ruled the roost.

Anyway, here are my thoughts.

Brooks' piece is thought provoking, but I think he's wrong in a few key respects.

First, let's start where he's RIGHT. GM's biggest problem, at the end of the day, has been that its corporate culture could not accurately allow reality to seep into the key decision makers' in-box. Roger & Me was 1989 for heaven's sake. GM's been mismanaged for Olympiads!

Second, and much more worryingly, Brooks is surely right that, "the Obama plan won't revolutionize GM's corporate culture." However, the realistic risk of oblivion might. And that's where Brooks is wrong. He says there won't be any more outside investors. Baloney. Banks/investment funds will be CLAMORING to invest in GM (owned by Obama and thus unlikely to go truly bust as Brooks himself argues) if they show any signs of life. Perhaps even if they don't. Brooks is making the always fatal error of projecting the recent past into the near future. Credit markets will be loosened, money will look for a home, and if GM climbs out of intensive care, money will find it.

Brooks is importantly right that Obama's plan DOES entrench the ancien regime, which is terrible. The internal resistance in the administration to actually get in the car business and RUN IT for a few years is monumental. Look, I don't like the idea of a government running a car company much either. Put the factories in the district of powerful chairman, kowtow to the unions, block imports, ease rules, etc. But GMs management has been SO bad for SO long that its really hard for me to believe that Uncle Sam could do too much worse. Where I do think Brooks is somewhat wrong is that it "would be politically suicidal for the Democrats, or whoever is in power, to pull the plug on the company -- now or ever." He's not WRONG here, for sure, but he forgets a somewhat likely scenario. GM shrinks, does not boost market share, shrinks further, eats up more money, shrinks further, etc. GM may not so much die as fade away, at least in North America. In fact, that's probably the most likely scenario. Now this is godawful because it WOULD mean that dems throw good money after bad (and rightly get roasted by the Southern/Western dominated GOP for doing so) but it would over a period of say 12 years mean the end of the company, at least its North American Operations. It is true that GM will have to beat to Obama's drummer. Given that its focus for decades has been on anything but innovation and building small cars that people want, as opposed to big trucks that warm the planet and drive up the price of oil, changing its focus to pleasing its new masters in Washington will be much less harmful than Brooks thinks it will. Its easy to be reflexively against government owning the commanding heights. It isn't totally wrongheaded. But GM is a bit of a special case b/c its management has been SO bad for SO LONG. To conclude, Brooks piece, although worthwhile, is, in main part, at war with itself.

1) GM's corporate culture is totally dysfunctional (totally true);

2) GM will now have to please new masters (totally true, and more than just Obama-- Congress too);

3) Therefore, things will get worse and more good money will be thrown in after bad (I submit false-- GM was so bad that pleasing DC should be an IMPROVEMENT.

Lastly, Brooks throws in a FASCINATING analogy to the Iraq war, without bringing himself to quite say that that's what he's analogizing to: "The end result is that G.M. will not become more like successful car companies. It will become less like them. The federal merger will not accelerate the company’s viability. It will impede it. We’ve seen this before, albeit in different context: An overconfident government throws itself into a dysfunctional culture it doesn’t really understand. The result is quagmire. The costs escalate. There is no exit strategy."

There are two possible exit strategies if things go wrong at GM:

First, bite the political bullet and let it go bust. Who knows, Obama might grow a set and do just that if the company just implodes. But let's stipulate that he/his successors won't.

Two, stand idly by as GM vainly struggles to right itself, and slowly fades away. Expensive, surely, to the extent any more money is put it. But the public is fed up with the bailouts, big time, and there may not be repeated bits at the apple. In any event, this would impose the market discipline that Brooks and the GOP so love, as oblivion nears. Then pleasing Obama/Congress would take a back seat to survival. After all, if DC isn't coughing up any more money, why kill yourself to please them. This exit strategy would be the "do nothing and watch them fade away" strategy. This is the strategy I predict Obama will take.

The recession will end in July, give or take a month or two.

Yup, I have finally figured it out, and this prediction will not likely be retracted.

On December 12, 2008, I posted that the recession would end on June 17th, meaning really June of this year.

http://flyingpinkunicorns.blogspot.com/2008/12/june-17-th-2009.html

My thinking was that as of June the recession would have been going on longer than any since World War II, and that a fair bit of the bloodletting had already took place.

Alas, on February 8, I retracted that prediction, fearing the banks were in truly horrible shape, and that it would take months, at a bare minimum, to even begin to clean them up.

http://flyingpinkunicorns.blogspot.com/2009/02/i-was-wrong.html

I guess I lost my nerve.

A few weeks back, the administration released the results of the so-called stress tests, indicating what would happen to the banks if unemployment went over 10% (a stressful situation for banks' balance sheets). The results indicated that the banks were in MUCH better shape than we had thought. Sure there were a few, notably Bank of America, which needed more capital. It was decided that 10 large banks needed a total of $75 billion more in capital, with Bank of America needing $33.9 billion.

In the few days following the results of the stress tests, several banks raised billions in capital, which would have been impossible late last year due to the fear in the financial markets about the banks. This was a loud (but largely unnoticed) vote of confidence in the banking system.

Anyway, the recent unemployment numbers have been godawful. The number of first time claims for unemployment, dropped by 13,000 last week, but were still at 623,000, a terrible number. That's the sort of number you'd expect when the economy was deep in recession. However, unemployment is what is referred to as a lagging indicator. That is, when business first starts getting better, you force your current employees to do a little more. Only when it keeps getting better do you finally take the plunge and hire new people. So even after the economy begins growing, everyone, including me, expects that unemployment will get worse. We will certainly see 10% before 2009 is over, and could conceivably see 11% early next year. But the worst is very very likely over. Barring a huge new shock in the banking system, the less bad news we've been hearing about the credit markets, coupled with more federal stimulus money, rock-bottom interest rates and the small Obama tax cuts will cause the economy to begin growing very soon. Almost certainly during the Fall, and probably during the Summer. Do hold the champagne. The mere fact of growth of GDP, in and of itself, doesn't mean too much for the great majority of people (though it does help the federal budget). But this time it may mean a little bit. I'm a big believer that people and businesses don't react to numbers that much, they react to conditions on the ground. But hearing a positive GDP number will almost certainly give business and consumer confidence a boost. And such a number is very possible for the quarter which runs from July- September of this year.

If I had to predict, (guess, really), I'd guess that the recovery is for real, but not vigorous until early to mid 2010. Figure that unemployment will begin to fall by about May 2010, and fall sharply at that. Given that by May 2010 it will be about 10.5% I suspect, it can fall very fast without worrying anyone that the economy will overheat and cause inflation. In about April-May 2010 the fed can begin draining the economy of the extra money it created in 2008 and 2009, and begin raising interest rates. The day I can advocate for that in my blog will be a good day indeed, for all of us.

As you all likely know, congress is seriously considering major health care reforms. In 1993-94, the Clinton administration created a body headed by then first lady Hillary to draft up a complex plan. The administration drafted it, and intended to stick as much of it as possible down the democratic congress' throat. The democrats gagged, and, in the face of the terrifying couple of Harry and Louise (google ads, Harry and Louise, health care) passed nothing at all. The GOP took control of both houses of congress in 1994, denied there was a serious health care problem that needed fixing, and the rest is history. Painful, expensive, life shattering history for millions of Americans who lack health insurance, or who find that when they need it most their insurance company slow pays their doctor, denies claims, denies authorizations for tests, demands pre-notification before an emergency room admission (presumably you should have known you would be rear-ended) and so on along the litany of things wrong with our health care system. Oh yeah, we spend nearly 50% more PER PERSON than any other country in the world (with the tiny exception of Switzerland, who we spend more than anyway) and we get outcomes that are slightly worse than our peer countries (Canada, France, the UK, Germany, Japan). I always thought conservatives believed in cost-benefit analysis. Well, our system costs more and generates slightly worse outcomes. Sounds like it needs fixing....

Anyway, the point of this post is to jolt you, my readers, into DOING SOMETHING. The burning issue of health care reform in the last few weeks is whether the Obama administration will compromise on what is known as a public option. Liberal and lefty democrats favor a single payer system, like Canada or France, whereby the government is the primary (or only) purchaser of health care. This is socialized medicine, which the right has made a dirty word, on a par with communist, terrorist, or gay married person. A bogeyman. Anyway, the democrats are, sadly, NOT proposing any such option, which would, among many other things, put the health insurance industry out of business. Instead, the mantra these days is that if you like your private insurance (and many Americans justifiably do) you can keep it, largely unaltered. But, if you don't like it, or you don't have private insurance, a PUBLIC OPTION allows you to buy into some form of government run or regulated option, such as Medicare.

Imho, a public option is CRUCIAL if health care reform is to really deliver any significant benefits to America. In fact, I would state that the issue of the public option is by far the most significant issue facing the congress and president these days. The economy will soon recover (more on that in a post coming soon), the shape of energy reform is becoming clear, but we could choose to omit a public option for health care and simply let a big opportunity to reform a part of our economy which badly needs reform, and allow millions of uninsured Americans to stay uninsured.

Howard Dean has created a web site that asks everyone to sign a petition supporting a public option for health care. I have signed this petition and I urge all of you to do the same.

http://standwithdrdean.com/

My thoughts on Afghanistan/Pakistan

I begin with the assumption that the Taliban would get KILLED in a free and fair country-wide election. That is, although they have real pockets of support among the Pashtuns on the border, they are not a genuinely popular movement, as Mao's communists were, and so many successful revolutionaries were. They were wildly unpopular, by all accounts, the first time around.

I'm no Afghan expert, but I'm told they don't have a ton of support. Remember, Al Queda in Iraq looked like they had real Sunni support, until the Sunni leaders turned on their asses and asked the infidels, ie. US, to help kill them, b/c they horribly overplayed their hand. The Taliban was a foreign import, rather than a genuine Afghan movement. They were really installed by Pakistan's intelligence service (the ISI) as a way to stabalize and have a tad of control over their northern neighbor. Control didn't quite happen, but a modicum of stability (vis-a-vis Pakistan) did. Prior to the installation of the Taliban, various factions vying for control over Afghanistan took their battles, literally, to the streets of Pakistan. They set off car bombs and did other damage. The Pakistani army and intelligence services (and people) were NOT amused.

The Taliban are not natural leaders of Afghanistan in any way, shape or form, and are not viewed that way by basically any non-Pashtuns, and not really by many Pashtuns either as I understand it. They were accepted by many, especially in the beginning, because they brought an end to the chaos and fighting. Once the Afghan people got a taste of the Taliban, they were ready to throw them out.

Why do we care whether Hamid Karzi or the Taliban control Afghanistan? Afghanistan is one of the very poorest countries on earth. Even though it is nearly 100% Muslim, your average Muslim in another country doesn't begin to care about it (as they might Iraq, Egypt, and other countries of significance). Their only exports are poppy seeds and instability. They have no oil. On the other hand, they are strategically located, and are vital to the future of Pakistan. So they do matter.

As we all know, Bin Ladin had completely free reign in Afghanistan prior to 9-11. The Taliban ran things day to day, but Bin Ladin did as he pleased. So its perfectly fair to say that the Taliban attacked us. But would they dare do it again if they somehow regained power? Probably not. The best reason to be willing to spend lives and oodles of money to defeat the Taliban lies in Pakistan. Although Pakistan is poor as well, it has circa 180 million people, nearly all Muslim, most of a modern army, and many dozen nuclear weapons. Bin Ladin followers taking over Pakistan (as many have dreamt of for years) would be a HUGE disaster for American national security. In my view, a seriously first order problem. Andrew thinks that even in this godawful eventuality, we could rely on MAD (mutually assured destruction) to prevent them from getting too uppity. I don't. Religious nutjobs are just not nearly as predictable as the Soviets were. Besides, I'm not willing to bet New York on it. I'm highly confident that India feels the same way. Sure, Pakistan is their enemy. But the Pakistani regime mostly plays within defined bounds. (The terror attacks last year in Mumbai (formerly Bombay), which killed 173 people and were huge front page news worldwide were a glaring exception, but India knows perfectly well that Pakistan didn't orchestrate the attacks. Whether Al Queda (or the Taliban) would similarly confront India within a known parameter of permissible activity is another matter entirely. That's a question which India would greatly prefer not to have to answer.

I've made a leap that I should explain. There are several areas of Pakistan, near the Afghan border, which are in virtual open revolt against the Pakistan government. These are sometimes referred to as the Tribal areas, which is only one part of Pakistan that is in near revolt. It is in these border areas (including but not limited to the Swat Valley) where Bin Ladin and the rest of the remaining Al Queda leadership are thought to be hiding, and it is from these areas where the Taliban is launching their attacks across the border into Afghanistan. The Pakistani government is none too pleased at these developments. Although a cease fire was controversially signed between Pakistan and some of the rebel elements back in February, the Pakistani army has moved in in force in recent days.

http://www.nytimes.com/2009/05/08/world/asia/08pstan.html?ref=asia

Pakistan fears that the Taliban types, with the aid of Al Queda types, could be a grave threat to their (always weak) government. So they're pushing back hard in certain areas.

So what does Pakistan think of the Taliban war in Afghanistan? What with the rebellion going on near the border and all, and the army and the intelligence services being the only institutions in Pakistan worth a NYC subway ride, I doubt seriously they're going to see it in their long term interests for the Taliban to WIN in Afghanistan. For them to EXIST, maybe. Keeps the US interested, keeps our billions flowing into Pakistan, keeps us from following our foreign policy where it wants to go, which is a wholehearted embrace of India, for trade reasons, as a counterweight to China, and a counterweight to possible Islamic radicalism coming from Pakistan or Sri Lanka. (Was that the longest sentence you ever read?)

That's where gravity is (strongly) pulling the US foreign policy. Fear of Bin Ladinists controlling Pakistan's nukes are pulling in the other direction. Both the army and the ISI realize this, and are playing a bit of a dangerous double game, but they don't see it in their interests to order the army to turn border areas into rubble. They've, however, gone from playing patty cake with the rebels to playing a bit rough, and from the US perspective, that will just about do. I think the Pakistan/Afghan problem is approaching a sort of equilibrium. Pakistan sees the rearming of the Taliban and the chaos following in Afghanistan and sees a more than mini rebellion by very similar types in the north of Pakistan, with the aid of Al Queda. They've looked in the crystal ball and just cringed. So the army under MUSHARRAF preferred to play patty cake, while the army under weak civilian leadership is starting to crack heads. These people aren't Saddam's sycophant idiots. They have more than 1/2 a clue, the army does. And while they may not crack down hard enough to WIN (by which I mean crush the rebellion utterly) they will, I humbly predict, crack down hard enough not to lose (in Pakistan). Which is really more than enough from their perspective. India can tolerate this, the US can tolerate this, and at the very very VERY end of the day it may be that even the TALIBAN can tolerate this. Leverage from the US on the Afghan side of the border can badly squeeze an already somewhat squeezed Taliban until they slowly whither away into dust. That, in broad outline, is my Plan. I think it has a high chance of "success" and a low chance of bad failure (Al Queda types controlling swaths of Pakistan or, god forbid, the Pakistani military and with it its nuclear arsenal). It is for this reason that I support the escalation of the effort in Afghanistan-- not so much because its worth that much American money and blood to see who rules Afghanistan, but because it is worth lots of American treasure to ensure that the rebel types, aided and assisted by (and part and parcel of) the Taliban (and aided by Al Queda) don't rule Pakistan.

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.