Reich: Saved by the Deficit?

Robert Reich is worried "that we are about to have a rerun of 1993":

Saved by the Deficit?, by Robert Reich, Commentary, NY Times: Both presidential candidates have been criticized for failing ... to name any ... plans they’re going to have to scrap because of the bailout and the failing economy. That criticism is unwarranted. The assumption that we are about to have a rerun of 1993 — when Bill Clinton, newly installed as president, was forced to jettison much of his agenda because of a surging budget deficit — may well be mistaken.

At first glance, January 2009 is starting to look a lot like January 1993. Then, the federal deficit was running at roughly ... 5 percent of gross domestic product, way too high for comfort. By contrast, the deficit for the 2009 fiscal year is now projected to be ... about 3.3 percent of gross domestic product. That’s not too worrying. But if the Treasury shovels out the full $700 billion of bailout money next year, the deficit could balloon to more than 6 percent of gross domestic product... And if the nation plunges into a deeper recession, with tax revenues dropping..., the deficit will be even larger...

Yet all is not what it seems. First, the $700 billion bailout is ... like ... a temporary loan or investment. The Treasury will take on Wall Street’s bad ... securities for which there’s no market right now — and ... hope it ... will be able to resell the securities for at least as much as it paid, if not for a profit. And if there is a shortfall, the bailout bill allows the president to impose a fee on Wall Street to fill it.

Another difference is that in 1993, the nation was emerging from a recession. ... Under these circumstances, the deficit Bill Clinton inherited threatened to overheat the economy. He had no choice but to trim it, a point that the Federal Reserve chairman, Alan Greenspan, was not reluctant to emphasize. ...

Next year, however, is likely to be quite different. All economic indicators are now pointing toward a deepening recession. ... Under these circumstances,... the government will probably have to run deficits to keep the economy going anywhere near capacity...

Finally, not all deficits are equal. As every family knows, going into debt in order to send a child to college is fundamentally different from going into debt to take an ocean cruise. Deficits that finance investments in the nation’s future are not the same as deficits that maintain the current standard of living.

...[W]ithout adequate public investment [in infrastructure, education, healthcare, and the environment], the vast majority of Americans will be condemned to a lower standard of living for themselves and their children. The top 1 percent now takes home about 20 percent of total national income. As recently as 1980, it took home 8 percent. Although the economy has grown considerably since 1980, the middle class’s share has shrunk. That’s a problem not just because it strikes so many as being unfair, but also because it’s starting to limit the capacity of most Americans to buy the goods and services we produce without going deep into debt. ...

Perhaps it should not be surprising, then, that the Wall Street bailout has generated so much anger among middle-class Americans. Let’s not compound the problem by needlessly letting it prevent the government from spending what it must to lift the prospects of Main Street.

Comments

[Gegner]

I can't help but suspect that when the bill comes due for all of these bailouts that we're going to be handed the 'who knew' excuse, again.

We're already the world's largest debtor.

We can't dilute our currency by tens of trillions of dollars and then act surprised when we 'wake up' in Zimbabwe!

Which is to point out that the US is only a 'safe haven' for now. How long will that be the case?

I've read the arguments, that the US is the least 'ugly' (right now) of the many potential markets to 'park' money in

But there's no guarantee this will be the case once the global economy starts to recover.

Then there will be hell to pay.

I'm extremely uncomfortable letting a guy that has made it clear that he is walking off the job on January 20th, regardless of who wins, throw trillions of dollars at his pals.

Have you noticed that every solution proposed by this administration starts with making investors whole, then attempts to address the underlying problem? (However feebly.)

[Real Person from the Real World]

Even when people talked about how we depended on foreigners to buy our debt, it was always true, that the US was the least ugly and safest economy. Take a look at the scandal in China, of spiking various items with melamine. We outsource tech to countries where education can be spotty, but we will hire someone who memorized how to do something, but doesn't understand the concepts behind it. And even foreigners would like to go home at night, rather than work their nights because they are our days.

Frankly, I think it will be a long time, before there should be any reasonable fear that foreigners will pull out their money and go off merrily. Globalized economies are too interconnected. After this crisis, there will be more attention paid to internal economies, thruout the world, but that may be a good thing. Oversight and regulation is what we need, everywhere.

[Trust]

Rather, saved by past generations faithfully repaying what was borrowed. Foreign lenders are still willing to extend loans because of it. Abusing this trust could prevent the next generation from borrowing in times of trouble. Think about it.

[donna]

There's plenty of money, we just need it to circulate. The problem is the big stinky piles of the wealthy. Spread it around, and stuff will grow.

This is the problem with the bailout. They would be far better off just giving it to people who will spend it, instead of even bothering to let the failed banks be involved. When people have proven they can't handle money responsibly, they shouldn't be handed even more.

[me]

http://scienceblogs.com/cortex/2008/10/the_inner_argument.php

"... this new paper, which shows that different brain areas are activated by risk and reward when people make a risky decision ...."

"... we assess risk and reward separately, and not as part of some unified Bayesian equation, we're able to selectively inhibit those brain areas warning us of risk. (This is the downside of executive control: we can silence our inner Cassandra.) If Moody's says the debt is AAA, then it must be safe, and so we just focus on the nub of cortex telling us to seek out rewards. We don't worry about what will happen when foreclosures rise, or the market tanks, or something unexpected happens...."

[Lafayette]

Reckless Ronnie Redux

cynthia: The problem is the big stinky piles of the wealthy. Spread it around, and stuff will grow.

The above is a good notion, but it isn't really enough. The situation, given the Credit Seizure AND the imminent Recession, will require far, far more. It will require political courage, not just funding.

In fact, we are faced with a once-in-a-lifetime opportunity. If the right president gets elected (that is, Left-of-center), it could announce an historical renewal that sets this nation heading towards Income Equality.

Taxing the hell out of the 10% of the population that garner more than 40% of the wealth generated is NOT Mission Impossible. We would be only correcting an error, justified with stupid Laffer Curve nonsense, which Reckless Ronnie made in 1983. It is necessary, but not sufficient however.

Though difficult to believe, the only Good Bit from the Subprime Mess has been to force us to debate real issues that affect our destiny.

Isn’t that amazing? In the month preceding a PotUS election, we are actually discussing in-depth Economic Policy! Will wonders never cease ....

It’s a shame nonetheless that we had to be walloped over the head to do it.

En passant

For the historical record: Do we now understand how utterly wrongheaded political decisions can work their way through time to bring about disaster? One does not elect a PotUS because of his/her Baby Blues or knack for kissing babies or grade-B movie stardom. A nation must elect its leaders who articulate a vision of where s/he wants to take the country. A vision that we can share because we believe in it as well.

[Lafayette]

Trust: Foreign lenders are still willing to extend loans because of it.

Talked to any Sovereign Fund recently?

Thought not.