Obama's Up, But The Jobs Still Must Come Back

The President is slowly moving back up the ladder.

President Barack Obama's approval ratings are starting to rise after declining ever since his inauguration, new poll figures show as the country's mood begins to brighten. But concerns about the economy, health care and war persist, and support for the war in Afghanistan is falling.

An Associated Press-GfK poll says 56 percent of those surveyed in the past week approve of Obama's job performance, up from 50 percent in September. It's the first time since he took office in January that his rating has gone up.

People also feel better about his handling of the economy and his proposed health care overhaul.

The tea parties of August appeared to be a dead cat bounce. Obama still has problems on the war in Afghanistan, but otherwise he's slowly starting to come back. Perhaps it was his assumption of authority in the Congressional speech. Perhaps it's that things are moving forward, however glacially, on health care. Perhaps it's a recognition that he's one of the few adults in the room, as the right descends into madness and begins to scuffle amongst themselves. For whatever reason, he's getting some goodwill.

Again, I still believe that ultimately, his fate is inextricably tied to the economy. Perhaps we will see some job creation efforts, although I'm still wary of the job creation tax credit because it can be so easily gamed. I trust EPI to come up with a decent version, though.

One version of the approach, to be unveiled next week by the Economic Policy Institute, a labor-oriented research organization, would give employers a two-year tax credit if they increased the size of their work force or added significant hours of work (for example, making a part-time worker full time). Employers would receive a credit worth twice the first-year payroll tax for each new hire, amounting to several thousand dollars, depending on the new worker’s salary [...]

States have dabbled with similar tax credits in recent years, with mixed results. The federal government last tried this measure in 1977-78. During that period, employment — which had been soft from the 1973-75 recession — climbed at a record pace. The creation of one out of three jobs that was awarded the credit then was attributed directly to the policy. But the permanence of those jobs was less clear, and some dispute how many of those positions would have been created eventually anyway.

Supporters say that improvements upon the 1970s policy would increase its potency. These include better publicizing the credit; making it available even to concerns that are not making money, in the form of a direct payout to nonprofits and companies in the red; and distributing the credit quarterly so that companies see it sooner.

One thing this will do is just freeze the job market until the moment it passes. If you're a business and you're going to get a tax credit for hiring workers, of course you would lower your workforce as much as possible to qualify for the maximum credit. In that sense, it really is corporate welfare. Not to mention that corporations just aren't as likely to hire people they feel they don't need if there's no work for them to do.

You know what could really help hiring? Fixing the credit markets for small business in particular. Those markets are still tight, and just returning to the 2007 system of shadow banking, instead of having banks just make loans out of their capital, won't work. If that doesn't get done, this small Obama bounce won't last long.

Coming Around On The Jobs Crisis

Bob Herbert wonders today if the Obama Administration understands the nature of the jobs crisis. He says that millions of Americans need to get back to work, and if the private sector is unwilling or unable to produce those jobs, then the government must step in. This was the most crucial passage:

The survey for the Economic Policy Institute was conducted in September by Hart Research Associates. Respondents said that they had more faith in President Obama’s ability to handle the economy than Congressional Republicans. The tally was 43 percent to 32 percent. But when asked who had been helped most by government stimulus efforts, substantial majorities said “large banks” and “Wall Street investment companies.”

When asked how “average working people” or “you and your family” had benefited, very small percentages, in a range of 10 percent to 13 percent, said they had fared well.

I think the White House got an advanced copy of Herbert's column, because their message today has a lot to do with jobs. Peter Orszag reiterated that the President is "exploring additional options to promote job creation." Bloomberg covers it as well:

President Barack Obama is considering a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label.

The discussion of the initiatives, including a boost in transportation spending and an extension of an expiring tax credit for first-time homebuyers, comes as the White House is balancing rising concern about unemployment and a budget deficit the Congressional Budget Office estimates will total $1.6 trillion for 2009, and $1.4 trillion in 2010.

Administration officials have told allies in Congress that a broader transportation bill, and extensions of a homebuyer tax credit and unemployment benefits are all on the table, a Senate aide said.

As well as Herbert's paper, The New York Times:

President Obama’s economic team discussed a wide range of ideas at a meeting on Monday, following his Saturday radio address in which he said it would “explore additional options to promote job creation.” But officials emphasized that a decision was still far off and that in any event the effort would not add up to a second economic stimulus package, only an extension of the first [...]

Among the options for additional steps is some variation on Mr. Obama’s proposal during the stimulus debate to give employers a $3,000 tax credit for each new hire, which Congress rejected last winter partly out of concern that businesses would manipulate their payrolls to claim the credit. Another option would allow more businesses to deduct their net operating losses going back five years instead of the usual two; Congress limited the break to small businesses as part of the economic stimulus law.

Not to mention the WSJ and a separate Times article.

Calculated Risk worked through some of the safety net options the other day. Extending unemployment benefits and COBRA reductions sounds fine, but I don't see exactly how they create jobs - though added consumer spending may save some. The homebuyer tax credit, while popular, is a complete waste of money, costing tens of thousands per new home sold, and it isn't boosting housing and construction to any great degree.

As for the rest, infrastructure spending through the transportation bill would be great, but is the Administration willing to waive paygo rules, or do they have some idea to pay for it? The business tax credit for new hires seems ripe for abuse, as does the "carry-back" provision allowing major tax breaks for corporations. That just sounds like trickle-down economics to me, and thus far it hasn't worked.

Robert Reich has some much better ideas, though he does side with the new jobs tax credit.

Use existing authority under both the stimulus package enacted earlier this year and the nefarious TARP bailout fund -- extending and combining them into a fund to make up for state and local cuts in public school budgets, childrens' health, public health (we need workers to administer swine flu vaccine) and public transportation. Instead of bailing out banks and giant automakers, we should switch to bailing out public services that average people need.

Propose a one-year payroll tax holiday on the first 20,000 of income. Republicans as well as Blue Dog Dems could go along with this, and it would be a highly progressive tax cut since 80 percent of Americans pay more in payroll taxes than they do in income taxes.

Give small businesses a "new jobs tax credit" for every net new job created over the next year. Granted, under normal circumstances this sort of jobs credit doesn't have much effect, and it's difficult to separate hires that would have happened anyway from net new ones. But we're not in normal circumstances; small businesses, which are responsible for most new jobs, still aren't hiring. They need a boost.

Dramatically expand the Small Business Administration's lending programs and have the Fed buy up the SBA's debt. Big banks are not lending to small businesses. TARP has been an utter failure in this regard. The SBA and the Fed should circumvent them and help small businesses get the capital they need, so they can start hiring again.

These might work in separate bills instead of one big stimulus bill that would have a target on its back. There's no question that state aid should be on the top of the list, and I think accelerating infrastructure spending is vital enough that deficit spending makes sense; government interest rates remain low, after all.

More than anything, the Obama Administration has to show through their actions a concern for those struggling right now. The jobs picture is intimately tied to their economic fortunes, so they have every incentive to do so.

No More Military General Pronouncements

James Jones has cordially invited Gen. Stanley McChrystal to shove it.

National security adviser James L. Jones suggested Sunday that the public campaign being conducted by the U.S. commander in Afghanistan on behalf of his war strategy is complicating the internal White House review underway, saying that "it is better for military advice to come up through the chain of command."

Gen. Stanley A. McChrystal, who commands the 100,000 U.S. and international forces in Afghanistan, warned bluntly last week in a London speech that a strategy for defeating the Taliban that is narrower than the one he is advocating would be ineffective and "short-sighted." The comments effectively rejected a policy option that senior White House officials, including Vice President Biden, are considering nearly eight years after the U.S. invasion.

McChrystal's statement came a day after senior White House officials challenged him over his dire assessment of the war, and what it will take to improve the U.S. position there, during a videoconference from Kabul with President Obama and his national security team. Obama then summoned McChrystal to Copenhagen the day after the general's speech for a private meeting aboard Air Force One.

We're simply unused to the chain of command predominating in this day and age, but there really was a time where military commanders didn't make public statements about strategy and troop requests. And Jones is right in wishing for that time to return. While some don't see McChrystal's statements as objectionable, and certainly they aren't a prelude to a coup or anything, because of our military conferring hero status on generals they are overweighted in the debate, and have a tendency to place Presidents in a box should they want to disagree. That's what has angered people, Jones included.

Meanwhile, this WaPo piece offers a lot of good thoughts about the problems in Afghanistan - particularly with respect to jobs. I don't know if the country facing 10% unemployment should be seen as a savior in this regard.

Still Shedding Jobs

Last month's employment report:

Nonfarm payroll employment continued to decline in September (-263,000), and the unemployment rate (9.8 percent) continued to trend up, the U.S. Bureau of Labor Statistics reported today. The largest job losses were in construction, manufacturing, retail trade, and government.

Household Survey Data

Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent.

The change in total nonfarm payroll employment for July was revised from -276,000 to -304,000, and the change for August was revised from -216,000 to -201,000.

Economists were hoping for something around 175,000 losses.

Earlier this week, I wrote about how Obama's approval rating is intimately timed to the jobs situation. A report by two professors at Rutgers says it will take until 2017 for jobs to reach pre-recession levels. That could be two Presidents from now, the way things are going.

Obama doesn't need a full recovery, but he needs to show improvement. And the only way, at this point, to improve the jobs situation is with another stimulus.

...Krugman:

Stocks are up. Ben Bernanke says that the recession is over. And I sense a growing willingness among movers and shakers to declare “Mission Accomplished” when it comes to fighting the slump. It’s time, I keep hearing, to shift our focus from economic stimulus to the budget deficit.

No, it isn’t. And the complacency now setting in over the state of the economy is both foolish and dangerous.

Obama's Approval Ratings And Jobs

John Judis has a compelling piece up arguing that the fortunes of Barack Obama relies entirely on the fortunes of the economy, and specifically the jobless rate. Judis shows a direct correlation between the approval ratings of past Presidents and the jobs number.

When Roosevelt took office in 1933, unemployment was almost 25 percent, but, during his first term, it fell steadily-- to less than 14 percent in November 1936. The economy, in other words, seemed to be healing. Gallup wasn't measuring presidential approval then, but FDR's rising popularity was evident in election results: Democrats picked up congressional seats in 1934 and 1936, despite already enjoying huge majorities; and, in 1936, Roosevelt won in a landslide, carrying the Electoral College by the largest margin ever.

The arc of Reagan's popularity illustrates the same phenomenon. In July 1981, when unemployment stood at 7.2 percent--what it had been at the end of Carter's presidency--only 28 percent of Gallup's respondents disapproved of Reagan. But, by January 1983, after unemployment had risen to 10.8 percent the previous month, Reagan's disapproval rating was a whopping 54 percent. In November 1982, even a crippled Democratic Party had been able to win seats in the House and Senate. During the same time, Reagan benefited politically from surviving an assassination attempt, got Congress to approve his signature tax and budget programs, and certainly didn't make egregious political errors. What mattered, finally, was the economy. And, as the economy turned around, so did the GOP's political prospects. By November 1984, unemployment had dropped back to 7.2 percent, and only 30 percent of respondents disapproved of Reagan. In that month's election, he claimed a landslide victory over Walter Mondale.

Today, we see that joblessness has risen under President Obama, and his approval ratings, while still decent, have softened (they've picked back up in recent weeks). The economy may be improving under various statistics, but until people are working again, Obama will not be credited for it. It's hard to argue with Judis' charts. With the exception of goodwill toward Bush 43 after September 11, approval ratings and job loss have followed the same trajectory in most recent years.

Judis offers some thoughts about Obama's options:

So what can Obama do? It's easy to say what would really help: rapid job growth, the revival of the housing market, transit systems that aren't breaking down, the reinstitution of after-school programs, crowded shopping malls and auto showrooms--the kind of things that go with a robust economic recovery. But the U.S. economy isn't going to morph overnight from its current woeful condition to a state of buoyant full employment. In a September 14 speech, Janet Yellen, president of the Federal Reserve Bank of San Francisco, warned of a "tepid" recovery that is "vulnerable to shocks" and an "unemployment rate [that] will remain elevated for a few more years."

What Obama and the Democrats have to hope for, then, is not a full recovery, but sufficient improvement in jobs, wages, and public services to convince voters that the economy is on the mend. That's what helped Roosevelt and Reagan keep their majorities--and, in Roosevelt's case, what lay the basis for nearly four decades of Democratic hegemony. With the Republicans in disarray and demographic trends favoring the Democrats, an uptick in the economy for which voters credit Obama could lay the basis for a new Democratic majority. But, to accomplish this, Obama must promote programs that visibly and immediately provide economic relief.

I think passing a health care bill will give some relief, but with most of the provisions delayed until 2013, this cannot be the end of it all - the political impact of health care may be long-term rather than short-term. Subsequent bills in the end of this year and 2010, job-creating bills, need to be put into effect. The stimulus package has a lot more room to run, with hundreds of billions left to be allocated. This should not only be managed well but expanded, even if it means more deficit spending in the short term.

Moreover, to avoid what marred Roosevelt's second term--the precipitous double-dip in the depression that occurred in 1937–1938--Obama should turn a deaf ear to those who are calling for fiscal responsibility. He should keep pouring money into jobs and into the pockets of people who will spend until the unemployment rate begins going down and wages begin going up. That may mean a second stimulus (despite the current hostility toward spending in Congress) would be worth pushing. He might also be wise to follow Reagan's example and get tough with foreign competitors who are using import barriers, export subsidies, and currency manipulation to inflict large trade deficits on the United States. And, whatever he does to try to mend the economy, Obama should never stop loudly trumpeting his efforts--so that he is able to reap the credit when improvements occur.

In the absence of efforts like this, I shudder to think what will happen, not only to the Democratic majority, which is a lesser concern, but to the landscape of the workplace. Millions and millions of jobs are unlikely to ever be replaced by private industry. And continued joblessness, along with option ARMs recasting, will lead to the higher foreclosure rates we keep seeing, leading to job losses in the construction sector, leading to more risk of foreclosures, leading to more job loss.

People are starting to believe more strongly in the stimulus as a job creation engine. But it's probably going to take more than that to get the kind of tangible recovery needed, not just for Obama and the Democrats, but for the fortunes of regular people.

Financial Reform FAIL And A New Metric For Recessions

Simon Johnson had the same problem as I did with the President's speech on financial reform:

As a diagnosis of the problems that let us into financial crisis, it was his clearest and best effort so far. He didn’t say it was a rare accident for which no one is to blame; rather he placed the blame squarely on the structure, incentives, and actions of Wall Street.

But then he said: our regulatory reforms will fix that. This is hard to believe. And even the President seems to have his doubts, because he added a plea that – in the meantime – the financial sector should behave better [...]

Louis Brandeis, of course, would have seen things differently. The author of “Other People’s Money: And How The Bankers Use It,” was under no illusions concerning the underlying financial power structures and how they operated. He would have regarded an appeal to the better nature of bankers as somewhere between humorous and sad.

The only thing that will make a different is regulation. This is the lesson of the 1930s in the US – the regulations imposed at that time created a financial sector that did not impede growth after World War II; basic intermediation (connecting savers and borrowers) worked fine and destabilizing frenzies were avoided. During this period, the financial sector came up with venture capital, ATMs, and credit cards – arguably the three most important financial innovations of the past 100 years, and much more helpful of real innovation than anything you’ve seen since 1980.

As Johnson has repeatedly argued, we need to break up the biggest banks, end the revolving door between Wall Street and Washington and ensure that the executives taking the risks put their own fortunes at stake instead of gambling with our money. Sadly, none of these elements exist in the more modest reform proposals from the President, and even those are faltering in the face of institutional pressure.

As a result, we muddle through, resetting the clock to the pre-bailout days without having fundamentally fixed the system or prevented the possibility of a relapse. It's great that Ben Bernanke thinks the recession is over. But the 9.4 million people who have lost their jobs would disagree with him. Their personal depressions continue, and I would argue that this is a direct result of allowing the titans of Wall Street trillions in Treasury wealth while ordinary Americans suffer with a too-small stimulus and not much prospect for recovery.

Fifteen million Americans are locked in the nightmare of unemployment, nearly 10 percent of the work force. A third have been jobless for more than six months. Thirteen percent of Latinos and 15 percent of blacks are out of work. (Those are some of the official statistics. The reality is much worse.)

Consider this: Some 9.4 million new jobs would have to be created to get us back to the level of employment at the time that the recession began in December 2007. But last month, we lost 216,000 jobs. If the recession technically ends soon and we get to a point where some modest number of jobs are created — say, 100,000 or 150,000 a month — the politicians and the business commentators will celebrate like it’s New Year’s [...]

At some point the unemployment crisis in America will have to be confronted head-on. Poverty rates are increasing. Tax revenues are plunging. State and local governments are in a terrible fiscal bind. Unemployment benefits for many are running out. Families are doubling up, and the number of homeless children is rising.

It’s eerie to me how little attention this crisis is receiving. The poor seem to be completely out of the picture.

Joseph Stiglitz has a similar view in today's Guardian, arguing that the Administration through saving the financial system has perversely created banks that are not only too big to fail but too big to resolve, the way you would other entities which cannot meet their obligations. In a separate piece, he argues that the metric for evaluating recession - gross domestic product - now has almost no bearing on everyday lives, and ought to be scrapped in favor of something that truly reflects the outlook for ordinary people.

The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.

I remember Andy Stern coming up with the same idea in his book a few years ago. If we continue to use a metric based on the desires of elites, then they will please themselves with growth results even though the mass of people continue to suffer. Believe it or not, common statistics can actually change policy for the better. The problem lies in getting everybody to use it.

...Kevin Drum offers up real median income growth as a better metric. If that's the case, we've actually been in a depression for a decade.

Legislature Passes Groundbreaking Renewable Energy Legislation; "Green" Governor Will Veto

SB14, which would set a first-in-the-nation standard that utilities must receive 33% of their energy from renewable sources by 2020, passed the Legislature late last night.

“Increased development of renewable energy in California has tremendous potential as an economic development tool. These are clean, green jobs that belong in California. SB 14 sets a clear target with a real deadline, and then makes it as easy as possible to bring renewable energy on line.

In light of the state’s ambitious new carbon emission targets, SB 14 will give energy agencies the flexibility they need in order to meet those goals. Current law “caps” the amount of renewable energy that the Public Utilities Commission may order utilities to buy or build at 20 percent. This bill would remove this cap and require utilities to acquire 33 percent of their electricity from renewable resources by 2020.”

This would make California's renewable energy standard one of the most aggressive in the world. The Governor, feted in magazines and national media as an environmental leader, has vocally backed the 33% standard in the past. But power plant generators have pressured Schwarzenegger to veto the bill. And according to the LA Times, he will.

The Senate did manage to pass the energy bill, which would raise to 33% the amount of energy the utilities must get from renewable sources. Final approval by the Assembly of some minor amendments was expected.

However, a high-ranking administration official said late Friday that the governor may not sign the bill, SB 14 by Sen. Joe Simitian (D-Palo Alto), because of provisions limiting the amount of energy that could come from outside California. The official spoke on condition of anonymity because the bills were not yet on the governor's desk.

That would really be the icing on the cake to the worst Governorship in California history. The one issue on which he staked his legacy, and he is likely to veto the bill most likely to drive the lowering of greenhouse gas emissions, mainly because it would keep too many jobs in the state. Adding a renewable energy standard and mandating a majority of that energy be generated in state, is probably the only bill passed this year that looks to expand the local economy. And because of that, Schwarzenegger will veto it.

And the same magazines will put him on the cover with the slogan "The Greenenator" and talk up his environmental credentials.

The Poor, The Adrift, The Uninsured

We interrupt yesterday, today and tomorrow's media soccer scrum ("Does Ellen DeGeneres Think Michael Vick Should Agree With Joe Wilson About Health Care?") to bring you the consequences of a Gilded Age economy:

The U.S. Census Bureau has just announced that the poverty rate for 2008 was 13.2%. This means the number of people in poverty has increased by about 2.5 million, to 39.8 million. To give you some perspective, 2.5 million is more than the number of people who live in Detroit and San Francisco combined.

The Census data is just devastating, particularly when you take into account that the numbers come before the job loss in the first 8 months of this year. In addition to the uptick in the poverty rate, real median household income fell 3.6%, the biggest drop in 40 years. The richest tenth of one percent saw their incomes rise by 35% over the last 10 years while median incomes stayed flat. And the number of Americans lacking health insurance increased by about 700,000 to at least 46.3 million, which does not account for the under-insured. In fact, if it wasn't for government programs, this number would be far worse.

Things would have been worse but for one thing: continued expansion of government-provided health insurance coverage. Between 2007 and 2008, the proportion of Americans reporting any private coverage fell by 0.8 percentage points, from 67.5 percent to 66.7 percent. Meanwhile, the percentage reporting some form of government coverage rose by 1.2 points, from 27.8 percent to 29.0 percent [...]

First, the absolute number of uninsured has increased. Second, employer-based coverage is eroding. Third, adverse trends in private coverage are partly masked in the overall numbers by the rise in public coverage.

Fourth, improved insurance coverage among children--thanks largely to Medicaid and SCHIP--is more than offset by increases in the number and proportion of uninsured working-age adults. As shown in the final column, the number of uninsured adults increased by almost 9 million in nine years. Since working-age adults are much more likely to actually get sick, this is a significant economic and public health concern.

Yes, it's been government - eeevil, socialist government - which has had to step into the breach and take care of its citizenry amid a failing private market. And that includes your local fire department, increasingly becoming a primary care doctor for millions of Americans.

In 2008, fire departments around the country responded to 15.8 million medicals calls, a 213 percent increase over the 5 million medical runs record in 1980. The combining of cities’ fire and emergency medical services accounts for some of the increase.

But as the logs of a Washington, D.C., fire company show, the lack of health insurance by too many people—especially low-income families—has turned some local fire departments into mobile emergency rooms.

In one 24-hour period this summer, D.C.’s Engine Company No. 10 responded to more than two dozen emergency calls—two fires and the rest were medical emergencies. It is the same throughout the District. The Times reports the D.C. fire department responded to more medical emergency calls per capita than any other in the nation—and most come from poor neighborhoods [...] such calls tie up a community’s resources and cost communities more because so many calls for emergency medical care aren’t true medical emergencies. Also, the increasing reliance on first responders and on 911 also comes at a time when firefighters and paramedics all across the country are being laid off, as the nation’s economic woes place a strain on public budgets. The recession is shrinking our resources and reducing manpower while the demand for emergency medical care is skyrocketing.

Best health care system in the history of man.

This is bigger than just health care, though, and it's driving a lot of the anxiety out there. Recessions are disruptive events, but in previous years quick turnarounds would blunt the pain. More recently, jobless recoveries that last years and years have become the norm, and as a result, people cannot keep up. Inequality has risen to an almost comical degree, while more and more people sit on the other side of a gated community. This breeds anger, unrest, and ultimately enormous amounts of needless suffering.

And as long as government is captive to interests which place their corporate well-being above the well-being of the people, it will remain this way.

Falling Down On Making The Argument For Good Government

I think this post from John Aravosis is a little bit unfair, but only a little. The White House has soft-pedaled their defense of the stimulus package, but really with the jobs picture as it is, it was always going to be a hard sell to tell people who are losing their job that the stimulus prevented things from getting worse. The problem lay in the lack of job creation in the stimulus itself, rather than job saving. Those who follow these things closely understand that the stimulus really saved us from a deep recession if not a depression. But we also know it didn't go far enough to truly bring about recovery. Those who look at their own lives and don't pay attention to the day-to-day debate only see that they and their colleagues can't find work.

I think the White House will eventually get some credit for the inevitable recovery, but only if it includes jobs. A second stimulus simply won't happen now, and we're basically at the mercy of large firms and when they decide to hire at this point, which isn't likely in the near term if they can increase productivity without bringing anyone back.

That said, when the White House goes out and defends the stimulus, the least they can do is defend the underlying ideology. This AP "fact check" on the stimulus is fairly ridiculous, more a nitpick than a fact check, but assuming they quoted Biden right, this is terrible:

Biden exercised some restraint in his praise for the stimulus' impact. He took a more cautious approach, for example, when asked if his declaration of stimulus success means Americans can now rethink the common view that government is wasteful and inefficient.

"I think it's too early to make that decision, to be very blunt about it," he said.

No, it's not too early to make that decision. The point of stimulus is to get money out quickly and into people's hands. If anything, Biden and his team are being too deliberate about that, to keep away the newspaper headlines of wasteful spending. Pro Publica, for example, needs to blow it out their ass. Anything that creates jobs is stimulus, people. Pro Publica tries to catch Biden in a lie by claiming that money isn't flowing to hard-hit communities, when Biden was clearly talking about increased unemployment benefits and food stamps and help for all low-income Americans. It's hoops like this which modern Presidencies have to jump through that create such a "common view" about inefficient government.

But Biden needs to attack that. The fact of the matter is that public investment creates jobs and saves people's lives. It's OK to state that aggressively. If he doesn't, Republicans certainly won't. And they'll continue to demonize government.

The Administration is in a tough rhetorical spot, considering the jobless recovery. But that's not a time to give ground.

Washington, We Have A Jobs Problem

The jobs report for August showed another 216,000 losses. That's far less than previous months, in fact the smallest in a year, but still not very good. The unemployment rate jumped up to 9.7%, and it'll basically be a matter of time before we're at 10%.

The AFL-CIO released a stunning report about young workers, showing their struggles in the past decade, where they have less jobs, worse jobs and no security.

Some of the report’s key findings include:

31 percent of young workers report being uninsured, up from 24 percent 10 years ago, and 79 percent of the uninsured say they don’t have coverage because they can’t afford it or their employer does not offer it.
Strikingly, one in three young workers are currently living at home with their parents.
Only 31 percent say they make enough money to cover their bills and put some money aside—22 percentage points fewer than in 1999—while 24 percent cannot even pay their monthly bills.
A third cannot pay their bills and seven in 10 do not have enough saved to cover two months of living expenses.
37 percent have put off education or professional development because they can’t afford it.
When asked who is most responsible for the country’s economic woes, close to 50 percent of young workers place the blame on Wall Street and banks or corporate CEOs. And young workers say greed by corporations and CEOs is the factor most to blame for in the current financial downturn.
By a 22-point margin, young workers favor expanding public investment over reducing the budget deficit. Young workers rank conservative economic approaches such as reducing taxes, government spending and regulation on business among the five lowest of 16 long-term priorities for Congress and the president.
Thirty-five percent say they voted for the first time in 2008, and nearly three-quarters now keep tabs on government and public affairs, even when there’s not an election going on.
The majority of young workers and nearly 70 percent of first-time voters are confident that Obama will take the country in the right direction.

At the low end, workers are often paid under the minimum wage and cheated out of overtime pay.

This is just not sustainable. A thin layer of the super-rich exploiting a permanent underclass, with many out of work or unable to gain independence, will not result in a workable society. Social unrest is a more likely outcome.

We cannot forget this. The Democratic Party is becoming reliant on the professional class instead of the working class, and it leads to policy that doesn't help workers. The shrinking unionized sector, and the inability to create policy to reverse that trend, will come back to hurt the so-called "party of the people."

Labor's lack of clout to pass EFCA in even the most overwhelmingly Democratic -- and progressive -- Congress in decades is an indication that we already have a successful progressive movement in which labor plays only a modest role. Union support was less crucial to Obama's nomination and his general election victory than it was to any previous Democratic president, which is why he's not obligated to twist arms to pass the bill. Many Democratic victories in 2008 were in states and districts where labor is weakest, like Virginia and North Carolina. And I know dozens of engaged liberals who have no idea why EFCA matters.

The new progressive coalition follows the lines of the "emerging Democratic majority" that Ruy Teixeira and John Judis predicted in their 2002 book of that name: minority, professional, and younger voters, with help from a large gender gap. This is a coalition that can win without a majority of white working-class voters, whether union members or not. (Those who were union members were always solid Democrats.) In many ways, that's good because it helps to bring an end to the culture wars that limited the party's ability to speak clearly about matters of fundamental rights and justice.

But it's also dangerous. A political coalition that doesn't need Joe the -- fake -- Plumber (John McCain's mascot of the white working class) can also afford to ignore the real Joes, Josés, and Josephines of the working middle class, the ones who earn $16 an hour, not $250,000 a year. It can afford to be unconcerned about the collapse of manufacturing jobs, casually reassuring us that more education is the answer to all economic woes. A party of professionals and young voters risks becoming a party that overlooks the core economic crisis--not the recession but the 40-year crisis--that is wiping out the American dream for millions of workers and communities that are never going to become meccas for foodies and Web designers.

I think the lack of connection between Democrats and the working class reflects itself in all these jobless recoveries we're seeing. Policy just isn't made for the median income, but of, by and for the rich. It's a very dangerous situation.

Jobless Recoveries Aren't Recoveries

The President's poll numbers, which haven't slipped as much as has been reported if you take away crazy Zogby Internet polls (42%? Really, Zogby?), have little to do with his policies and much to do with the economy. Most political leaders are falling right now as the economic slump continues to worsen. The "recovery" that we're seeing is really more of a case of getting worse more slowly. The so-called "liberal interventions" that Obama has made in the economy clearly staved off a deep depression. Virtually everyone who's studied the issue would agree. But it's hard to prove a negative, and this is the source of Obama's troubles right now. For example, Joe Biden is right to say that the stimulus is working, but this is a difficult concept for people to wrap their heads around:

"The recovery act has played a significant role in changing the trajectory of our economy, and changing the conversation in this country," Biden said. "Instead of talking about the beginning of a depression, we are talking about the end of a recession."

Absolutely true, but if there are still no jobs, this won't register. People feel that the recession is still happening because, for their personal lives, it is. The rates of job loss have slowed but remain negative. That means less people working. That means less money available to spend. That means lower consumer spending. And so retailers feel the pinch, individuals feel the pinch, and even with economic growth, everyone feels like they're in a recession.

Jobs lag a recovery, so there's a chance for the White House to break out of this. But in recent times, the jobless recovery has become more and more prevalent. Know this - an economic "revival" which benefits elites and not the overall public will not be looked upon favorably. In fact, people will blame the President for failing to turn things around. You can put together all the white papers you want about the recovery meeting benchmarks, or whatever. But the only answer to the economic troubles are JOBS. If we don't value work over wealth in this country, we will not sustain an economic future.

...Biden's speech on the Recovery Act actually does some good message-building about the economy and the need for public investment, which is key.

We're also investing what everybody knows is necessary to build a 21st century economy. I have people sometimes say, aren't you guys doing too much? You know, Presidents in the past have been able to -- and I've been here for eight of them -- they've been able to take the problems that they have and segregate them -- said, we're going to take these two first. We'll put these other four or six or five aside, and we'll get to them next, because they know the status quo ante will pertain. But name me one problem that landed on the President's desk that allowed him to say, no, no, we're going to focus on this, and then in three years we'll get to this?

I say to my friends, does anybody think we can lead in the 21st century without a radically altered energy policy? Does anybody think we can sustain our position in the world without a radically altered education system, where we're no longer 17th in the world in the number of college graduates we graduate? Does anybody think we can sustain without radical change in the cost of health care in this country, and bending that curve? [...]

To state the obvious, we will emerge from this great recession. And I believe that is only -- that's necessary but not sufficient. We have to emerge better positioned to lead the world in the 21st century as we did in the 20th century.

Where the last cycle generated billions of dollars -- billions from investments made via high-speed trades, this cycle needs to make real investments in high-speed rail.

In the last cycle, "innovation" meant bundling and selling subprime mortgages. In this one, our innovations will bundle and sell technologies to produce clean, efficient, renewable energy.

Where the benefits of productivity have not grown in the past, from 2000 and 2007, productivity grew 20 percent; yet the middle-income households fell 3 percent, their income. In this cycle, we're determined to make sure that productivity doesn't elude the poor and the middle class. And this cycle must be one in which, once again, American workers get his or her fair share of the wealth they helped produce.

Um, The Stimulus Is Working

Conservatives very smartly conflated the bailout and the stimulus in people's minds, and traded off public anger with one to demonize the other. They're still doing it, too, with Eric Cantor today suggesting to cancel the rest of the stimulus and "pay off the debt." Most of the debt comes from Bush-era policies, so this is nonsense. It's also wrong to state that the stimulus should be cancelled because it's not working. In fact, Rupert Murdoch's Wall Street Journal tells us the opposite today:

The U.S. economy is beginning to show signs of improvement, with many economists asserting the worst is past and data pointing to stronger-than-expected growth. On Tuesday, data showed manufacturing grew in August for the first time in more than a year. "There's a method to the madness. We're getting out of this," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.

Much of the stimulus spending is just beginning to trickle through the economy, with spending expected to peak sometime later this year or in early 2010. The government has funneled about $60 billion of the $288 billion in promised tax cuts to U.S. households, while about $84 billion of the $499 billion in spending has been paid. About $200 billion has been promised to certain projects, such as infrastructure and energy projects.

Economists say the money out the door -- combined with the expectation of additional funds flowing soon -- is fueling growth above where it would have been without any government action.

Many forecasters say stimulus spending is adding two to three percentage points to economic growth in the second and third quarters, when measured at an annual rate. The impact in the second quarter, calculated by analyzing how the extra funds flowing into the economy boost consumption, investment and spending, helped slow the rate of decline and will lay the groundwork for positive growth in the third quarter -- something that seemed almost implausible just a few months ago. Some economists say the 1% contraction in the second quarter would have been far worse, possibly as much as 3.2%, if not for the stimulus.

The recovery is still jobless thus far, which means it's not a real recovery yet. And the White House made two mistakes - one, they soft-pedaled the recession, claiming that unemployment would not go above 9% or so, leaving them susceptible to the charge that the stimulus isn't working; and two, they put too much of the stimulus into tax cuts instead of the public investment that would have made it even more successful, particularly on the jobs front.

But without the public investment the stimulus has thus far provided and will continue to provide, we'd be mired in more negative growth and a near-depression. That's the reality.

The President has actually tried to talk up the benefits of the stimulus, but not in a forceful way. As a result, the conservative conflation has led to a souring on government, directly attributable to a lack of leadership and messaging.

Paul Krugman argued recently that Obama hadn't effectively used the bully pulpit to slay "government-is-bad fundamentalism." This is only one poll, but it's fair to ask whether these numbers bear that out.

Obama's poll slide has prompted some to ask whether his presidency might fall short of the transformative moment many expected. I think it's too early to reach a conclusion on this. If Obama pulls out a health care victory, everything will shift again.

But for a time it seemed like shattering the government-is-bad paradigm was distinctly within Obama's reach. General confidence in the government's ability to secure the public's well being seems like pretty good number to keep an eye on when gaming out the potential for transformation of this moment, and of this presidency.

This has mostly resonated in the health care debate, with insurance companies inexplicably getting somewhat higher marks now than government as a health care provider, despite the fact that the groups with the highest satisfaction with their health care are seniors (government-provided single-payer system), and veterans (government-run NHS-style system).

Politics is about storytelling. Obama during his campaign actually started to tell a pretty decent story about government as a guarantor of basic rights, which can equalize opportunity and give everyone a shot. He told a story of community, where we take care of each other and use government as a means to do so.

That's basically gone. And as a result, the public investment program that averted a depression is considered a failure.

Very dangerous.

Cash For Clunkers, Consumer Savings, Increased Fuel Efficiency And Jobs

With the cash for clunkers program winding down, we can start to measure its effectiveness. And guess what, it was effective! The program sold almost 700,000 cars, many of which would not have otherwise been sold. It saved consumers money in both purchasing the automobile and long-term gasoline costs. Dealers who were facing hard times due to the Chrysler and GM bankruptcies will now have a boost to get them through. Third-quarter economic figures expect to have a .3-.4 increase in growth (from just a $3 billion outlay). And despite naysayers like Edmunds.com, the most tangible impact of the program is the 39,000 jobs it created:

One auto analyst called the program a success, if only because his research showed that it was responsible for saving 39,000 jobs that otherwise would have been eliminated.

"It's really more substantial than we had thought in terms of stimulus," said David Cole, chairman of the Center for Automotive Research. "This is companies putting people back to work."

General Motors announced last week that it will reinstate 1,350 workers and add overtime for about 10,000 at three plants, as the automaker replenishes inventory sold during the government program. Honda also said it will increase U.S. production.

The other big winners in the program were Asian automakers. Eight of the top 10 new cars purchased through the program came from Honda, Hyundai, Nissan and Toyota, which claimed the top spot with its Corolla. The Corolla, Honda Civic and Ford Focus are manufactured in the United States.

I don't know how anyone in their right mind could find the program to be anything other than a fantastic success.

...Joe Romm concurs.

About That Deficit

Many are speculating that the President re-appointed Ben Bernanke in the middle of his vacation to get the story away from this:

The Obama administration, citing an economic downturn that has been deeper than it had first thought, raised its estimate on Tuesday of the government’s deficit over the next decade to $9 trillion from $7.1 trillion.

Despite the shortfall, White House officials said they saw no reason to back away from President Obama’s ambitious and costly goal of overhauling the health care system. The new amount includes the cost of the health care overhaul as well as about $600 billion in additional revenue that the administration hopes to raise, two initiatives Congress has yet to approve [...]

Analysts at the Congressional Budget Office put their 10-year deficit estimate slightly lower, at $7.14 trillion, though the agency uses a slightly different method to reach its number. The budget office takes into account only policies already in place, while the administration can consider policies and budget decisions that its hopes to install.

White House officials predicted that the budget deficit this year will peak at $1.58 trillion, though they said the 2009 shortfall will be about $261 billion lower than they had predicted in May. The main reason is that officials have decided that they will not need another round of bailout money for the nation’s banks. The Congressional Budget Official also estimated a deficit this year of about $1.6 trillion.

Paul Krugman puts the numbers in perspective, saying that the added debt in the next decade is bad, but would equal 40% of annual GDP, which is comparable to what many other countries have dealt with in the past. What I'm wondering is if the deficit has ever actually been registered that way. I've certainly never seen it reported in the papers in ten-year increments - you usually see what the annual deficit is, and then the total debt. This seems like a new tactic that plays to the fiscal scolds.

Meanwhile, the way to reduce deficits is to increase productivity, output and employment, and that's the real problem with these numbers.

The real story in the new CBO projections should be the more dire economic outlook. CBO now expects the unemployment rate to be near 10 percent through most of 2010. Its new projections will show that the unemployment rate will only return to more normal levels in 2013 or even 2014, more than six years after the collapse of the housing bubble threw the economy into recession.

The implication of the new CBO projections is that millions more people will be needlessly suffering because of the economic mismanagement of the Greenspan-Bernanke-Bush crew. CBO views 4.5 percent unemployment as being the sustainable rate of unemployment. If the unemployment rate is 10 percent, more than 8 million people are needlessly out of work, with another 5 million or so being forced to work part-time because they cannot find full-time employment. These people will be struggling to pay their health care bills, cover their mortgage or rent payments, and meet other necessary expenses for themselves and their families.

The rational response to the news that the economy will be far worse than had previously been projected should be a demand for more stimulus. After all, why should millions of people lose their jobs, their homes, and their health just because the people who managed the country's economic policy over the last decade were incompetent?

But the focus is placed on the deficit, meaning that the ability to spend our way into full employment has become politically impossible. A second stimulus looks unliklely at this point.

...by the way, a good bit of these 10-year projected deficits - probably half of the total - comes from Bush Administration unfunded mandates. Ten years' worth of Bush tax cuts for the wealthiest Americans could have filled the rest.

...And also note that this near-term projection has a deficit that's $260 billion less for FY2009 than expected, because there is no need for another bank bailout. That could be a headline too, if reporters wanted to write it, especially considering that near-term projections are more reliable than ones about what the economy will look like in 2019.

I Don't See That Curve Bending

We're still in uncharted economic territory:

Employers cut a larger-than-expected 467,000 jobs in June, driving the unemployment rate up to a 26-year high of 9.5 percent, suggesting that the economy's road to recovery will be bumpy.

The Labor Department report, released Thursday, showed that even as the recession flashes signs of easing, companies likely will want to keep a lid on costs and be wary of hiring until they feel certain the economy is on solid ground.

June's payroll reductions were deeper than the 363,000 that economists expected and average weekly earnings dropped to the lowest level in nearly a year.

However, the rise in the unemployment rate from 9.4 percent in May wasn't as sharp as the expected 9.6 percent. Still, many economists predict the jobless rate will hit 10 percent this year, and keep rising into next year, before falling back.

All told, 14.7 million people were unemployed in June.

Here's the latest chart showing job losses, from Calculated Risk:



We have two problems threatening economic recovery: joblessness and foreclosures. The stimulus is supposed to at least mitigate the former, and the Obama Administration is expanding their program to mitigate the latter, including homeowners that owe up to 125% of the value of their homes on their mortgages into their modification plans.

Neither look to be sufficient for the scale of the problem. It's almost unfair what the President has had to deal with since coming into office, but I fear we're in something of a death spiral.

Yes, Cutting Jobs And Services Does Affect The Economy

Dan Walters had a funny column a few days back, excoriating anyone who use "numbers" and "projections" to theorize about the impacts of budget cuts. As if it's some kind of novel idea that an economy dominated by government spending would rise or fall based on the amount of that spending. Mr. Walters, 1937 called and wants a word with you.

Anyway, let's look at the heart of Walters' complaint. First he says that we must have a hefty budget reserve because the economy is likely to go south, and because it will signal to bankers that "we're solvent so they'll buy our short-term notes." As I noted earlier, this is nonsense given the clear Constitutional duty to repay debt before practically everything else. Then he says this:

Democrats and Republicans are equally guilty, meanwhile, of emitting self-important nonsense about the impacts of their actions on the state's recession-wracked economy. While Democrats claim that cutting "safety net" programs and/or public payrolls will worsen the recession by taking money out of circulation, Republicans claim that raising taxes will retard recovery by discouraging investment and/or consumer spending.

Both practice voodoo economics. The entire deficit on which they are working, $24.3 billion including Schwarzenegger's desired reserve, is well under 2 percent of the state's economy. The lesser cuts and taxes they are debating would merely shift relatively small amounts of money from one form of spending to another, all within the state's economy, so the macro economic impact would probably be nil, no matter what they do.

That's a strange opinion, especially because in the next sentence, he argued that a budget filled with gimmicks would threaten our economic future, even though such gimmickry would effect the same small amount of cash, from a macroeconomic perspective. But to his main point - cutting spending for state services, cutting jobs, cutting salaries for public employees and their related vendors, has a multiplier effect that in fact does weaken the prospects for economic recovery. You don't have to take my word for it. John Myers ran a story on this just today.

"It's hard to see how the country recovers if California does not," says U.S. Rep. Zoe Lofgren (D-San Jose). Lofgren says she thinks congressional authorization of loan guarantees for any state will happen. But no one thinks it'll happen in time for California, which needs to go to market -- assuming a budget deficit deal is agreed to in the state Capitol -- early next month.

Lofgren says she's particularly troubled that the national stimulus and recovery programs... which are expected to benefit California by as much as $80 billion... could be drained of their help by the cuts needed to balance the state budget. "It is contrary to the efforts that we're making," she says.

This is a fact neglected by Walters, the very real possibility that certain spending cuts would result in the forfeiture of stimulus funds as well as regular funding, multiplying the effect of the cuts. Many of the programs that Schwarzenegger wants to eliminate, like Healthy Families, CalWorks and Medi-Cal, have their funding matched by the federal government. Clearly any dollar cut there would mean $2 in practical cuts to Californians. And losing out on stimulus dollars could number in the tens of billions.

This UCLA Anderson Report also speaks to the impact of state spending on California and the nation at large.

According to UCLA Anderson Forecast senior economist Jerry Nickelsburg, there is nothing happening in California that will help pull the state out of recession in advance of the nation.

"California," Nickelsburg writes, "is in for a continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year, shortly after the U.S. economy begins to grow."

The dire conditions surrounding the state budget will contribute to prolonging tough conditions in California, according to the report.

In his essay, Nickelsburg notes that Gov. Arnold Schwarzenegger is attempting to close the state's $24 billion budget gap with a combination of fee increases, forced borrowing from local government, the sale of state assets and, primarily, budget cuts.

Yet that the real risk for California, Nickelsburg writes, is the possibility that there will be no budget agreement at all and that the chaotic and inefficient spending cuts that would likely follow would have an even more severe impact on the ability of California to stem the downturn in economic activity this year.

The rhetoric has risen to the extent where a prolonged stalemate, like every year given our broken governmental structure, is possible. But clearly, Nickelsburg is demonstrating that state spending does have an impact on the economic picture at large, especially at a time when there's 11.5% unemployment and a growing dependence on state services.

That one of the top political reporters in the state would deny this economic reality is just baffling.

Fighting Foreclosures By Any Means Necessary

Regardless of whether we all see green shoots or yellow weeds, whether we've hit bottom or keep hurtling downward, reality suggests that we're many years from normal.

The economy could begin to pull out of the recession later this year but a full recovery could take as long as six years, according to a forecast issued today by the Federal Reserve.

The projections were grimmer than those issued by the Fed in January. Yet, they still reflected a growing sentiment inside and outside the central bank that the economy has turned a corner and is declining at a more moderate pace than in the fall.

Fed leaders predicted the economy would shrink this year and then expand at an annualized rate of between 2 and 3 percent in 2010, before gaining further momentum in 2011. However, Fed leaders anticipated labor market conditions will be weak for some time. They projected unemployment to rise to between 9.2 and 9.6 percent and stay in that range through the end of next year before leveling off at between 7.7 and 8.5 percent in 2011. As of April, the unemployment rate was 8.9 percent.

I trust that assessment, and if anything it's too optimistic. We're seeing other developed economies basically in depression right now, and liabilities that were an outgrowth of the market crash, like our record pension insurance deficit, will really start to affect pensioners and those who will have less money to spend for years to come. The market remains 40% below its peak.

Our biggest problem right now remains the foreclosure crisis. The economy cannot sustain continued foreclosures at this rate. It impacts construction, because new inventory need not be created. It impacts the lenders' bottom lines, which affects lending throughout the economy. And small business who cannot get credit cannot create jobs. Then there's the ripple effect of foreclosures to property values, which affects the bottom lines of local governments, resulting in decreased services, particularly for education, and fewer jobs. Rising foreclosures hit just about every aspect of the economy. And the bill the President signed this week won't do much to help.

After months of debate, the final version of the latest bill eliminated a key provision that would have allowed bankruptcy judges to modify mortgage terms. Faced with heavy pressure from the banking industry, Congress again tabled the highly contentious provision after several attempts to introduce it over the past year. That leaves the decision to refinance a mortgage up to lenders and investors holding securities backed by those loans.

Meanwhile, homeowners stuck with unaffordable payments, or who now owe more than their house is worth, must slog through the red tape of negotiating a new loan with their lender.

I've come to the point where this guy's activism is starting to look pretty good to me.

Bruce Marks doesn't bother being diplomatic. A campaigner on behalf of homeowners facing foreclosure, he was on the phone one day in March to a loan executive at Bank of America Corp.

"I'm tired of borrowers being screwed!" Mr. Marks yelled into the phone. "You're incompetent!" Before hanging up, he threatened to call bank CEO Kenneth Lewis at home to complain about the loan executive.

Mr. Marks's nonprofit organization, Neighborhood Assistance Corp. of America, has emerged as one of the loudest scourges of the banking industry in the post-bubble economy. It salts its Web site with photos of executives it accuses of standing in the way of helping homeowners -- emblazoning "Predator" across their photos, picturing their homes and sometimes including home phone numbers. In February, NACA, as it's called, protested at the home of a mortgage investor by scattering furniture on his lawn, to give him a taste of what it feels like to be evicted.

In the 1990s, Mr. Marks leaked details of a banker's divorce to the press and organized a protest at the school of another banker's child. He says he would use such tactics again. "We have to terrorize these bankers," Mr. Marks says.

Something needs to shake up the status quo. Because the results for the overwhelming majority of people, even those with seemingly no connection to homeownership or foreclosures, will be catastrophic.

Only 539,000?

The news that businesses laid off "only" 539,000 jobs in April is supposed to be positive, and yet the February and March numbers revised upwards, and most important, the jobless rate increased at basically the same rate as previous months, to 8.9%. Despite less jobs lost, nobody is creating jobs in any meaningful way to re-employ those people.

I know employment is a lagging indicator, but if this is the good news, I don't want to see the bad.

But the Obama Administration has clearly taken the message from the green shoots they're reading through the tea leaves: the banks can "earn their way" out of the crisis (Geithner even said that today. Wow), and then they can capitalize everything else. We know the stress tests lightened up on their adverse assessment to paint as pretty a picture as possible for the banks' economic outlook. "If this picture proves to be wrong, then it means that we will have unnecessarily delayed the clean-up of the financial system," as Dean Baker says.

Paul Krugman has more, noting that while the banks will "make it" through the recession, and lending through the government's other programs may fill in the gap for weak banks, lots could go wrong.

It’s not at all clear that credit from the Fed, Fannie and Freddie can fully substitute for a healthy banking system. If it can’t, the muddle-through strategy will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth.

Actually, a multiyear period of economic weakness looks likely in any case. The economy may no longer be plunging, but it’s very hard to see where a real recovery will come from. And if the economy does stay depressed for a long time, banks will be in much bigger trouble than the stress tests — which looked only two years ahead — are able to capture.

Finally, given the possibility of bigger losses in the future, the government’s evident unwillingness either to own banks or let them fail creates a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout.

But what worries me most about the way policy is going isn’t any of these things. It’s my sense that the prospects for fundamental financial reform are fading.

This is why I'm stressing the importance of the modern-day Pecora Commission. Revealing the true rot at the heart of Wall Street is key to forcing regulatory reform down the throats of the banksters.

The Danger of Wage Cuts

The Washington Post perfectly fails to summarize the problem in its headline, "Wage Growth Is Eroding As Firms Rush To Slim Down". Um, actually, most of the examples in the piece show extreme wage cuts, not an erosion of growth. As Hilzoy notes, the bottom 90% of wage earners saw their wages "grow" a mere 10% over the past 30 years, while those in the top 10% grew 232%. Wages are falling now for that same group of workers not at the very top, because the threat of job loss forces them to accept cuts. And the result for the broader economy is tragic.

Suppose that workers at the XYZ Corporation accept a pay cut. That lets XYZ management cut prices, making its products more competitive. Sales rise, and more workers can keep their jobs. So you might think that wage cuts raise employment — which they do at the level of the individual employer.

But if everyone takes a pay cut, nobody gains a competitive advantage. So there’s no benefit to the economy from lower wages. Meanwhile, the fall in wages can worsen the economy’s problems on other fronts.

In particular, falling wages, and hence falling incomes, worsen the problem of excessive debt: your monthly mortgage payments don’t go down with your paycheck. America came into this crisis with household debt as a percentage of income at its highest level since the 1930s. Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they’re chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.

Constant wage deflation led to economic stagnation in Japan in the 1990s. That's what it looks like we're saddled with. There's a difference between saving the economy and leading to a real recovery. Wage cuts lead to the former but not the latter.

Shrinkage Of The US Auto Industry

It looks now like GM and Chrysler will avoid bankruptcy, by consolidating operations, giving stakeholders a haircut and basically shrinking the size of the American auto industry. Chrysler's biggest lenders reached a deal with the Treasury Department to accept about 28 cents on the dollar for the company's debt. Add this to their deal with the UAW forcing them to accept losses, and an imminent deal with Fiat, and the automaker will presumably meet the requirements to borrow another $6 billion in federal assistance.

As for GM, they're essentially shrinking their output, cutting brands like Hummer, Pontiac, Saab and Saturn, and closing up to 1,000 dealerships (though that's on top of what could be another 1,600). That's likely to put 130,000 people out of work at least.

Emptywheel has this to say about the GM restructuring:

That said, today's plan finally gets around to cutting the number of dealers that GM will need to cut to turn itself around--they're talking of closing 2,600 of their 6,200 dealers across the country (did I say tons more job losses?).

On a conference call with GM CEO Ray Young, I asked how they were going to pull this off--was the government going to help them get out of their contracts? As a later questioner noted, the elimination of the Oldsmobile dealers was a very costly process. Young basically said that GM now could use the Oldsmobile process as a lesson in how not to do things.

That said, Young wasn't prepared to explain how GM plans to get out of 2,600 dealer contracts without billions in costs. The government is not going to help--so this is still an area where bankruptcy would offer an advantage to GM over this restructuring. Young said the impacted dealers would be approached over the month of May, and dealers would be wound down over 2009 and 2010. One of the reasons for the big factory idling, he explaned, was to help dealers sell down stock before they closed up shop (which means dealers may be able to pay off their debt before closing their business.

I'll again point out that it makes perfect sense to shrink the part of the American auto industry that makes AUTOMOBILES, but not to shrink the companies that could make other useful durable goods; namely, wind turbines, high speed rail cars, and other factory-produced items. Why can't GM and Chrysler get in on those contracts? Why would we build up new factories instead of retooling the ones we have?