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Krugman’s letter to Obama
Paul Krugman, Rolling Stone
What Obama Must Do
A Letter to the New President
Dear Mr. President:
Like FDR three-quarters of a century ago, you’re taking charge at a moment when all the old certainties have vanished, all the conventional wisdom been proved wrong. We’re not living in a world you or anyone else expected to see. Many presidents have to deal with crises, but very few have been forced to deal from Day One with a crisis on the scale America now faces.
So, what should you do?
… The Economic Crisis
How bad is the economic outlook? Worse than almost anyone imagined.
… If things continue on their current trajectory, Mr. President, we will soon be facing a great national catastrophe. And it’s your job — a job no other president has had to do since World War II — to head off that catastrophe.
Wait a second, you may say. Didn’t other presidents also face troubled economies? Yes, they did — but when it came to economic policy, your predecessors weren’t actually running the show. For the past half century the Federal Reserve — a more or less independent institution, run by technocrats and deliberately designed to be independent of whoever happens to occupy the White House — has been taking care of day-to-day, and even year-to-year, economic management. Your fellow presidents were just along for the ride.
… This time, however, the transmission mechanism is broken.
First of all, while the Fed can still print money, it can’t drive interest rates down. Why? Because those interest rates are already about as low as they can go. As I write this letter, the interest rate on Treasury bills is 0.005 percent — that is, zero. And you can’t push rates lower than that.
… Rescuing The Economy
The last president to face a similar mess was Franklin Delano Roosevelt, and you can learn a lot from his example. That doesn’t mean, however, that you should do everything FDR did. On the contrary, you have to take care to emulate his successes, but avoid repeating his mistakes.
About those successes: The way FDR dealt with his own era’s financial mess offers a very good model. Then, as now, the government had to deploy taxpayer money in order to rescue the financial system.
… There was, however, a big difference between FDR’s approach to taxpayer-subsidized financial rescue and that of the Bush administration: Namely, FDR wasn’t shy about demanding that the public’s money be used to serve the public good. By 1935 the U.S. government owned about a third of the banking system, and the Roosevelt administration used that ownership stake to insist that banks actually help the economy, pressuring them to lend out the money they were getting from Washington. Beyond that, the New Deal went out and lent a lot of money directly to businesses, to home buyers and to people who already owned homes, helping them restructure their mortgages so they could stay in their houses.
Can you do anything like that today? Yes, you can.
… Conservatives will accuse you of nationalizing the financial system, and some will call you a Marxist. (It happens to me all the time.) And the truth is that you will, in a way, be engaging in temporary nationalization. But that’s OK: In the long run we don’t want the government running financial institutions, but for now we need to do whatever it takes to get credit flowing again.
All of this will help — but not enough. By all means you should try to fix the problems of banks and other financial institutions. But to pull the economy out of its slide, you need to go beyond funneling money to banks and other financial institutions. You need to give the real economy of work and wages a boost. In other words, you have to get job creation right — which FDR never did.
This may sound like a strange thing to say. After all, what we remember from the 1930s is the Works Progress Administration, which at its peak employed millions of Americans building roads, schools and dams. But the New Deal’s job-creation programs, while they certainly helped, were neither big enough nor sustained enough to end the Great Depression. When the economy is deeply depressed, you have to put normal concerns about budget deficits aside; FDR never managed to do that. As a result, he was too cautious: The boost he gave the economy between 1933 and 1936 was enough to get unemployment down, but not back to pre-Depression levels. And in 1937 he let the deficit worriers get to him: Even though the economy was still weak, he let himself be talked into slashing spending while raising taxes. This led to a severe recession that undid much of the progress the economy had made to that point. It took the giant public works project known as World War II – a project that finally silenced the penny pinchers – to bring the Depression to an end.
… The lesson from FDR’s limited success on the employment front, then, is that you have to be really bold in your job-creation plans. Basically, businesses and consumers are cutting way back on spending, leaving the economy with a huge shortfall in demand, which will lead to a huge fall in employment — unless you stop it. To stop it, however, you have to spend enough to fill the hole left by the private sector’s retrenchment.
How much spending are we talking about? You might want to be seated before you read this. OK, here goes: “Full employment” means a jobless rate of five percent at most, and probably less. Meanwhile, we’re currently on a trajectory that will push the unemployment rate to nine percent or more. Even the most optimistic estimates suggest that it takes at least $200 billion a year in government spending to cut the unemployment rate by one percentage point. Do the math: You probably have to spend $800 billion a year to achieve a full economic recovery. Anything less than $500 billion a year will be much too little to produce an economic turnaround.
Spending on that scale, at a time when the weakening economy is driving down tax collection, will produce some really scary deficit numbers. But the consequences of too much caution — of a failure on your part to do enough to stop the economy’s nose dive — will be even scarier than the coming ocean of red ink.
In fact, the biggest problem you’re going to face as you try to rescue the economy will be finding enough job-creation projects that can be started quickly. Traditional WPA-type programs — spending on roads, government buildings, ports and other infrastructure — are a very effective tool for creating employment. But America probably has less than $150 billion worth of such projects that are “shovel-ready” right now, projects that can be started in six months or less. So you’ll have to be creative: You’ll have to find lots of other ways to push funds into the economy.
As much as possible, you should spend on things of lasting value, things that, like roads and bridges, will make us a richer nation. Upgrade the infrastructure behind the Internet; upgrade the electrical grid; improve information technology in the health care sector, a crucial part of any health care reform.
… Even if you do all this, however, it won’t be enough to offset the awesome slump in private spending. So yes, it also makes sense to cut taxes on a temporary basis. The tax cuts should go primarily to lower- and middle-income Americans — again, both because that’s the fair thing to do, and because they’re more likely to spend their windfall than the affluent. The tax break for working families you outlined in your campaign plan looks like a reasonable vehicle.
But let’s be clear: Tax cuts are not the tool of choice for fighting an economic slump. For one thing, they deliver less bang for the buck than infrastructure spending, because there’s no guarantee that consumers will spend their tax cuts or rebates.
… Now my honest opinion is that even with all this, you won’t be able to prevent 2009 from being a very bad year. If you manage to keep the unemployment rate from going above eight percent, I’ll consider that a major success. But by 2010 you should be able to have the economy on the road to recovery. What should you do to prepare for that recovery?
… First, let’s put the costs of the economic-recovery program in perspective. It’s possible that reviving the economy might cost as much as a trillion dollars over the course of your first term. But the Bush administration wasted at least twice that much on an unnecessary war and tax cuts for the wealthiest; the recovery plan will be intense but temporary, and won’t place all that much burden on future budgets.
… Second, there’s good reason to believe that health care reform will save money in the long run. Our system isn’t just full of holes in coverage, it’s also grossly inefficient, with huge bureaucratic costs
… But the New Deal achieved something else: It made America a middle-class society. Under FDR, America went through what labor historians call the Great Compression, a dramatic rise in wages for ordinary workers that greatly reduced income inequality. Before the Great Compression, America was a society of rich and poor; afterward it was a society in which most people, rightly, considered themselves middle class. It may be hard to match that achievement today, but you can, at least, move the country in the right direction.
What caused the Great Compression? That’s a complicated story, but one important factor was the rise of organized labor …
(14 January 2009)
The Keynsian strategy. I haven’t heard anything as compelling from the those to the left or to the right of Krugman. We are in new territory, and I think even Krugman underestimates how great a change we are in for.
Wind, ethanol cloud our difficult energy choices
Rolf E. Westgard, Duluth News Tribune
The assumption that wind and ethanol will make a major contribution to our energy supply is a delusion, distracting us from hard choices involving aggressive conservation and lifestyle changes.
The U.S. Energy Information Administration is forecasting that U.S. wind turbines will supply 101 billion kilowatt hours of electricity in the year 2020. That would be just 2.14 percent of the total projected U.S. electric power supply. Undeterred by this 2 percent forecast for wind, our Minnesota Legislature passed SF0004, the Renewable Energy Standard Bill. It requires our state’s largest utility, Excel, to get 25 percent of its energy from wind turbines by 2020, 10 times the Energy Information Administration’s average for the U.S.
There’s reason for caution. Unlike conventional fuel sources — coal, natural gas and nuclear — wind turns itself on and off, whether the electric grid needs it or not. It’s intermittent.
… Hundreds of giant corn-to-ethanol stills now dot our Midwestern landscape. They use four-tenths of a corn bushel to produce a gallon of ethanol, which currently sells for $1.65. The raw corn alone for this ethanol gallon costs $1.65. This is a major reason why VeraSun, our largest ethanol producer, recently declared bankruptcy.
Meanwhile, the wholesale price of a gallon of gasoline, which provides 30 percent more energy than ethanol, is currently about $1.10.For ethanol to achieve 20 percent of energy supply, a dream of state lawmakers, America’s entire 10 billion bushel corn crop would be needed. Cellulosic ethanol from leaves, stalks and grasses is still a research project, and it is inherently more expensive than the corn product.
A frequently ignored issue is the time required to bring a major new fuel to the world’s energy supply.
… We do have a looming energy crisis. Coal is a big environmental problem, and oil supplies may well peak in the near future. We need to improve energy efficiency with upgraded buildings, high-mileage vehicles, and electric public transportation. The way we produce and transport food may have to be recast to avoid so much of it having to travel great distances. Funding and encouraging these hard projects will probably require energy taxes, especially on gasoline.
Recent well-intentioned statements by Al Gore and others that we can repower our electricity generation in a decade with alternatives cause us to defer hard choices. It’s the kind of delusion we cannot afford to harbor.
Rolf E. Westgard of St. Paul is a professional member of the Geological Society of America.
(17 January 2009)
UPDATE (Jan 19)
Changed the phrase ‘Minnesota’s 10 billion bushel’ to read ‘America’s 10 billion bushel’ corn crop.
Reelin’ in the Green
Agence France-Presse, via Gristmill
Environmental movies with a message are taking center stage at the 25th Sundance Film Festival, with films ranging from vanishing bees and threatened dolphins being screened here.
“We are ravaging the earth. We need to think how we treat our resources but more importantly how we treat the people,” said director Joe Berlinger in an interview with AFP.
Berlinger’s latest documentary “Crude” in the US Documentary Competition is the riveting story of five Ecuadoran tribes as they seek justice from oil giant Chevron.
“We as a society fill our gas tanks but don’t think where these products come from. It’s our moral responsibility to know. I hope that’s what people get out of this film,” Berlinger said…
(16 January 2009)