For lower-income working Americans , lack of health insurance is quickly becoming the new normal
That 's the implication of survey results just released by the Commonwealth Fund , a nonpartisan organization that studies health care
The survey found that 41 percent of nonelderly American adults with incomes between $ 20,000 and $ 40,000 a year were without health insurance for all or part of 2005
That 's up from 28 percent as recently as 2001
Many of the uninsured reported spending their entire savings on health care and\/or that they were having difficulty paying for basic necessities
And most uninsured adults reported cutting corners on medical care to save money -- failing to fill prescriptions , skipping medications , going without preventive care
Here 's the other side of the same coin : health insurers ' business is lagging , reports The Wall Street Journal , as '' rising premiums and medical costs push more of their traditional-employer customers to shun or curtail company health benefits .
And some investors are feeling the pain
Aetna 's stock price fell sharply last week , on news that its '' medical cost ratio '' -- a term I 'll explain in a minute -- rose from 77.9 to 79.4
Taken together , these stories tell the tale of a health care system that 's driving a growing number of Americans into financial ruin , and in many cases kills them through lack of basic care
-LRB- The Institute of Medicine , part of the National Academy of Sciences , estimates that lack of health insurance leads to 18,000 unnecessary American deaths -- the equivalent of six 9\/11 's -- each year .
Yet this system actually costs more to run than we would spend if we guaranteed health insurance to everyone
How do we know this
The medical cost ratio is the percentage of insurance premiums paid out to doctors , hospitals and other health care providers
Investors are upset about Aetna 's rising ratio , because it leaves less room for profit
But even after the rise in the cost ratio , Aetna spends less than 80 cents of each dollar in health insurance premiums on actually providing medical care
The other 20 cents go into profits , marketing and administrative expenses
Other private insurers have similar ratios
And here 's the thing : most of those 20 cents spent on things other than medical care are unnecessary
Older Americans are covered by Medicare , which does n't spend large sums on marketing and does n't devote a lot of resources to screening out people likely to have high medical bills
As a result , Medicare manages to spend about 98 percent of its funds on actual medical care
What would happen if Medicare was expanded to cover everyone
You might think that the nation would spend more on health care , since this would mean covering 46 million Americans who are currently uninsured
But the uninsured already receive some medical care at public expense -- for example , treatment in emergency rooms that would have been both cheaper and more effective if provided in doctors ' offices
And Medicare manages to spend much more of its funds on medicine , as opposed to other things , than private insurers
If you do the math , it becomes clear that covering everyone under Medicare would actually be significantly cheaper than our current system
And this calculation does n't even take into account the costs our fragmented system imposes on doctors and hospitals
Benjamin Brewer , a doctor who writes an online column for The Wall Street Journal , recently commented on the excess expenses he incurs trying to deal with 301 different private insurance plans
According to Dr. Brewer , he currently employs two full-time staff members for billing , and his two secretaries spend half their time collecting insurance information .
I suspect , '' he wrote , '' I could go from four people in the paper chase to one with a single-payer system .
Many pundits see red at the words '' single-payer system .
They think it means low-quality socialized medicine ; they start telling horror stories -- almost all of them false -- about the problems of other countries ' health care
Yet there 's nothing foreign or exotic about the concept : Medicare is a single-payer system
It 's not perfect , it could certainly be improved , but it works
So here we are
Our current health care system is unraveling
Older Americans are already covered by a national health insurance system ; extending that system to cover everyone would save money , reduce financial anxiety and save thousands of American lives every year
Why do n't we just do it
In October 2003 , the nonpartisan Program on International Policy Attitudes published a study titled '' Misperceptions , the media and the Iraq war .
It found that 60 percent of Americans believed at least one of the following : clear evidence had been found of links between Iraq and Al Qaeda ; W.M.D. had been found in Iraq ; world public opinion favored the U.S. going to war with Iraq
The prevalence of these misperceptions , however , depended crucially on where people got their news
Only 23 percent of those who got their information mainly from PBS or NPR believed any of these untrue things , but the number was 80 percent among those relying primarily on Fox News
In particular , two-thirds of Fox devotees believed that the U.S. had '' found clear evidence in Iraq that Saddam Hussein was working closely with the Al Qaeda terrorist organization .
So , does anyone think it 's O.K. if Rupert Murdoch 's News Corporation , which owns Fox News , buys The Wall Street Journal
The problem with Mr. Murdoch is n't that he 's a right-wing ideologue
If that were all he was , he 'd be much less dangerous
What he is , rather , is an opportunist who exploits a rule-free media environment -- one created , in part , by conservative political power -- by slanting news coverage to favor whoever he thinks will serve his business interests
In the United States , that strategy has mainly meant blatant bias in favor of the Bush administration and the Republican Party -- but last year Mr. Murdoch covered his bases by hosting a fund-raiser for Hillary Clinton 's Senate re-election campaign
In Britain , Mr. Murdoch endorsed Tony Blair in 1997 and gave his government favorable coverage , '' ensuring , '' reports The New York Times , '' that the new government would allow him to keep intact his British holdings .
And in China , Mr. Murdoch 's organizations have taken care not to offend the dictatorship
Now , Mr. Murdoch 's people rarely make flatly false claims
Instead , they usually convey misinformation through innuendo
During the early months of the Iraq occupation , for example , Fox gave breathless coverage to each report of possible W.M.D. 's , with little or no coverage of the subsequent discovery that it was a false alarm
No wonder , then , that many Fox viewers got the impression that W.M.D. 's had been found
When all else fails , Mr. Murdoch 's news organizations simply stop covering inconvenient subjects
Last year , Fox relentlessly pushed claims that the '' liberal media '' were failing to report the '' good news '' from Iraq
Once that line became untenable -- well , the Project for Excellence in Journalism found that in the first quarter of 2007 daytime programs on Fox News devoted only 6 percent of their time to the Iraq war , compared with 18 percent at MSNBC and 20 percent at CNN
What took Iraq 's place
Anna Nicole Smith , who received 17 percent of Fox 's daytime coverage
Defenders of Mr. Murdoch 's bid for The Journal say that we should judge him not by Fox News but by his stewardship of the venerable Times of London , which he acquired in 1981
Indeed , the political bias of The Times is much less blatant than that of Fox News
But a number of former Times employees have said that there was pressure to slant coverage -- and everyone I 've seen quoted defending Mr. Murdoch 's management is still on his payroll
In any case , do we want to see one of America 's two serious national newspapers in the hands of a man who has done so much to mislead so many
#NAME?
The McClatchy papers , though their Washington bureau 's reporting in the run-up to Iraq put more prestigious news organizations to shame , still do n't have The Journal 's ability to drive national discussion .
There does n't seem to be any legal obstacle to the News Corporation 's bid for The Journal : F.C.C. rules on media ownership are mainly designed to prevent monopoly in local markets , not to safeguard precious national informational assets
Still , public pressure could help avert a Murdoch takeover
Maybe Congress should hold hearings
If Mr. Murdoch does acquire The Journal , it will be a dark day for America 's news media -- and American democracy
If there were any justice in the world , Mr. Murdoch , who did more than anyone in the news business to mislead this country into an unjustified , disastrous war , would be a discredited outcast
Instead , he 's expanding his empire
And now we 've reached the next stage of our seemingly never-ending financial crisis
This time Fannie Mae and Freddie Mac are in the headlines , with dire warnings of imminent collapse
How worried should we be
Well , I 'm going to take a contrarian position : the storm over these particular lenders is overblown
Fannie and Freddie probably will need a government rescue
But since it 's already clear that that rescue will take place , their problems wo n't take down the economy
Furthermore , while Fannie and Freddie are problematic institutions , they are n't responsible for the mess we 're in
Here 's the background : Fannie Mae -- the Federal National Mortgage Association -- was created in the 1930s to facilitate homeownership by buying mortgages from banks , freeing up cash that could be used to make new loans
Fannie and Freddie Mac , which does pretty much the same thing , now finance most of the home loans being made in America
The case against Fannie and Freddie begins with their peculiar status : although they 're private companies with stockholders and profits , they 're '' government-sponsored enterprises '' established by federal law , which means that they receive special privileges
The most important of these privileges is implicit : it 's the belief of investors that if Fannie and Freddie are threatened with failure , the federal government will come to their rescue
This implicit guarantee means that profits are privatized but losses are socialized
If Fannie and Freddie do well , their stockholders reap the benefits , but if things go badly , Washington picks up the tab
Heads they win , tails we lose
Such one-way bets can encourage the taking of bad risks , because the downside is someone else 's problem
The classic example of how this can happen is the savings-and-loan crisis of the 1980s : S. & L. owners offered high interest rates to attract lots of federally insured deposits , then essentially gambled with the money
When many of their bets went bad , the feds ended up holding the bag
The eventual cleanup cost taxpayers more than $ 100 billion
But here 's the thing : Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago , an explosion that dwarfed the S. & L. fiasco
In fact , Fannie and Freddie , after growing rapidly in the 1990s , largely faded from the scene during the height of the housing bubble
Partly that 's because regulators , responding to accounting scandals at the companies , placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off
Also , they did n't do any subprime lending , because they ca n't : the definition of a subprime loan is precisely a loan that does n't meet the requirement , imposed by law , that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income
So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take
You could say that the Fannie-Freddie experience shows that regulation works
In that case , however , how did they end up in trouble
Part of the answer is the sheer scale of the housing bubble , and the size of the price declines taking place now that the bubble has burst
In Los Angeles , Miami and other places , anyone who borrowed to buy a house at the peak of the market probably has negative equity at this point , even if he or she originally put 20 percent down
The result is a rising rate of delinquency even on loans that meet Fannie-Freddie guidelines
Also , Fannie and Freddie , while tightly regulated in terms of their lending , have n't been required to put up enough capital -- that is , money raised by selling stock rather than borrowing
This means that even a small decline in the value of their assets can leave them underwater , owing more than they own
And yes , there is a real political scandal here : there have been repeated warnings that Fannie 's and Freddie 's thin capitalization posed risks to taxpayers , but the companies ' management bought off the political process , systematically hiring influential figures from both parties
While they were ugly , however , Fannie 's and Freddie 's political machinations did n't play a significant role in causing our current problems
Still , is n't it shocking that taxpayers may end up having to rescue these institutions
Not really
We 're going through a major financial crisis -- and such crises almost always end with some kind of taxpayer bailout for the banking system
And let 's be clear : Fannie and Freddie ca n't be allowed to fail
With the collapse of subprime lending , they 're now more central than ever to the housing market , and the economy as a whole
Iraqi insurgents , hurricanes and low-income Medicare recipients have three things in common
Each has been at the center of a policy disaster
In each case experts warned about the impending disaster
And in each case -- well , let 's look at what happened
Knight Ridder 's Washington bureau reports that from 2003 on , intelligence agencies '' repeatedly warned the White House '' that '' the insurgency in Iraq had deep local roots , was likely to worsen and could lead to civil war .
But senior administration officials insisted that the insurgents were a mix of dead-enders and foreign terrorists
Intelligence analysts who refused to go along with that line were attacked for not being team players
According to U.S. News & World Report , President Bush 's reaction to a pessimistic report from the C.I.A. 's Baghdad station chief was to remark , '' What is he , some kind of defeatist ?
Many people have now seen the video of the briefing Mr. Bush received before Hurricane Katrina struck
Much has been made of the revelation that Mr. Bush was dishonest when he claimed , a few days later , that nobody anticipated the breach of the levees
But what 's really striking , given the gravity of the warnings , is the lack of urgency Mr. Bush and his administration displayed in responding to the storm
A horrified nation watched the scenes of misery at the Superdome and wondered why help had n't arrived
But as Newsweek reports , for several days nobody was willing to tell Mr. Bush , who '' equates disagreement with disloyalty , '' how badly things were going .
For most of those first few days , '' Newsweek says , '' Bush was hearing what a good job the Feds were doing .
Now for one you may not have heard about
The new Medicare drug program got off to a disastrous start : '' Low-income Medicare beneficiaries around the country were often overcharged , and some were turned away from pharmacies without getting their medications , in the first week of Medicare 's new drug benefit , '' The New York Times reported
How did this happen
The same way the other disasters happened : experts who warned of trouble ahead were told to shut up
We can get a sense of what went on by looking at a 2005 report by the nonpartisan Government Accountability Office on potential problems with the drug program
Included with the report is a letter from Mark McClellan , the Medicare administrator
Rather than taking the concerns of the G.A.O. seriously , he tried to bully it into changing its conclusions
He demanded that the report say that the administration had '' established effective contingency plans '' -- which it had n't -- and that it drop the assertion that some people would encounter difficulties obtaining necessary drugs , which is exactly what happened
Experts within the Centers for Medicare and Medicaid Services must have faced similar bullying
And unlike experts at the independent G.A.O. , they were not in a position to stand up for what they knew to be true
In short , our country is being run by people who assume that things will turn out the way they want
And if someone warns of problems , they shoot the messenger
Some commentators speak of the series of disasters now afflicting the Bush administration -- there seems to be a new one every week -- as if it were just a string of bad luck
But it is n't
If good luck is what happens when preparation meets opportunity , bad luck is what happens when lack of preparation meets a challenge
And our leaders , who think they can govern through a mix of wishful thinking and intimidation , are never , ever prepared
Thirty-plus years ago , when I was a graduate student in economics , only the least ambitious of my classmates sought careers in the financial world
Even then , investment banks paid more than teaching or public service but not that much more , and anyway , everyone knew that banking was , well , boring
In the years that followed , of course , banking became anything but boring
Wheeling and dealing flourished , and pay scales in finance shot up , drawing in many of the nation 's best and brightest young people -LRB- O.K. , I 'm not so sure about the `` best '' part -RRB-
And we were assured that our supersized financial sector was the key to prosperity
Instead , however , finance turned into the monster that ate the world economy
Recently , the economists Thomas Philippon and Ariell Reshef circulated a paper that could have been titled `` The Rise and Fall of Boring Banking '' -LRB- it 's actually titled `` Wages and Human Capital in the U.S. Financial Industry , 1909-2006 '' -RRB-
They show that banking in America has gone through three eras over the past century
Before 1930 , banking was an exciting industry featuring a number of larger-than-life figures , who built giant financial empires -LRB- some of which later turned out to have been based on fraud -RRB-
This highflying finance sector presided over a rapid increase in debt : Household debt as a percentage of G.D.P. almost doubled between World War I and 1929
During this first era of high finance , bankers were , on average , paid much more than their counterparts in other industries
But finance lost its glamour when the banking system collapsed during the Great Depression
The banking industry that emerged from that collapse was tightly regulated , far less colorful than it had been before the Depression , and far less lucrative for those who ran it
Banking became boring , partly because bankers were so conservative about lending : Household debt , which had fallen sharply as a percentage of G.D.P. during the Depression and World War II , stayed far below pre-1930s levels
Strange to say , this era of boring banking was also an era of spectacular economic progress for most Americans
After 1980 , however , as the political winds shifted , many of the regulations on banks were lifted and banking became exciting again
Debt began rising rapidly , eventually reaching just about the same level relative to G.D.P. as in 1929
And the financial industry exploded in size
By the middle of this decade , it accounted for a third of corporate profits
As these changes took place , finance again became a high-paying career spectacularly high-paying for those who built new financial empires
Indeed , soaring incomes in finance played a large role in creating America 's second Gilded Age
Needless to say , the new superstars believed that they had earned their wealth
`` I think that the results our company had , which is where the great majority of my wealth came from , justified what I got , '' said Sanford Weill in 2007 , a year after he had retired from Citigroup
And many economists agreed
Only a few people warned that this supercharged financial system might come to a bad end
Perhaps the most notable Cassandra was Raghuram Rajan of the University of Chicago , a former chief economist at the International Monetary Fund , who argued at a 2005 conference that the rapid growth of finance had increased the risk of a `` catastrophic meltdown .
But other participants in the conference , including Lawrence Summers , now the head of the National Economic Council , ridiculed Mr. Rajan 's concerns
And the meltdown came
Much of the seeming success of the financial industry has now been revealed as an illusion
-LRB- Citigroup stock has lost more than 90 percent of its value since Mr. Weill congratulated himself .
Worse yet , the collapse of the financial house of cards has wreaked havoc with the rest of the economy , with world trade and industrial output actually falling faster than they did in the Great Depression
And the catastrophe has led to calls for much more regulation of the financial industry
But my sense is that policy makers are still thinking mainly about rearranging the boxes on the bank supervisory organization chart
They 're not at all ready to do what needs to be done which is to make banking boring again
Part of the problem is that boring banking would mean poorer bankers , and the financial industry still has a lot of friends in high places
But it 's also a matter of ideology : Despite everything that has happened , most people in positions of power still associate fancy finance with economic progress
Can they be persuaded otherwise
Will we find the will to pursue serious financial reform
If not , the current crisis wo n't be a one-time event ; it will be the shape of things to come
Unfortunately , she had previously sought care at the same clinic while uninsured and had a large unpaid balance
The clinic would n't see her again unless she paid $ 100 per visit which she did n't have
Eventually , she sought care at a hospital 30 miles away
By then , however , it was too late
Both she and the baby died
You may think that this was an extreme case , but stories like this are common in America
Back in 2006 , The Wall Street Journal told another such story : that of a young woman named Monique White , who failed to get regular care for lupus because she lacked insurance
Then , one night , `` as skin lesions spread over her body and her stomach swelled , she could n't sleep .
The Journal 's report goes on : `` Mama , please help me
Please take me to the E.R. , '' she howled , according to her mother , Gail Deal
`` O.K. , let 's go , '' Mrs. Deal recalls saying
`` No , I ca n't , '' the daughter replied
`` I do n't have insurance .
She was rushed to the hospital the next day after suffering a seizure and the hospital spared no expense on her treatment
But it all came too late ; she was dead a few months later
How can such things happen
`` I mean , people have access to health care in America , '' President Bush once declared
`` After all , you just go to an emergency room .
Not quite
First of all , visits to the emergency room are no substitute for regular care , which can identify and treat health problems before they get acute
And more than 40 percent of uninsured adults have no regular source of care
Second , uninsured Americans often postpone medical care , even when they know they need it , because of expense
Finally , while it 's true that hospitals will treat anyone who arrives in an emergency room with an acute problem and it 's wonderful that they will it 's also true that hospitals bill patients for emergency-room treatment
And fear of those bills often causes uninsured Americans to hesitate before seeking medical help , even in emergencies , as the Monique White story illustrates
The end result is that the uninsured receive a lot less care than the insured
And sometimes this lack of care kills them
According to a recent estimate by the Urban Institute , the lack of health insurance leads to 27,000 preventable deaths in America each year
But are they really preventable
Stories like those of Trina Bachtel and Monique White are common in America , but do n't happen in any other rich country because every other advanced nation has some form of universal health insurance
We should , too
All of which makes the media circus of a few days ago truly shameful
Some readers may already have recognized the story of Trina Bachtel
While campaigning in Ohio , Hillary Clinton was told this story , and she took to repeating it , without naming the victim , on the campaign trail
She used it as an illustration of what 's wrong with American health care and why we need universal coverage
Then The Washington Post identified Ms. Bachtel , the hospital where she died claimed that the story was false and the news media went to town , accusing Mrs. Clinton of making stuff up
Instead of being a story about health care , it became a story about the candidate 's supposed problems with the truth
In fact , Mrs. Clinton was accurately repeating the story as it was told to her and it turns out that while some of the details were slightly off , the essentials of her story were correct
After all the fuss , The Washington Post eventually conceded that `` Bachtel 's medical tragedy began with circumstances very close to the essence '' of Mrs. Clinton 's account
And even more important , Mrs. Clinton was making a valid point about the state of health care in this country
In other words , this was a disgraceful episode
It was particularly sad to see a number of Obama supporters -LRB- though not the Obama campaign itself -RRB- join enthusiastically in the catcalls against Mrs. Clinton 's good-faith effort to put a human face on the cruelty and injustice of the American health care system
Look , I know that many progressives have their hearts set on seeing Barack Obama get the Democratic nomination
But politics is supposed to be about more than cheering your team and jeering the other side
It 's supposed to be about changing the country for the better
And if being a progressive means anything , it means believing that we need universal health care , so that terrible stories like those of Monique White , Trina Bachtel and the thousands of other Americans who die each year from lack of insurance become a thing of the past
Correction : April 15 , 2008 In his column on Friday , Paul Krugman discussed an anecdote told by Hillary Clinton about a woman in Ohio who supposedly lost her newborn child , and then her life , because of bills run up when she did not have health insurance
Mr. Krugman relied on early news accounts of the incident , but later accounts , including one from The Columbus Dispatch , show that those bills did not lead to loss of care
Mr. Krugman has posted a detailed explanation on his blog at krugman.blogs.nytimes.com
As we look for ways to prevent future financial crises , many questions should be asked
Here 's one you may not have heard : What 's the matter with Georgia
I 'm not sure how many people know that Georgia leads the nation in bank failures , accounting for 37 of the 206 banks seized by the Federal Deposit Insurance Corporation since the beginning of 2008
These bank failures are a symptom of deeper problems : arguably , no other state has suffered as badly from banks gone wild
To appreciate Georgia 's specialness , you need to realize that the housing bubble was a geographically uneven affair
Basically , prices rose sharply only where zoning restrictions and other factors limited the construction of new houses
In the rest of the country what I once dubbed Flatland permissive zoning and abundant land make it easy to increase the housing supply , a situation that prevented big price increases and therefore prevented a serious bubble
Most of the post-bubble hangover is concentrated in states where home prices soared , then fell back to earth , leaving many homeowners with negative equity houses worth less than their mortgages
It 's no accident that Florida , Nevada and Arizona lead the nation in both negative equity and mortgage delinquencies ; prices more than doubled in Miami , Las Vegas and Phoenix , and have subsequently suffered some of the biggest declines
But not all of Flatland has gotten off lightly
In particular , there 's a sharp contrast between the two biggest Flatland states , Texas which avoided the worst and Georgia , which did n't
This contrast ca n't be explained by the geography of the two states ' major cities
Like Dallas or Houston , Atlanta is a sprawling metropolis facing few limits on expansion
And like other Flatland cities , Atlanta never saw much of a housing price surge
Yet Texas has managed to avoid severe stress to either its housing market or its banking system , while Georgia is suffering severe post-bubble trauma
The share of mortgages with delinquent payments is higher in Georgia than in California ; the percentage of Georgia homeowners with negative equity is well above the national average
And Georgia leads the nation in bank failures
So what 's the matter with Georgia
As I said , banks went wild , in a scene strongly reminiscent of the savings-and-loan excesses of the 1980s
High-flying bank executives aggressively expanded lending and paid themselves lavishly while relying heavily on `` hot money '' raised from outside investors rather than on their own depositors
It was fun while it lasted
Then the music stopped
Why did n't the same thing happen in Texas
The most likely answer , surprisingly , is that Texas had strong consumer-protection regulation
In particular , Texas law made it difficult for homeowners to treat their homes as piggybanks , extracting cash by increasing the size of their mortgages
Georgia lacked any similar protections -LRB- and the Bush administration blocked the state 's efforts to restrict subprime lending directly -RRB-
And Georgia suffered from the difference
What 's striking about the contrast between the Texas story and Georgia 's debacle is that it does n't seem to have anything to do with the issues that have dominated debates about banking reform
For example , many observers have blamed complex financial derivatives for the crisis
But Georgia banks blew themselves up with old-fashioned loans gone bad
And for all the concern about banks that are too big to fail , Georgia suffered , if anything , from a proliferation of small banks
Actually , the worst offenders in the lending spree tended to be relatively small start-ups that attracted customers by playing to a specific community
Thus Georgian Bank , founded in 2001 , catered to the state 's elite , some of whom were entertained on the C.E.O. 's yacht and private jet
Meanwhile , Integrity Bank , founded in 2000 , played up its `` faith based '' business model it was featured in a 2005 Time magazine article titled `` Praying for Profits .
Both banks have now gone bust
So what 's the moral of this story
As I see it , it 's a caution against silver-bullet views of reform , the idea that cracking down on just one thing in particular , breaking up big banks will solve our problems
The case of Georgia shows that bad behavior by many small banks can do as much damage as misbehavior by a few financial giants
And the contrast between Texas and Georgia suggests that consumer protection is an essential element of reform
By all means , let 's limit the power of the big banks
But if we do n't also protect consumers from predatory lending , there are plenty of smaller players both small banks and the nonbank `` mortgage originators '' responsible for many of the worst subprime abuses that will step in and fill the gap
This is a column about Republicans and I 'm not sure I should even be writing it
Today 's G.O.P. is , after all , very much a minority party
It retains some limited ability to obstruct the Democrats , but has no ability to make or even significantly shape policy
Beyond that , Republicans have become embarrassing to watch
And it does n't feel right to make fun of crazy people
Better , perhaps , to focus on the real policy debates , which are all among Democrats
But here 's the thing : the G.O.P. looked as crazy 10 or 15 years ago as it does now
That did n't stop Republicans from taking control of both Congress and the White House
And they could return to power if the Democrats stumble
So it behooves us to look closely at the state of what is , after all , one of our nation 's two great political parties
One way to get a good sense of the current state of the G.O.P. , and also to see how little has really changed , is to look at the `` tea parties '' that have been held in a number of places already , and will be held across the country on Wednesday
These parties antitaxation demonstrations that are supposed to evoke the memory of the Boston Tea Party and the American Revolution have been the subject of considerable mockery , and rightly so
But everything that critics mock about these parties has long been standard practice within the Republican Party
Thus , President Obama is being called a `` socialist '' who seeks to destroy capitalism
Because he wants to raise the tax rate on the highest-income Americans back to , um , about 10 percentage points less than it was for most of the Reagan administration
But the charge of socialism is being thrown around only because `` liberal '' does n't seem to carry the punch it used to
And if you go back just a few years , you find top Republican figures making equally bizarre claims about what liberals were up to
Remember when Karl Rove declared that liberals wanted to offer `` therapy and understanding '' to the 9\/11 terrorists
Then there are the claims made at some recent tea-party events that Mr. Obama was n't born in America , which follow on earlier claims that he is a secret Muslim
Crazy stuff but nowhere near as crazy as the claims , during the last Democratic administration , that the Clintons were murderers , claims that were supported by a campaign of innuendo on the part of big-league conservative media outlets and figures , especially Rush Limbaugh
Speaking of Mr. Limbaugh : the most impressive thing about his role right now is the fealty he is able to demand from the rest of the right
The abject apologies he has extracted from Republican politicians who briefly dared to criticize him have been right out of Stalinist show trials
But while it 's new to have a talk-radio host in that role , ferocious party discipline has been the norm since the 1990s , when Tom DeLay , the House majority leader , became known as `` The Hammer '' in part because of the way he took political retribution on opponents
Going back to those tea parties , Mr. DeLay , a fierce opponent of the theory of evolution he famously suggested that the teaching of evolution led to the Columbine school massacre also foreshadowed the denunciations of evolution that have emerged at some of the parties
Last but not least : it turns out that the tea parties do n't represent a spontaneous outpouring of public sentiment
They 're AstroTurf -LRB- fake grass roots -RRB- events , manufactured by the usual suspects
In particular , a key role is being played by FreedomWorks , an organization run by Richard Armey , the former House majority leader , and supported by the usual group of right-wing billionaires
And the parties are , of course , being promoted heavily by Fox News
But that 's nothing new , and AstroTurf has worked well for Republicans in the past
The most notable example was the `` spontaneous '' riot back in 2000 actually orchestrated by G.O.P. strategists that shut down the presidential vote recount in Florida 's Miami-Dade County
So what 's the implication of the fact that Republicans are refusing to grow up , the fact that they are still behaving the same way they did when history seemed to be on their side
I 'd say that it 's good for Democrats , at least in the short run but it 's bad for the country
For now , the Obama administration gains a substantial advantage from the fact that it has no credible opposition , especially on economic policy , where the Republicans seem particularly clueless
But as I said , the G.O.P. remains one of America 's great parties , and events could still put that party back in power
We can only hope that Republicans have moved on by the time that happens
The Survey Research Center of the University of Michigan has been tracking American economic perceptions since the 1950s
On Friday the center released its latest estimate of the consumer sentiment index and it was a stunner
Americans are more pessimistic about their situation than they have been for more than a quarter century
Meanwhile , a recent Pew report found that the percentage of Americans saying that they 're better off than they were five years ago is at its lowest level in 44 years of polling
What 's striking about this bleak mood is that by the usual measures the economy is n't doing that badly at least not yet
In particular , the official unemployment rate of 5.1 percent , though rising , is still fairly low by historical standards
Yet economic attitudes are worse now than they were in 1992 , when the average unemployment rate was 7.5 percent
Why are we feeling so down
Our bleakness partly reflects the fact that most Americans are doing considerably worse than the usual economic measures let on
The official unemployment rate may be relatively low but the percentage of prime-working-age Americans without jobs , which is n't the same thing , is historically high
Gross domestic product is up , but the inflation-adjusted income of the median family is probably lower than it was in 2000
Beyond that , perceptions of the current economy are strongly influenced by the public 's sense of the larger pattern
When Ronald Reagan famously asked , `` Are you better off than you were four years ago
, '' the correct answer was `` Yes .
Median household income , adjusted for inflation , was higher in 1980 than it had been in 1976
But gas lines and double-digit inflation made people feel that things were falling apart
Conversely , unemployment was still historically high when Reagan proclaimed `` Morning in America .
But people were ready to hear an upbeat message , because the economic storm seemed to have passed
More recently , economic confidence held up relatively well during the 2001 recession , maybe because people were willing to see it as no more than a temporary interruption of the great 1990s boom
A major reason we 're feeling so down now is that for working Americans the boom never did come back
Job creation in the post-2001 recovery was pathetic by Clinton-era standards ; wages barely kept up with inflation
Instead , corporate profits and the incomes of a tiny elite surged sucking up so much of the economy 's growth that only crumbs were left for everyone else
Now the boom that was n't has gone bust and Americans , understandably , have lost confidence in the prospects for a return to real prosperity
They have also , I 'd suggest , lost confidence in the integrity of our economic institutions
Early this decade , when the great corporate scandals broke Enron , WorldCom , and so on I expected big-business corruption to become a major political issue
It did n't , partly because the march to war had the effect of changing the subject , partly , perhaps , because Americans were n't ready to take a broadly negative view of the system that brought them the previous decade 's boom
But my impression is that the subprime crisis with its revelation that titans of finance were dealing in funny money and its tales of failed executives receiving hundred-million-dollar going-away presents has resurrected the sense that something is rotten in the state of our economy
And this sense is adding to the general gloom
The question is , can the next administration end America 's malaise
Some of the causes of poor economic performance since 2000 are probably beyond any administration 's control
Raw materials were cheap in the 1990s , but in the years ahead the rise of China and other emerging economies will place increasing pressure on world supplies of oil , copper and so on , no matter what the next president does
But reinvigorated regulation could help restore confidence to the financial system
A return to pro-labor policies could help raise real wages
Pro-competitive policies which are not the same thing as giving powerful businesses whatever they want could help America regain its leadership in information technology
In other words , there 's a lot that could be done to perk up our sagging confidence
That wo n't happen , however , unless the next president is someone who understands what went wrong
And right now , that does n't look at all certain
Firefighters , he declared , `` wo n't solve the problems that led to recent fires
They will make them worse .
The existence of fire departments , he went on , `` not only allows for taxpayer-funded bailouts of burning buildings ; it institutionalizes them .
He concluded , `` The way to solve this problem is to let the people who make the mistakes that lead to fires pay for them
We wo n't solve this problem until the biggest buildings are allowed to burn .
O.K. , I fibbed a bit
Mr. McConnell said almost everything I attributed to him , but he was talking about financial reform , not fire reform
In particular , he was objecting not to the existence of fire departments , but to legislation that would give the government the power to seize and restructure failing financial institutions
But it amounts to the same thing
Now , Mr. McConnell surely is n't sincere ; while pretending to oppose bank bailouts , he 's actually doing the bankers ' bidding
But before I get to that , let 's talk about why he 's wrong on substance
In his speech , Mr. McConnell seemed to be saying that in the future , the U.S. government should just let banks fail
We `` must put an end to taxpayer funded bailouts for Wall Street banks .
What 's wrong with that
The answer is that letting banks fail as opposed to seizing and restructuring them is a bad idea for the same reason that it 's a bad idea to stand aside while an urban office building burns
In both cases , the damage has a tendency to spread
In 1930 , U.S. officials stood aside as banks failed ; the result was the Great Depression
In 2008 , they stood aside as Lehman Brothers imploded ; within days , credit markets had frozen and we were staring into the economic abyss
So it 's crucial to avoid disorderly bank collapses , just as it 's crucial to avoid out-of-control urban fires
Since the 1930s , we 've had a standard procedure for dealing with failing banks : the Federal Deposit Insurance Corporation has the right to seize a bank that 's on the brink , protecting its depositors while cleaning out the stockholders
In the crisis of 2008 , however , it became clear that this procedure was n't up to dealing with complex modern financial institutions like Lehman or Citigroup
So proposed reform legislation gives regulators `` resolution authority , '' which basically means giving them the ability to deal with the likes of Lehman in much the same way that the F.D.I.C. deals with conventional banks
Who could object to that
Well , Mr. McConnell is trying
His talking points come straight out of a memo Frank Luntz , the Republican political consultant , circulated in January on how to oppose financial reform
`` Frankly , '' wrote Mr. Luntz , `` the single best way to kill any legislation is to link it to the Big Bank Bailout .
And Mr. McConnell is following those stage directions
It 's a truly shameless performance : Mr. McConnell is pretending to stand up for taxpayers against Wall Street while in fact doing just the opposite
In recent weeks , he and other Republican leaders have held meetings with Wall Street executives and lobbyists , in which the G.O.P. and the financial industry have sought to coordinate their political strategy
And let me assure you , Wall Street is n't lobbying to prevent future bank bailouts
If anything , it 's trying to ensure that there will be more bailouts
By depriving regulators of the tools they need to seize failing financial firms , financial lobbyists increase the chances that when the next crisis strikes , taxpayers will end up paying a ransom to stockholders and executives as the price of avoiding collapse
Even more important , however , the financial industry wants to avoid serious regulation ; it wants to be left free to engage in the same behavior that created this crisis
It 's worth remembering that between the 1930s and the 1980s , there were n't any really big financial bailouts , because strong regulation kept most banks out of trouble
It was only with Reagan-era deregulation that big bank disasters re-emerged
In fact , relative to the size of the economy , the taxpayer costs of the savings and loan disaster , which unfolded in the Reagan years , were much higher than anything likely to happen under President Obama
To understand what 's really at stake right now , watch the looming fight over derivatives , the complex financial instruments Warren Buffett famously described as `` financial weapons of mass destruction .
The Obama administration wants tighter regulation of derivatives , while Republicans are opposed
And that tells you everything you need to know
So do n't be fooled
When Mitch McConnell denounces big bank bailouts , what he 's really trying to do is give the bankers everything they want
So is it time to sound the all clear
Here are four reasons to be cautious about the economic outlook
Things are still getting worse
Industrial production just hit a 10-year low
Housing starts remain incredibly weak
Foreclosures , which dipped as mortgage companies waited for details of the Obama administration 's housing plans , are surging again
The most you can say is that there are scattered signs that things are getting worse more slowly that the economy is n't plunging quite as fast as it was
And I do mean scattered : the latest edition of the Beige Book , the Fed 's periodic survey of business conditions , reports that `` five of the twelve Districts noted a moderation in the pace of decline .
Some of the good news is n't convincing
The biggest positive news in recent days has come from banks , which have been announcing surprisingly good earnings
But some of those earnings reports look a little ... funny
Wells Fargo , for example , announced its best quarterly earnings ever
But a bank 's reported earnings are n't a hard number , like sales ; for example , they depend a lot on the amount the bank sets aside to cover expected future losses on its loans
And some analysts expressed considerable doubt about Wells Fargo 's assumptions , as well as other accounting issues
Meanwhile , Goldman Sachs announced a huge jump in profits from fourth-quarter 2008 to first-quarter 2009
But as analysts quickly noticed , Goldman changed its definition of `` quarter '' -LRB- in response to a change in its legal status -RRB- , so that I kid you not the month of December , which happened to be a bad one for the bank , disappeared from this comparison
I do n't want to go overboard here
Maybe the banks really have swung from deep losses to hefty profits in record time
But skepticism comes naturally in this age of Madoff
Oh , and for those expecting the Treasury Department 's `` stress tests '' to make everything clear : the White House spokesman , Robert Gibbs , says that `` you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests .
No , I do n't know what that means , either
There may be other shoes yet to drop
Even in the Great Depression , things did n't head straight down
There was , in particular , a pause in the plunge about a year and a half in roughly where we are now
But then came a series of bank failures on both sides of the Atlantic , combined with some disastrous policy moves as countries tried to defend the dying gold standard , and the world economy fell off another cliff
Can this happen again
Well , commercial real estate is coming apart at the seams , credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe
We probably wo n't repeat the disaster of 1931 , but it 's far from certain that the worst is over
Even when it 's over , it wo n't be over
The 2001 recession officially lasted only eight months , ending in November of that year
But unemployment kept rising for another year and a half
The same thing happened after the 1990-91 recession
And there 's every reason to believe that it will happen this time too
Do n't be surprised if unemployment keeps rising right through 2010
`` V-shaped '' recoveries , in which employment comes roaring back , take place only when there 's a lot of pent-up demand
In 1982 , for example , housing was crushed by high interest rates , so when the Fed eased up , home sales surged
That 's not what 's going on this time : today , the economy is depressed , loosely speaking , because we ran up too much debt and built too many shopping malls , and nobody is in the mood for a new burst of spending
Employment will eventually recover it always does
But it probably wo n't happen fast
So now that I 've got everyone depressed , what 's the answer
History shows that one of the great policy dangers , in the face of a severe economic slump , is premature optimism
F.D.R. responded to signs of recovery by cutting the Works Progress Administration in half and raising taxes ; the Great Depression promptly returned in full force
Japan slackened its efforts halfway through its lost decade , ensuring another five years of stagnation
The Obama administration 's economists understand this
They say all the right things about staying the course
But there 's a real risk that all the talk of green shoots and glimmers will breed a dangerous complacency
So here 's my advice , to the public and policy makers alike : Do n't count your recoveries before they 're hatched
Start with the economics
Mr. Obama : `` You go into these small towns in Pennsylvania and , like a lot of small towns in the Midwest , the jobs have been gone now for 25 years and nothing 's replaced them
And they fell through the Clinton administration , and the Bush administration .
There are , indeed , towns where the mill closed during the 1980s and nothing has replaced it
But the suggestion that the American heartland suffered equally during the Clinton and Bush years is deeply misleading
In fact , the Clinton years were very good for working Americans in the Midwest , where real median household income soared before crashing after 2000
-LRB- You can see the numbers at my blog , krugman.blogs.nytimes.com .
We can argue about how much credit Bill Clinton deserves for that boom
But if I were a Democratic Party elder , I 'd urge Mr. Obama to stop blurring the distinction between Clinton-era prosperity and Bush-era economic distress
Next , the sociology : `` And it 's not surprising then that they get bitter , they cling to guns or religion or antipathy toward people who are n't like them .
The crucial word here is n't `` bitter , '' it 's `` cling .
Does economic hardship drive people to seek solace in firearms , God and xenophobia
It 's true that people in poor states are more likely to attend church regularly than residents of rich states
This might seem to indicate that faith is indeed a response to economic adversity
But this result largely reflects the fact that southern states are both church-going and poor ; some poor states outside the South , like Maine and Montana , are actually less religious than Connecticut
Furthermore , within poor states , people with low incomes are actually less likely to attend church than those with high incomes
-LRB- The correlation runs the opposite way in rich states .
Over all , none of this suggests that people turn to God out of economic frustration
Finally , Mr. Obama , in later clarifying remarks , declared that the people he 's talking about `` do n't vote on economic issues , '' and are motivated instead by things like guns and gay marriage
That 's a political theory made famous by Thomas Frank 's `` What 's the Matter With Kansas ?
According to this theory , `` values '' issues lead working-class Americans to act against their own interests by voting Republican
Mr. Obama seemed to suggest that 's also why they support Hillary Clinton
I was impressed by Mr. Frank 's book when it came out
But my Princeton colleague Larry Bartels , who had an Op-Ed in The Times on Thursday , convinced me that Mr. Frank was mostly wrong
In his Op-Ed , Mr. Bartels cited data showing that small-town , working-class Americans are actually less likely than affluent metropolitan residents to vote on the basis of religion and social values
Nor have working-class voters trended Republican over time ; on the contrary , Democrats do better with these voters now than they did in the 1960s
It 's true that Americans who attend church regularly are more likely to vote Republican
But contrary to the stereotype , this relationship is weak at low incomes but strong among high-income voters
That is , to the extent that religion helps the G.O.P. , it 's not by convincing the working class to vote against its own interests , but by producing supermajorities among the evangelical affluent
So why have Republicans won so many elections
In his book , `` Unequal Democracy , '' Mr. Bartels shows that `` the shift of the Solid South from Democratic to Republican control in the wake of the civil rights movement '' explains all literally all of the Republican success story
Does it matter that Mr. Obama has embraced an incorrect theory about what motivates working-class voters
His campaign certainly has n't been based on Mr. Frank 's book , which calls for a renewed focus on economic issues as a way to win back the working class
Indeed , the book concludes with a blistering attack on Democrats who cater to `` affluent , white-collar professionals who are liberal on social issues '' while `` dropping the class language that once distinguished them sharply from Republicans .
Does n't this sound a bit like the Obama campaign
Anyway , the important point is that working-class Americans do vote on economic issues and can be swayed by a politician who offers real answers to their problems
And one more thing : let 's hope that once Mr. Obama is no longer running against someone named Clinton , he 'll stop denigrating the very good economic record of the only Democratic administration most Americans remember
Last October , I saw a cartoon by Mike Peters in which a teacher asks a student to create a sentence that uses the verb `` sacks , '' as in looting and pillaging
The student replies , `` Goldman Sachs .
Sure enough , last week the Securities and Exchange Commission accused the Gucci-loafer guys at Goldman of engaging in what amounts to white-collar looting
I 'm using the term looting in the sense defined by the economists George Akerlof and Paul Romer in a 1993 paper titled `` Looting : The Economic Underworld of Bankruptcy for Profit .
That paper , written in the aftermath of the savings-and-loan crisis of the Reagan years , argued that many of the losses in that crisis were the result of deliberate fraud
Was the same true of the current financial crisis
Most discussion of the role of fraud in the crisis has focused on two forms of deception : predatory lending and misrepresentation of risks
Clearly , some borrowers were lured into taking out complex , expensive loans they did n't understand a process facilitated by Bush-era federal regulators , who both failed to curb abusive lending and prevented states from taking action on their own
And for the most part , subprime lenders did n't hold on to the loans they made
Instead , they sold off the loans to investors , in some cases surely knowing that the potential for future losses was greater than the people buying those loans -LRB- or securities backed by the loans -RRB- realized
What we 're now seeing are accusations of a third form of fraud
We 've known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value
This practice , however , while arguably reprehensible , was n't illegal
But now the S.E.C. is charging that Goldman created and marketed securities that were deliberately designed to fail , so that an important client could make money off that failure
That 's what I would call looting
And Goldman is n't the only financial firm accused of doing this
According to the Pulitzer-winning investigative journalism Web site ProPublica , several banks helped market designed-to-fail investments on behalf of the hedge fund Magnetar , which was betting on that failure
So what role did fraud play in the financial crisis
Neither predatory lending nor the selling of mortgages on false pretenses caused the crisis
But they surely made it worse , both by helping to inflate the housing bubble and by creating a pool of assets guaranteed to turn into toxic waste once the bubble burst
As for the alleged creation of investments designed to fail , these may have magnified losses at the banks that were on the losing side of these deals , deepening the banking crisis that turned the burst housing bubble into an economy-wide catastrophe
The obvious question is whether financial reform of the kind now being contemplated would have prevented some or all of the fraud that now seems to have flourished over the past decade
And the answer is yes
For one thing , an independent consumer protection bureau could have helped limit predatory lending
Another provision in the proposed Senate bill , requiring that lenders retain 5 percent of the value of loans they make , would have limited the practice of making bad loans and quickly selling them off to unwary investors
It 's less clear whether proposals for derivatives reform which mainly involve requiring that financial instruments like credit default swaps be traded openly and transparently , like ordinary stocks and bonds would have prevented the alleged abuses by Goldman -LRB- although they probably would have prevented the insurer A.I.G. from running wild and requiring a federal bailout -RRB-
What we can say is that the final draft of financial reform had better include language that would prevent this kind of looting in particular , it should block the creation of `` synthetic C.D.O. 's , '' cocktails of credit default swaps that let investors take big bets on assets without actually owning them
The main moral you should draw from the charges against Goldman , though , does n't involve the fine print of reform ; it involves the urgent need to change Wall Street
Listening to financial-industry lobbyists and the Republican politicians who have been huddling with them , you 'd think that everything will be fine as long as the federal government promises not to do any more bailouts
But that 's totally wrong and not just because no such promise would be credible
For the fact is that much of the financial industry has become a racket a game in which a handful of people are lavishly paid to mislead and exploit consumers and investors
And if we do n't lower the boom on these practices , the racket will just go on
`` What , '' asked my interlocutor , `` is the worst-case outlook for the world economy ?
It was n't until the next day that I came up with the right answer : America could turn Irish
Go to Columnist Page Blog : The Conscience of a Liberal What 's so bad about that
Well , the Irish government now predicts that this year G.D.P. will fall more than 10 percent from its peak , crossing the line that is sometimes used to distinguish between a recession and a depression
But there 's more to it than that : to satisfy nervous lenders , Ireland is being forced to raise taxes and slash government spending in the face of an economic slump policies that will further deepen the slump
And it 's that closing off of policy options that I 'm afraid might happen to the rest of us
The slogan `` Erin go bragh , '' usually translated as `` Ireland forever , '' is traditionally used as a declaration of Irish identity
But it could also , I fear , be read as a prediction for the world economy
How did Ireland get into its current bind
By being just like us , only more so
Like its near-namesake Iceland , Ireland jumped with both feet into the brave new world of unsupervised global markets
Last year the Heritage Foundation declared Ireland the third freest economy in the world , behind only Hong Kong and Singapore
One part of the Irish economy that became especially free was the banking sector , which used its freedom to finance a monstrous housing bubble
Ireland became in effect a cool , snake-free version of coastal Florida
Then the bubble burst
The collapse of construction sent the economy into a tailspin , while plunging home prices left many people owing more than their houses were worth
The result , as in the United States , has been a rising tide of defaults and heavy losses for the banks
And the troubles of the banks are largely responsible for putting the Irish government in a policy straitjacket
On the eve of the crisis Ireland seemed to be in good shape , fiscally speaking , with a balanced budget and a low level of public debt
But the government 's revenue which had become strongly dependent on the housing boom collapsed along with the bubble
Even more important , the Irish government found itself having to take responsibility for the mistakes of private bankers
Last September Ireland moved to shore up confidence in its banks by offering a government guarantee on their liabilities thereby putting taxpayers on the hook for potential losses of more than twice the country 's G.D.P. , equivalent to $ 30 trillion for the United States
The combination of deficits and exposure to bank losses raised doubts about Ireland 's long-run solvency , reflected in a rising risk premium on Irish debt and warnings about possible downgrades from ratings agencies
Hence the harsh new policies
Earlier this month the Irish government simultaneously announced a plan to purchase many of the banks ' bad assets putting taxpayers even further on the hook while raising taxes and cutting spending , to reassure lenders
Is Ireland 's government doing the right thing
As I read the debate among Irish experts , there 's widespread criticism of the bank plan , with many of the country 's leading economists calling for temporary nationalization instead
-LRB- Ireland has already nationalized one major bank .
The arguments of these Irish economists are very similar to those of a number of American economists , myself included , about how to deal with our own banking mess
But there is n't much disagreement about the need for fiscal austerity
As far as responding to the recession goes , Ireland appears to be really , truly without options , other than to hope for an export-led recovery if and when the rest of the world bounces back
So what does all this say about those of us who are n't Irish
For now , the United States is n't confined by an Irish-type fiscal straitjacket : the financial markets still consider U.S. government debt safer than anything else
But we ca n't assume that this will always be true
Unfortunately , we did n't save for a rainy day : thanks to tax cuts and the war in Iraq , America came out of the `` Bush boom '' with a higher ratio of government debt to G.D.P. than it had going in
And if we push that ratio another 30 or 40 points higher not out of the question if economic policy is mishandled over the next few years we might start facing our own problems with the bond market
Not to put too fine a point on it , that 's one reason I 'm so concerned about the Obama administration 's bank plan
If , as some of us fear , taxpayer funds end up providing windfalls to financial operators instead of fixing what needs to be fixed , we might not have the money to go back and do it right
And the lesson of Ireland is that you really , really do n't want to put yourself in a position where you have to punish your economy in order to save your banks
Nine years ago The Economist ran a big story on oil , which was then selling for $ 10 a barrel
The magazine warned that this might not last
Instead , it suggested , oil might well fall to $ 5 a barrel
In any case , The Economist asserted , the world faced `` the prospect of cheap , plentiful oil for the foreseeable future .
Last week , oil hit $ 117
It 's not just oil that has defied the complacency of a few years back
Food prices have also soared , as have the prices of basic metals
And the global surge in commodity prices is reviving a question we have n't heard much since the 1970s : Will limited supplies of natural resources pose an obstacle to future world economic growth
How you answer this question depends largely on what you believe is driving the rise in resource prices
Broadly speaking , there are three competing views
The first is that it 's mainly speculation that investors , looking for high returns at a time of low interest rates , have piled into commodity futures , driving up prices
On this view , someday soon the bubble will burst and high resource prices will go the way of Pets.com
The second view is that soaring resource prices do , in fact , have a basis in fundamentals especially rapidly growing demand from newly meat-eating , car-driving Chinese but that given time we 'll drill more wells , plant more acres , and increased supply will push prices right back down again
The third view is that the era of cheap resources is over for good that we 're running out of oil , running out of land to expand food production and generally running out of planet to exploit
I find myself somewhere between the second and third views
There are some very smart people not least , George Soros who believe that we 're in a commodities bubble -LRB- although Mr. Soros says that the bubble is still in its `` growth phase '' -RRB-
My problem with this view , however , is this : Where are the inventories
Normally , speculation drives up commodity prices by promoting hoarding
Yet there 's no sign of resource hoarding in the data : inventories of food and metals are at or near historic lows , while oil inventories are only normal
The best argument for the second view , that the resource crunch is real but temporary , is the strong resemblance between what we 're seeing now and the resource crisis of the 1970s
What Americans mostly remember about the 1970s are soaring oil prices and lines at gas stations
But there was also a severe global food crisis , which caused a lot of pain at the supermarket checkout line I remember 1974 as the year of Hamburger Helper and , much more important , helped cause devastating famines in poorer countries
In retrospect , the commodity boom of 1972-75 was probably the result of rapid world economic growth that outpaced supplies , combined with the effects of bad weather and Middle Eastern conflict
Eventually , the bad luck came to an end , new land was placed under cultivation , new sources of oil were found in the Gulf of Mexico and the North Sea , and resources got cheap again
But this time may be different : concerns about what happens when an ever-growing world economy pushes up against the limits of a finite planet ring truer now than they did in the 1970s
For one thing , I do n't expect growth in China to slow sharply anytime soon
That 's a big contrast with what happened in the 1970s , when growth in Japan and Europe , the emerging economies of the time , downshifted and thereby took a lot of pressure off the world 's resources
Meanwhile , resources are getting harder to find
Big oil discoveries , in particular , have become few and far between , and in the last few years oil production from new sources has been barely enough to offset declining production from established sources
And the bad weather hitting agricultural production this time is starting to look more fundamental and permanent than El Ni o and La Ni a , which disrupted crops 35 years ago
Australia , in particular , is now in the 10th year of a drought that looks more and more like a long-term manifestation of climate change
Suppose that we really are running up against global limits
What does it mean
Even if it turns out that we 're really at or near peak world oil production , that does n't mean that one day we 'll say , `` Oh my God
We just ran out of oil !
and watch civilization collapse into `` Mad Max '' anarchy
But rich countries will face steady pressure on their economies from rising resource prices , making it harder to raise their standard of living
And some poor countries will find themselves living dangerously close to the edge or over it
Do n't look now , but the good times may have just stopped rolling
On Thursday , President Obama went to Manhattan , where he urged an audience drawn largely from Wall Street to back financial reform
`` I believe , '' he declared , `` that these reforms are , in the end , not only in the best interest of our country , but in the best interest of the financial sector .
Well , I wish he had n't said that and not just because he really needs , as a political matter , to take a populist stance , to put some public distance between himself and the bankers
The fact is that Mr. Obama should be trying to do what 's right for the country full stop
If doing so hurts the bankers , that 's O.K. More than that , reform actually should hurt the bankers
A growing body of analysis suggests that an oversized financial industry is hurting the broader economy
Shrinking that oversized industry wo n't make Wall Street happy , but what 's bad for Wall Street would be good for America
Now , the reforms currently on the table which I support might end up being good for the financial industry as well as for the rest of us
But that 's because they only deal with part of the problem : they would make finance safer , but they might not make it smaller
What 's the matter with finance
Start with the fact that the modern financial industry generates huge profits and paychecks , yet delivers few tangible benefits
Remember the 1987 movie `` Wall Street , '' in which Gordon Gekko declared : Greed is good
By today 's standards , Gekko was a piker
In the years leading up to the 2008 crisis , the financial industry accounted for a third of total domestic profits about twice its share two decades earlier
These profits were justified , we were told , because the industry was doing great things for the economy
It was channeling capital to productive uses ; it was spreading risk ; it was enhancing financial stability
None of those were true
Capital was channeled not to job-creating innovators , but into an unsustainable housing bubble ; risk was concentrated , not spread ; and when the housing bubble burst , the supposedly stable financial system imploded , with the worst global slump since the Great Depression as collateral damage
So why were bankers raking it in
My take , reflecting the efforts of financial economists to make sense of the catastrophe , is that it was mainly about gambling with other people 's money
The financial industry took big , risky bets with borrowed funds bets that paid high returns until they went bad but was able to borrow cheaply because investors did n't understand how fragile the industry was
And what about the much-touted benefits of financial innovation
I 'm with the economists Andrei Shleifer and Robert Vishny , who argue in a recent paper that a lot of that innovation was about creating the illusion of safety , providing investors with `` false substitutes '' for old-fashioned assets like bank deposits
Eventually the illusion failed and the result was a disastrous financial crisis
In his Thursday speech , by the way , Mr. Obama insisted twice that financial reform wo n't stifle innovation
Too bad
And here 's the thing : after taking a big hit in the immediate aftermath of the crisis , financial-industry profits are soaring again
It seems all too likely that the industry will soon go back to playing the same games that got us into this mess in the first place
So what should be done
As I said , I support the reform proposals of the Obama administration and its Congressional allies
Among other things , it would be a shame to see the antireform campaign by Republican leaders a campaign marked by breathtaking dishonesty and hypocrisy succeed
But these reforms should be only the first step
We also need to cut finance down to size
And it 's not just critical outsiders saying this -LRB- not that there 's anything wrong with critical outsiders , who have been much more right than supposedly knowledgeable insiders ; see Greenspan , Alan -RRB-
An intriguing proposal is about to be unveiled from , of all places , the International Monetary Fund
In a leaked paper prepared for a meeting this weekend , the fund calls for a Financial Activity Tax yes , FAT levied on financial-industry profits and remuneration
Such a tax , the fund argues , could `` mitigate excessive risk-taking .
It could also `` tend to reduce the size of the financial sector , '' which the fund presents as a good thing
Now , the I.M.F. proposal is actually quite mild
Nonetheless , if it moves toward reality , Wall Street will howl
But the fact is that we 've been devoting far too large a share of our wealth , far too much of the nation 's talent , to the business of devising and peddling complex financial schemes schemes that have a tendency to blow up the economy
Ending this state of affairs will hurt the financial industry
`` Nothing will be gained by spending our time and energy laying blame for the past .
So declared President Obama , after his commendable decision to release the legal memos that his predecessor used to justify torture
Some people in the political and media establishments have echoed his position
We need to look forward , not backward , they say
No prosecutions , please ; no investigations ; we 're just too busy
And there are indeed immense challenges out there : an economic crisis , a health care crisis , an environmental crisis
Is n't revisiting the abuses of the last eight years , no matter how bad they were , a luxury we ca n't afford
No , it is n't , because America is more than a collection of policies
We are , or at least we used to be , a nation of moral ideals
In the past , our government has sometimes done an imperfect job of upholding those ideals
But never before have our leaders so utterly betrayed everything our nation stands for
`` This government does not torture people , '' declared former President Bush , but it did , and all the world knows it
And the only way we can regain our moral compass , not just for the sake of our position in the world , but for the sake of our own national conscience , is to investigate how that happened , and , if necessary , to prosecute those responsible
What about the argument that investigating the Bush administration 's abuses will impede efforts to deal with the crises of today
Even if that were true even if truth and justice came at a high price that would arguably be a price we must pay : laws are n't supposed to be enforced only when convenient
But is there any real reason to believe that the nation would pay a high price for accountability
For example , would investigating the crimes of the Bush era really divert time and energy needed elsewhere
Let 's be concrete : whose time and energy are we talking about
Tim Geithner , the Treasury secretary , would n't be called away from his efforts to rescue the economy
Peter Orszag , the budget director , would n't be called away from his efforts to reform health care
Steven Chu , the energy secretary , would n't be called away from his efforts to limit climate change
Even the president need n't , and indeed should n't , be involved
All he would have to do is let the Justice Department do its job which he 's supposed to do in any case and not get in the way of any Congressional investigations
I do n't know about you , but I think America is capable of uncovering the truth and enforcing the law even while it goes about its other business
Still , you might argue and many do that revisiting the abuses of the Bush years would undermine the political consensus the president needs to pursue his agenda
But the answer to that is , what political consensus
There are still , alas , a significant number of people in our political life who stand on the side of the torturers
But these are the same people who have been relentless in their efforts to block President Obama 's attempt to deal with our economic crisis and will be equally relentless in their opposition when he endeavors to deal with health care and climate change
The president can not lose their good will , because they never offered any
That said , there are a lot of people in Washington who were n't allied with the torturers but would nonetheless rather not revisit what happened in the Bush years
Some of them probably just do n't want an ugly scene ; my guess is that the president , who clearly prefers visions of uplift to confrontation , is in that group
But the ugliness is already there , and pretending it is n't wo n't make it go away
Others , I suspect , would rather not revisit those years because they do n't want to be reminded of their own sins of omission
For the fact is that officials in the Bush administration instituted torture as a policy , misled the nation into a war they wanted to fight and , probably , tortured people in the attempt to extract `` confessions '' that would justify that war
And during the march to war , most of the political and media establishment looked the other way
It 's hard , then , not to be cynical when some of the people who should have spoken out against what was happening , but did n't , now declare that we should forget the whole era for the sake of the country , of course
Sorry , but what we really should do for the sake of the country is have investigations both of torture and of the march to war
These investigations should , where appropriate , be followed by prosecutions not out of vindictiveness , but because this is a nation of laws
We need to do this for the sake of our future
For this is n't about looking backward , it 's about looking forward because it 's about reclaiming America 's soul
He may well be right but what a comedown
A few months ago the Obama campaign was talking about transcendence
Now it 's talking about math
`` Yes we can '' has become `` No she ca n't .
This was n't the way things were supposed to play out
Mr. Obama was supposed to be a transformational figure , with an almost magical ability to transcend partisan differences and unify the nation
Once voters got to know him and once he had eliminated Hillary Clinton 's initial financial and organizational advantage he was supposed to sweep easily to the nomination , then march on to a huge victory in November
Well , now he has an overwhelming money advantage and the support of much of the Democratic establishment yet he still ca n't seem to win over large blocs of Democratic voters , especially among the white working class
As a result , he keeps losing big states
And general election polls suggest that he might well lose to John McCain
What 's gone wrong
According to many Obama supporters , it 's all Hillary 's fault
If she had n't launched all those vile , negative attacks on their hero if she had just gone away his aura would be intact , and his mission of unifying America still on track
But how negative has the Clinton campaign been , really
Yes , it ran an ad that included Osama bin Laden in a montage of crisis images that also included the Great Depression and Hurricane Katrina
To listen to some pundits , you 'd think that ad was practically the same as the famous G.O.P. ad accusing Max Cleland of being weak on national security
It was n't
The attacks from the Clinton campaign have been badminton compared with the hardball Republicans will play this fall
If the relatively mild rough and tumble of the Democratic fight has been enough to knock Mr. Obama off his pedestal , what hope did he ever have of staying on it through the general election
Let me offer an alternative suggestion : maybe his transformational campaign is n't winning over working-class voters because transformation is n't what they 're looking for
From the beginning , I wondered what Mr. Obama 's soaring rhetoric , his talk of a new politics and declarations that `` we are the ones we 've been waiting for '' -LRB- waiting for to do what , exactly ?
would mean to families troubled by lagging wages , insecure jobs and fear of losing health coverage
The answer , from Ohio and Pennsylvania , seems pretty clear : not much
Mrs. Clinton has been able to stay in the race , against heavy odds , largely because her no-nonsense style , her obvious interest in the wonkish details of policy , resonate with many voters in a way that Mr. Obama 's eloquence does not
Yes , I know that there are lots of policy proposals on the Obama campaign 's Web site
But addressing the real concerns of working Americans is n't the campaign 's central theme
Tellingly , the Obama campaign has put far more energy into attacking Mrs. Clinton 's health care proposals than it has into promoting the idea of universal coverage
During the closing days of the Pennsylvania primary fight , the Obama campaign ran a TV ad repeating the dishonest charge that the Clinton plan would force people to buy health insurance they ca n't afford
It was as negative as any ad that Mrs. Clinton has run but perhaps more important , it was fear-mongering aimed at people who do n't think they need insurance , rather than reassurance for families who are trying to get coverage or are afraid of losing it
No wonder , then , that older Democrats continue to favor Mrs. Clinton
The question Democrats , both inside and outside the Obama campaign , should be asking themselves is this : now that the magic has dissipated , what is the campaign about
More generally , what are the Democrats for in this election
That should be an easy question to answer
Democrats can justly portray themselves as the party of economic security , the party that created Social Security and Medicare and defended those programs against Republican attacks and the party that can bring assured health coverage to all Americans
They can also portray themselves as the party of prosperity : the contrast between the Clinton economy and the Bush economy is the best free advertisement that Democrats have had since Herbert Hoover
But the message that Democrats are ready to continue and build on a grand tradition does n't mesh well with claims to be bringing a `` new politics '' and rhetoric that places blame for our current state equally on both parties
And unless Democrats can get past this self-inflicted state of confusion , there 's a very good chance that they 'll snatch defeat from the jaws of victory this fall
Let 's hear it for the Senate 's Permanent Subcommittee on Investigations
Its work on the financial crisis is increasingly looking like the 21st-century version of the Pecora hearings , which helped usher in New Deal-era financial regulation
In the past few days scandalous Wall Street e-mail messages released by the subcommittee have made headlines
That 's the good news
The bad news is that most of the headlines were about the wrong e-mails
When Goldman Sachs employees bragged about the money they had made by shorting the housing market , it was ugly , but that did n't amount to wrongdoing
No , the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies , which bestowed AAA ratings on hundreds of billions of dollars ' worth of dubious assets , nearly all of which have since turned out to be toxic waste
And no , that 's not hyperbole : of AAA-rated subprime-mortgage-backed securities issued in 2006 , 93 percent 93 percent
have now been downgraded to junk status
What those e-mails reveal is a deeply corrupt system
And it 's a system that financial reform , as currently proposed , would n't fix
The rating agencies began as market researchers , selling assessments of corporate debt to people considering whether to buy that debt
Eventually , however , they morphed into something quite different : companies that were hired by the people selling debt to give that debt a seal of approval
Those seals of approval came to play a central role in our whole financial system , especially for institutional investors like pension funds , which would buy your bonds if and only if they received that coveted AAA rating
It was a system that looked dignified and respectable on the surface
Yet it produced huge conflicts of interest
Issuers of debt which increasingly meant Wall Street firms selling securities they created by slicing and dicing claims on things like subprime mortgages could choose among several rating agencies
So they could direct their business to whichever agency was most likely to give a favorable verdict , and threaten to pull business from an agency that tried too hard to do its job
It 's all too obvious , in retrospect , how this could have corrupted the process
And it did
The Senate subcommittee has focused its investigations on the two biggest credit rating agencies , Moody 's and Standard & Poor 's ; what it has found confirms our worst suspicions
In one e-mail message , an S. & P. employee explains that a meeting is necessary to `` discuss adjusting criteria '' for assessing housing-backed securities `` because of the ongoing threat of losing deals .
Another message complains of having to use resources `` to massage the sub-prime and alt-A numbers to preserve market share .
Clearly , the rating agencies skewed their assessments to please their clients
These skewed assessments , in turn , helped the financial system take on far more risk than it could safely handle
Paul McCulley of Pimco , the bond investor -LRB- who coined the term `` shadow banks '' for the unregulated institutions at the heart of the crisis -RRB- , recently described it this way : `` explosive growth of shadow banking was about the invisible hand having a party , a non-regulated drinking party , with rating agencies handing out fake IDs .
So what can be done to keep it from happening again
The bill now before the Senate tries to do something about the rating agencies , but all in all it 's pretty weak on the subject
The only provision that might have teeth is one that would make it easier to sue rating agencies if they engaged in `` knowing or reckless failure '' to do the right thing
But that surely is n't enough , given the money at stake and the fact that Wall Street can afford to hire very , very good lawyers
What we really need is a fundamental change in the raters ' incentives
We ca n't go back to the days when rating agencies made their money by selling big books of statistics ; information flows too freely in the Internet age , so nobody would buy the books
Yet something must be done to end the fundamentally corrupt nature of the the issuer-pays system
An example of what might work is a proposal by Matthew Richardson and Lawrence White of New York University
They suggest a system in which firms issuing bonds continue paying rating agencies to assess those bonds but in which the Securities and Exchange Commission , not the issuing firm , determines which rating agency gets the business
I 'm not wedded to that particular proposal
But doing nothing is n't an option
It 's comforting to pretend that the financial crisis was caused by nothing more than honest errors
But it was n't ; it was , in large part , the result of a corrupt system
And the rating agencies were a big part of that corruption
On July 15 , 2007 , The New York Times published an article with the headline `` The Richest of the Rich , Proud of a New Gilded Age .
The most prominently featured of the `` new titans '' was Sanford Weill , the former chairman of Citigroup , who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society
Soon after that article was printed , the financial edifice Mr. Weill took credit for helping to build collapsed , inflicting immense collateral damage in the process
Even if we manage to avoid a repeat of the Great Depression , the world economy will take years to recover from this crisis
All of which explains why we should be disturbed by an article in Sunday 's Times reporting that pay at investment banks , after dipping last year , is soaring again right back up to 2007 levels
Why is this disturbing
Let me count the ways
First , there 's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society , let alone enough to justify those humongous paychecks
Remember that the gilded Wall Street of 2007 was a fairly new phenomenon
From the 1930s until around 1980 banking was a staid , rather boring business that paid no better , on average , than other industries , yet kept the economy 's wheels turning
So why did some bankers suddenly begin making vast fortunes
It was , we were told , a reward for their creativity for financial innovation
At this point , however , it 's hard to think of any major recent financial innovations that actually aided society , as opposed to being new , improved ways to blow bubbles , evade regulations and implement de facto Ponzi schemes
Consider a recent speech by Ben Bernanke , the Federal Reserve chairman , in which he tried to defend financial innovation
His examples of `` good '' financial innovations were -LRB- 1 -RRB- credit cards not exactly a new idea ; -LRB- 2 -RRB- overdraft protection ; and -LRB- 3 -RRB- subprime mortgages
-LRB- I am not making this up .
These were the things for which bankers got paid the big bucks
Still , you might argue that we have a free-market economy , and it 's up to the private sector to decide how much its employees are worth
But this brings me to my second point : Wall Street is no longer , in any real sense , part of the private sector
It 's a ward of the state , every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families , a k a `` welfare .
I 'm not just talking about the $ 600 billion or so already committed under the TARP
There are also the huge credit lines extended by the Federal Reserve ; large-scale lending by Federal Home Loan Banks ; the taxpayer-financed payoffs of A.I.G. contracts ; the vast expansion of F.D.I.C. guarantees ; and , more broadly , the implicit backing provided to every financial firm considered too big , or too strategic , to fail
One can argue that it 's necessary to rescue Wall Street to protect the economy as a whole and in fact I agree
But given all that taxpayer money on the line , financial firms should be acting like public utilities , not returning to the practices and paychecks of 2007
Furthermore , paying vast sums to wheeler-dealers is n't just outrageous ; it 's dangerous
Why , after all , did bankers take such huge risks
Because success or even the temporary appearance of success offered such gigantic rewards : even executives who blew up their companies could and did walk away with hundreds of millions
Now we 're seeing similar rewards offered to people who can play their risky games with federal backing
So what 's going on here
Why are paychecks heading for the stratosphere again
Claims that firms have to pay these salaries to retain their best people are n't plausible : with employment in the financial sector plunging , where are those people going to go
No , the real reason financial firms are paying big again is simply because they can
They 're making money again -LRB- although not as much as they claim -RRB- , and why not
After all , they can borrow cheaply , thanks to all those federal guarantees , and lend at much higher rates
So it 's eat , drink and be merry , for tomorrow you may be regulated
Or maybe not
There 's a palpable sense in the financial press that the storm has passed : stocks are up , the economy 's nose-dive may be leveling off , and the Obama administration will probably let the bankers off with nothing more than a few stern speeches
Rightly or wrongly , the bankers seem to believe that a return to business as usual is just around the corner
We can only hope that our leaders prove them wrong , and carry through with real reform
In 2008 , overpaid bankers taking big risks with other people 's money brought the world economy to its knees
The last thing we need is to give them a chance to do it all over again
As the designated political heir of a deeply unpopular president according to Gallup , President Bush has the highest disapproval rating recorded in 70 years of polling John McCain should have little hope of winning in November
In fact , however , current polls show him roughly tied with either Democrat
In part this may reflect the Democrats ' problems
For the most part , however , it probably reflects the perception , eagerly propagated by Mr. McCain 's many admirers in the news media , that he 's very different from Mr. Bush a responsible guy , a straight talker
But is this perception at all true
During the 2000 campaign people said much the same thing about Mr. Bush ; those of us who looked hard at his policy proposals , especially on taxes , saw the shape of things to come
And a look at what Mr. McCain says about taxes shows the same combination of irresponsibility and double-talk that , back in 2000 , foreshadowed the character of the Bush administration
The McCain tax plan contains three main elements
First , Mr. McCain proposes making almost all of the Bush tax cuts , which are currently scheduled to expire at the end of 2010 , permanent
-LRB- He proposes reinstating the inheritance tax , albeit at a very low rate .
Second , he wants to eliminate the alternative minimum tax , which was originally created to prevent the wealthy from exploiting tax loopholes , but has begun to hit the upper middle class
Third , he wants to sharply reduce tax rates on corporate profits
According to the nonpartisan Tax Policy Center , the overall effect of the McCain tax plan would be to reduce federal revenue by more than $ 5 trillion over 10 years
That 's a lot of revenue loss enough to pose big problems for the government 's solvency
But before I get to that , let 's look at what I found truly revealing : the McCain campaign 's response to the Tax Policy Center 's assessment
The response , written by Douglas Holtz-Eakin , the former head of the Congressional Budget Office , criticizes the center for adopting `` unrealistic Congressional budgeting conventions .
What 's that about
Well , Congress `` scores '' tax legislation by comparing estimates of the revenue that would be collected if the legislation passed with estimates of the revenue that would be collected under current law
In this case that means comparing the McCain plan with what would happen if the Bush tax cuts expired on schedule
Mr. Holtz-Eakin wants the McCain plan compared , instead , with `` current policy '' which he says means maintaining tax rates at today 's levels
But here 's the thing : the reason the Bush tax cuts are set to expire is that the Bush administration engaged in a game of deception
It put an expiration date on the tax cuts , which it never intended to honor , as a way to hide those tax cuts ' true cost
The McCain campaign wants us to accept the success of that deception as a fact of life
Mr. Holtz-Eakin is saying , in effect , `` We 're not engaged in any new irresponsibility we 're just perpetuating the Bush administration 's irresponsibility
That does n't count .
It 's the sort of fiscal double-talk that has been a Bush administration hallmark
In any case , it offers no answer to the principal point raised by the Tax Policy Center analysis , which has nothing to do with scoring : the McCain tax plan would leave the federal government with far too little revenue to cover its expenses , leading to huge budget deficits unless there were deep cuts in spending
And Mr. McCain has said nothing realistic about how he would close the giant budget gap his tax cuts would produce a gap so large that eliminating it would require cutting Social Security benefits by three-quarters , eliminating Medicare , or something equivalently drastic
Talking , as Mr. Holtz-Eakin does , about fighting waste and reforming procurement does n't cut it
Now , Mr. McCain is n't unique in making promises he has no way to pay for the same can be said , to some extent , of the Democratic candidates
But Mr. McCain 's plan is far more irresponsible than anything the Democrats are proposing , and the difference in degree is so large as to be a difference in kind
Mr. McCain 's budget talk simply does n't make sense
So what are Mr. McCain 's real intentions
If truth be told , the McCain tax plan does n't seem to embody any coherent policy agenda
Instead , it looks like a giant exercise in pandering an attempt to mollify the G.O.P. 's right wing , and never mind if it makes any sense
The impression that Mr. McCain 's tax talk is all about pandering is reinforced by his proposal for a summer gas tax holiday a measure that would , in fact , do little to help consumers , although it would boost oil industry profits
More and more , Mr. McCain sounds like a man who will say anything to become president
Let 's face it : Financial reform is a hard issue to follow
It 's not like health reform , which was fairly straightforward once you cut through the nonsense
Reasonable people can and do disagree about exactly what we should do to avert another banking crisis
So here 's a brief guide to the debate and an explanation of my own position
Leave on one side those who do n't really want any reform at all , a group that includes most Republican members of Congress
Whatever such people may say , they will always find reasons to say no to any actual proposal to rein in runaway bankers
Even among those who really do want reform , however , there 's a major debate about what 's really essential
One side exemplified by Paul Volcker , the redoubtable former Federal Reserve chairman sees limiting the size and scope of the biggest banks as the core issue in reform
The other side a group that includes yours truly disagrees , and argues that the important thing is to regulate what banks do , not how big they get
It 's easy to see where concerns about banks that are `` too big to fail '' come from
In the face of financial crisis , the U.S. government provided cash and guarantees to financial institutions whose failure , it feared , might bring down the whole system
And the rescue operation was mainly focused on a handful of big players : A.I.G. , Citigroup , Bank of America , and so on
This rescue was necessary , but it put taxpayers on the hook for potentially large losses
And it also established a dangerous precedent : big financial institutions , we now know , will be bailed out in times of crisis
And this , it 's argued , will encourage even riskier behavior in the future , since executives at big banks will know that it 's heads they win , tails taxpayers lose
The solution , say people like Mr. Volcker , is to break big financial institutions into units that are n't too big to fail , making future bailouts unnecessary and restoring market discipline
It 's a convincing-sounding argument , but I 'm one of those people who does n't buy it
Here 's how I see it
Breaking up big banks would n't really solve our problems , because it 's perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions
In fact , that 's precisely what happened in the 1930s , when most of the banks that collapsed were relatively small small enough that the Federal Reserve believed that it was O.K. to let them fail
As it turned out , the Fed was dead wrong : the wave of small-bank failures was a catastrophe for the wider economy
The same would be true today
Breaking up big financial institutions would n't prevent future crises , nor would it eliminate the need for bailouts when those crises happen
The next bailout would n't be concentrated on a few big companies but it would be a bailout all the same
I do n't have any love for financial giants , but I just do n't believe that breaking them up solves the key problem
So what 's the alternative to breaking up big financial institutions
The answer , I 'd argue , is to update and extend old-fashioned bank regulation
After all , the U.S. banking system had a long period of stability after World War II , based on a combination of deposit insurance , which eliminated the threat of bank runs , and strict regulation of bank balance sheets , including both limits on risky lending and limits on leverage , the extent to which banks were allowed to finance investments with borrowed funds
And Canada whose financial system is dominated by a handful of big banks , but which maintained effective regulation has weathered the current crisis notably well
What ended the era of U.S. stability was the rise of `` shadow banking '' : institutions that carried out banking functions but operated without a safety net and with minimal regulation
In particular , many businesses began parking their cash , not in bank deposits , but in `` repo '' overnight loans to the likes of Lehman Brothers
Unfortunately , repo was n't protected and regulated like old-fashioned banking , so it was vulnerable to a pre-1930s-type crisis of confidence
And that , in a nutshell , is what went wrong in 2007-2008
So why not update traditional regulation to encompass the shadow banks
We already have an implicit form of deposit insurance : It 's clear that creditors of shadow banks will be bailed out in time of crisis
What we need now are two things : -LRB- a -RRB- regulators need the authority to seize failing shadow banks , the way the Federal Deposit Insurance Corporation already has the authority to seize failing conventional banks , and -LRB- b -RRB- there have to be prudential limits on shadow banks , above all limits on their leverage
Does the reform legislation currently on the table do what 's needed
Well , it 's a step in the right direction but it 's not a big enough step
I 'll explain why in a future column
Not that long ago , European economists used to mock their American counterparts for having questioned the wisdom of Europe 's march to monetary union
`` On the whole , '' declared an article published just this past January , `` the euro has , thus far , gone much better than many U.S. economists had predicted .
The article summarized the euro-skeptics ' views as having been : `` It ca n't happen , it 's a bad idea , it wo n't last .
Well , it did happen , but right now it does seem to have been a bad idea for exactly the reasons the skeptics cited
And as for whether it will last suddenly , that 's looking like an open question
To understand the euro-mess and its lessons for the rest of us you need to see past the headlines
Right now everyone is focused on public debt , which can make it seem as if this is a simple story of governments that could n't control their spending
But that 's only part of the story for Greece , much less for Portugal , and not at all the story for Spain
The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble
Even Greece 's 2007 budget deficit was no higher , as a share of G.D.P. , than the deficits the United States ran in the mid-1980s -LRB- morning in America !
, while Spain actually ran a surplus
And all of the countries were attracting large inflows of foreign capital , largely because markets believed that membership in the euro zone made Greek , Portuguese and Spanish bonds safe investments
Then came the global financial crisis
Those inflows of capital dried up ; revenues plunged and deficits soared ; and membership in the euro , which had encouraged markets to love the crisis countries not wisely but too well , turned into a trap
What 's the nature of the trap
During the years of easy money , wages and prices in the crisis countries rose much faster than in the rest of Europe
Now that the money is no longer rolling in , those countries need to get costs back in line
But that 's a much harder thing to do now than it was when each European nation had its own currency
Back then , costs could be brought in line by adjusting exchange rates e.g. , Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks
Now that Greece and Germany share the same currency , however , the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation
And since Germany wo n't accept inflation , deflation it is
The problem is that deflation falling wages and prices is always and everywhere a deeply painful process
It invariably involves a prolonged slump with high unemployment
And it also aggravates debt problems , both public and private , because incomes fall while the debt burden does n't
Hence the crisis
Greece 's fiscal woes would be serious but probably manageable if the Greek economy 's prospects for the next few years looked even moderately favorable
But they do n't
Earlier this week , when it downgraded Greek debt , Standard & Poor 's suggested that the euro value of Greek G.D.P. may not return to its 2008 level until 2017 , meaning that Greece has no hope of growing out of its troubles
All this is exactly what the euro-skeptics feared
Giving up the ability to adjust exchange rates , they warned , would invite future crises
And it has
So what will happen to the euro
Until recently , most analysts , myself included , considered a euro breakup basically impossible , since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks
But if the crisis countries are forced into default , they 'll probably face severe bank runs anyway , forcing them into emergency measures like temporary restrictions on bank withdrawals
This would open the door to euro exit
So is the euro itself in danger
In a word , yes
If European leaders do n't start acting much more forcefully , providing Greece with enough help to avoid the worst , a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible
Meanwhile , what are the lessons for the rest of us
The deficit hawks are already trying to appropriate the European crisis , presenting it as an object lesson in the evils of government red ink
What the crisis really demonstrates , however , is the dangers of putting yourself in a policy straitjacket
When they joined the euro , the governments of Greece , Portugal and Spain denied themselves the ability to do some bad things , like printing too much money ; but they also denied themselves the ability to respond flexibly to events
And when crisis strikes , governments need to be able to act
That 's what the architects of the euro forgot and the rest of us need to remember
Back in the early stages of the financial crisis , wags joked that our trade with China had turned out to be fair and balanced after all : They sold us poison toys and tainted seafood ; we sold them fraudulent securities
But these days , both sides of that deal are breaking down
On one side , the world 's appetite for Chinese goods has fallen off sharply
China 's exports have plunged in recent months and are now down 26 percent from a year ago
On the other side , the Chinese are evidently getting anxious about those securities
But China still seems to have unrealistic expectations
And that 's a problem for all of us
The big news last week was a speech by Zhou Xiaochuan , the governor of China 's central bank , calling for a new `` super-sovereign reserve currency .
The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar
But Mr. Zhou 's speech was actually an admission of weakness
In effect , he was saying that China had driven itself into a dollar trap , and that it can neither get itself out nor change the policies that put it in that trap in the first place
Some background : In the early years of this decade , China began running large trade surpluses and also began attracting substantial inflows of foreign capital
If China had had a floating exchange rate like , say , Canada this would have led to a rise in the value of its currency , which , in turn , would have slowed the growth of China 's exports
But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed
To do this , it had to buy up dollars as they came flooding in
As the years went by , those trade surpluses just kept growing and so did China 's hoard of foreign assets
Now the joke about fraudulent securities was actually unfair
Aside from a late , ill-considered plunge into equities -LRB- at the very top of the market -RRB- , the Chinese mainly accumulated very safe assets , with U.S. Treasury bills T-bills , for short making up a large part of the total
But while T-bills are as safe from default as anything on the planet , they yield a very low rate of return
Was there a deep strategy behind this vast accumulation of low-yielding assets
Probably not
China acquired its $ 2 trillion stash turning the People 's Republic into the T-bills Republic the same way Britain acquired its empire : in a fit of absence of mind
And just the other day , it seems , China 's leaders woke up and realized that they had a problem
The low yield does n't seem to bother them much , even now
But they are , apparently , worried about the fact that around 70 percent of those assets are dollar-denominated , so any future fall in the dollar would mean a big capital loss for China
Hence Mr. Zhou 's proposal to move to a new reserve currency along the lines of the S.D.R. 's , or special drawing rights , in which the International Monetary Fund keeps its accounts
But there 's both less and more here than meets the eye
S.D.R. 's are n't real money
They 're accounting units whose value is set by a basket of dollars , euros , Japanese yen and British pounds
And there 's nothing to keep China from diversifying its reserves away from the dollar , indeed from holding a reserve basket matching the composition of the S.D.R. 's nothing , that is , except for the fact that China now owns so many dollars that it ca n't sell them off without driving the dollar down and triggering the very capital loss its leaders fear
So what Mr. Zhou 's proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes
That 's not going to happen
And the call for some magical solution to the problem of China 's excess of dollars suggests something else : that China 's leaders have n't come to grips with the fact that the rules of the game have changed in a fundamental way
Two years ago , we lived in a world in which China could save much more than it invested and dispose of the excess savings in America
That world is gone
Yet the day after his new-reserve-currency speech , Mr. Zhou gave another speech in which he seemed to assert that China 's extremely high savings rate is immutable , a result of Confucianism , which values `` anti-extravagance .
Meanwhile , `` it is not the right time '' for the United States to save more
In other words , let 's go on as we were
That 's also not going to happen
The bottom line is that China has n't yet faced up to the wrenching changes that will be needed to deal with this global crisis
The same could , of course , be said of the Japanese , the Europeans and us
And that failure to face up to new realities is the main reason that , despite some glimmers of good news the G-20 summit accomplished more than I thought it would this crisis probably still has years to run
Elizabeth Edwards has cancer
John McCain has had cancer in the past
Last weekend , Mrs. Edwards bluntly pointed out that neither of them would be able to get insurance under Mr. McCain 's health care plan
It 's about time someone said that and , more generally , made the case that Mr. McCain 's approach to health care is based on voodoo economics not the supply-side voodoo that claims that cutting taxes increases revenues -LRB- though Mr. McCain says that , too -RRB- , but the equally foolish claim , refuted by all available evidence , that the magic of the marketplace can produce cheap health care for everyone
As Mrs. Edwards pointed out , the McCain health plan would do nothing to prevent insurance companies from denying coverage to those , like her and Mr. McCain , who have pre-existing medical conditions
The McCain campaign 's response was condescending and dismissive a statement that Mrs. Edwards does n't understand the comprehensive nature of the senator 's approach , which would harness `` the power of competition to produce greater coverage for Americans , '' reducing costs so that even people with pre-existing conditions could afford care
This is nonsense on multiple levels
For one thing , even if you buy the premise that competition would reduce health care costs , the idea that it could cut costs enough to make insurance affordable for Americans with a history of cancer or other major diseases is sheer fantasy
Beyond that , there 's no reason to believe in these alleged cost reductions
Insurance companies do try to hold down `` medical losses '' the industry 's term for what happens when an insurer actually ends up having to honor its promises by paying a client 's medical bills
But they do n't do this by promoting cost-effective medical care
Instead , they hold down costs by only covering healthy people , screening out those who need coverage the most which was exactly the point Mrs. Edwards was making
They also deny as many claims as possible , forcing doctors and hospitals to spend large sums fighting to get paid
And the international evidence on health care costs is overwhelming : the United States has the most privatized system , with the most market competition and it also has by far the highest health care costs in the world
Yet the McCain health plan actually a set of bullet points on the campaign 's Web site is entirely based on blind faith that competition among private insurers will solve all problems
I 'd like to single out one of these bullet points in particular the first substantive proposal Mr. McCain offers -LRB- the preceding entries are nothing but feel-good boilerplate -RRB-
As I 've mentioned in past columns , the Veterans Health Administration is one of the few clear American success stories in the struggle to contain health care costs
Since it was reformed during the Clinton years , the V.A. has used the fact that it 's an integrated system a system that takes long-term responsibility for its clients ' health to deliver an impressive combination of high-quality care and low costs
It has also taken the lead in the use of information technology , which has both saved money and reduced medical errors
Sure enough , Mr. McCain wants to privatize and , in effect , dismantle the V.A. Naturally , this destructive agenda comes wrapped in the flag : `` America 's veterans have fought for our freedom , '' says the McCain Web site
`` We should give them freedom to choose to carry their V.A. dollars to a provider that gives them the timely care at high quality and in the best location .
That 's a recipe for having healthy veterans drop out of the system , undermining its integrated nature and draining away resources
Mr. McCain , then , is offering a completely wrongheaded approach to health care
But the way the campaign for the Democratic nomination has unfolded raises questions about how effective his eventual opponent will be in making that point
Indeed , while Mrs. Edwards focused her criticism on Mr. McCain , she also made it clear that she prefers Hillary Clinton 's approach `` Sen. Clinton 's plan is a great plan '' to Barack Obama 's
The Clinton plan closely resembles the plan for universal coverage that John Edwards laid out more than a year ago
By contrast , Mr. Obama offers a watered-down plan that falls short of universality , and it would have higher costs per person covered
Worse yet , Mr. Obama attacked his Democratic rivals ' health plans using conservative talking points about choice and the evil of having the government tell you what to do
That 's going to make it hard if he is the nominee to refute Mr. McCain when he makes similar arguments on behalf of such things as privatizing veterans ' care
Still , health care ought to be a major issue in this campaign
I wonder if we 'll have time to discuss it after we deal with more important subjects , like bowling and basketball
The White House is confident that a financial regulatory reform bill will soon pass the Senate
I 'm not so sure , given the opposition of Republican leaders to any real reform
But in any case , how good is the legislation on the table , the bill put together by Senator Chris Dodd of Connecticut
Not good enough
It 's a good-faith effort to do what needs to be done , but it would create a system highly dependent on the wisdom and good intentions of government officials
And as the history of the last decade demonstrates , trusting in the quality of officials can be dangerous to the economy 's health
Now , it 's impossible to devise a truly foolproof regulatory regime anyone who believes otherwise is underestimating the power of foolishness
But you can try to create a system that 's relatively fool-resistant
Unfortunately , the Dodd bill does n't do that
As I argued in my last column , while the problem of `` too big to fail '' has gotten most of the attention and while big banks deserve all the opprobrium they 're getting the core problem with our financial system is n't the size of the largest financial institutions
It is , instead , the fact that the current system does n't limit risky behavior by `` shadow banks , '' institutions like Lehman Brothers that carry out banking functions , that are perfectly capable of creating a banking crisis , but , because they issue debt rather than taking deposits , face minimal oversight
The Dodd bill tries to fill this gaping hole in the system by letting federal regulators impose `` strict rules for capital , leverage , liquidity , risk management and other requirements as companies grow in size and complexity .
It also gives regulators the power to seize troubled financial firms and it requires that large , complex firms submit `` funeral plans '' that make it relatively easy to shut them down
That 's all good
In effect , it gives shadow banking something like the regulatory regime we already have for conventional banking
But what will actually be in those `` strict rules '' for capital , liquidity , and so on
The bill does n't say
Instead , everything is left at the discretion of the Financial Stability Oversight Council , a sort of interagency task force including the chairman of the Federal Reserve , the Treasury secretary , the comptroller of the currency and the heads of five other federal agencies
Mike Konczal of the Roosevelt Institute , whose blog has become essential reading for anyone interested in financial reform , has pointed out what 's wrong with this : just consider who would have been on that council in 2005 , which was probably the peak year for irresponsible lending
Well , in 2005 the chairman of the Fed was Alan Greenspan , who dismissed warnings about the housing bubble and who asserted in October 2005 that `` increasingly complex financial instruments have contributed to the development of a far more flexible , efficient , and hence resilient financial system .
Meanwhile , the secretary of the Treasury was John Snow , who ... actually , I do n't think anyone remembers anything about Mr. Snow , other than the fact that Karl Rove treated him like an errand boy
The comptroller of the currency was John Dugan , who still holds the office
He was recently the subject of a profile in The Times , which noted his habit of blocking efforts by states to crack down on abusive consumer lending , on the grounds that he , not the states , has authority over national banks except that he himself almost never acts to protect consumers
Oh , and on the subject of consumer protection : the Dodd bill creates a more or less independent agency to protect consumers against abusive lending , albeit one housed at the Fed
That 's a good thing
But it gives the oversight council the ability to override the agency 's recommendations
The point is that the Dodd bill would give an administration determined to rein in runaway finance the tools it needs to do the job
But it would n't do much to stiffen the spine of a less determined administration
On the contrary , it would make it easy for future regulators to look the other way as another bubble inflated
So what the legislation needs are explicit rules , rules that would force action even by regulators who do n't especially want to do their jobs
There should , for example , be a preset maximum level of allowable leverage the financial reform that has already passed the House sets this at 15 to 1 , and the Senate should follow suit
There should be hard rules determining when regulators have to seize a troubled financial firm
There should be no-exception rules requiring that complex financial derivatives be traded transparently
And so on
I know that getting such things into the bill would be hard politically : as financial reform legislation moves to the floor of the Senate , there will be pressure to make it weaker , not stronger , in the hope of attracting Republican votes
But I would urge Senate leaders and the Obama administration not to settle for a weak bill , just so that they can claim to have passed financial reform
We need reform with a fighting chance of actually working
These days you hear a lot about the world financial crisis
But there 's another world crisis under way and it 's hurting a lot more people
I 'm talking about the food crisis
Over the past few years the prices of wheat , corn , rice and other basic foodstuffs have doubled or tripled , with much of the increase taking place just in the last few months
High food prices dismay even relatively well-off Americans but they 're truly devastating in poor countries , where food often accounts for more than half a family 's spending
There have already been food riots around the world
Food-supplying countries , from Ukraine to Argentina , have been limiting exports in an attempt to protect domestic consumers , leading to angry protests from farmers and making things even worse in countries that need to import food
How did this happen
The answer is a combination of long-term trends , bad luck and bad policy
Let 's start with the things that are n't anyone 's fault
First , there 's the march of the meat-eating Chinese that is , the growing number of people in emerging economies who are , for the first time , rich enough to start eating like Westerners
Since it takes about 700 calories ' worth of animal feed to produce a 100-calorie piece of beef , this change in diet increases the overall demand for grains
Second , there 's the price of oil
Modern farming is highly energy-intensive : a lot of B.T.U. 's go into producing fertilizer , running tractors and , not least , transporting farm products to consumers
With oil persistently above $ 100 per barrel , energy costs have become a major factor driving up agricultural costs
High oil prices , by the way , also have a lot to do with the growth of China and other emerging economies
Directly and indirectly , these rising economic powers are competing with the rest of us for scarce resources , including oil and farmland , driving up prices for raw materials of all sorts
Third , there has been a run of bad weather in key growing areas
In particular , Australia , normally the world 's second-largest wheat exporter , has been suffering from an epic drought
O.K. , I said that these factors behind the food crisis are n't anyone 's fault , but that 's not quite true
The rise of China and other emerging economies is the main force driving oil prices , but the invasion of Iraq which proponents promised would lead to cheap oil has also reduced oil supplies below what they would have been otherwise
And bad weather , especially the Australian drought , is probably related to climate change
So politicians and governments that have stood in the way of action on greenhouse gases bear some responsibility for food shortages
Where the effects of bad policy are clearest , however , is in the rise of demon ethanol and other biofuels
The subsidized conversion of crops into fuel was supposed to promote energy independence and help limit global warming
But this promise was , as Time magazine bluntly put it , a `` scam .
This is especially true of corn ethanol : even on optimistic estimates , producing a gallon of ethanol from corn uses most of the energy the gallon contains
But it turns out that even seemingly `` good '' biofuel policies , like Brazil 's use of ethanol from sugar cane , accelerate the pace of climate change by promoting deforestation
And meanwhile , land used to grow biofuel feedstock is land not available to grow food , so subsidies to biofuels are a major factor in the food crisis
You might put it this way : people are starving in Africa so that American politicians can court votes in farm states
Oh , and in case you 're wondering : all the remaining presidential contenders are terrible on this issue
One more thing : one reason the food crisis has gotten so severe , so fast , is that major players in the grain market grew complacent
Governments and private grain dealers used to hold large inventories in normal times , just in case a bad harvest created a sudden shortage
Over the years , however , these precautionary inventories were allowed to shrink , mainly because everyone came to believe that countries suffering crop failures could always import the food they needed
This left the world food balance highly vulnerable to a crisis affecting many countries at once in much the same way that the marketing of complex financial securities , which was supposed to diversify away risk , left world financial markets highly vulnerable to a systemwide shock
What should be done
The most immediate need is more aid to people in distress : the U.N. 's World Food Program put out a desperate appeal for more funds
We also need a pushback against biofuels , which turn out to have been a terrible mistake
But it 's not clear how much can be done
Cheap food , like cheap oil , may be a thing of the past
The debt crisis in Greece is approaching the point of no return
As prospects for a rescue plan seem to be fading , largely thanks to German obduracy , nervous investors have driven interest rates on Greek government bonds sky-high , sharply raising the country 's borrowing costs
This will push Greece even deeper into debt , further undermining confidence
At this point it 's hard to see how the nation can escape from this death spiral into default
It 's a terrible story , and clearly an object lesson for the rest of us
But an object lesson in what , exactly
Yes , Greece is paying the price for past fiscal irresponsibility
Yet that 's by no means the whole story
The Greek tragedy also illustrates the extreme danger posed by a deflationary monetary policy
And that 's a lesson one hopes American policy makers will take to heart
The key thing to understand about Greece 's predicament is that it 's not just a matter of excessive debt
Greece 's public debt , at 113 percent of G.D.P. , is indeed high , but other countries have dealt with similar levels of debt without crisis
For example , in 1946 , the United States , having just emerged from World War II , had federal debt equal to 122 percent of G.D.P.
Yet investors were relaxed , and rightly so : Over the next decade the ratio of U.S. debt to G.D.P. was cut nearly in half , easing any concerns people might have had about our ability to pay what we owed
And debt as a percentage of G.D.P. continued to fall in the decades that followed , hitting a low of 33 percent in 1981
So how did the U.S. government manage to pay off its wartime debt
Actually , it did n't
At the end of 1946 , the federal government owed $ 271 billion ; by the end of 1956 that figure had risen slightly , to $ 274 billion
The ratio of debt to G.D.P. fell not because debt went down , but because G.D.P. went up , roughly doubling in dollar terms over the course of a decade
The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation , with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956
Unfortunately , Greece ca n't expect a similar performance
Because of the euro
Until recently , being a member of the euro zone seemed like a good thing for Greece , bringing with it cheap loans and large inflows of capital
But those capital inflows also led to inflation and when the music stopped , Greece found itself with costs and prices way out of line with Europe 's big economies
Over time , Greek prices will have to come back down
And that means that unlike postwar America , which inflated away part of its debt , Greece will see its debt burden worsened by deflation
That 's not all
Deflation is a painful process , which invariably takes a toll on growth and employment
So Greece wo n't grow its way out of debt
On the contrary , it will have to deal with its debt in the face of an economy that 's stagnant at best
So the only way Greece could tame its debt problem would be with savage spending cuts and tax increases , measures that would themselves worsen the unemployment rate
No wonder , then , that bond markets are losing confidence , and pushing the situation to the brink
What can be done
The hope was that other European countries would strike a deal , guaranteeing Greek debt in return for a commitment to harsh fiscal austerity
That might have worked
But without German support , such a deal wo n't happen
Greece could alleviate some of its problems by leaving the euro , and devaluing
But it 's hard to see how Greece could do that without triggering a catastrophic run on its banking system
Indeed , worried depositors have already begun pulling cash out of Greek banks
There are no good answers here actually , no nonterrible answers
But what are the lessons for America
Of course , we should be fiscally responsible
What that means , however , is taking on the big long-term issues , above all health costs not grandstanding and penny-pinching over short-term spending to help a distressed economy
Equally important , however , we need to steer clear of deflation , or even excessively low inflation
Unlike Greece , we 're not stuck with someone else 's currency
But as Japan has demonstrated , even countries with their own currencies can get stuck in a deflationary trap
What worries me most about the U.S. situation right now is the rising clamor from inflation hawks , who want the Fed to raise rates -LRB- and the federal government to pull back from stimulus -RRB- even though employment has barely started to recover
If they get their way , they 'll perpetuate mass unemployment
But that 's not all
America 's public debt will be manageable if we eventually return to vigorous growth and moderate inflation
But if the tight-money people prevail , that wo n't happen and all bets will be off
So it seems that we are n't going to have a second Great Depression after all
What saved us
The answer , basically , is Big Government
Just to be clear : the economic situation remains terrible , indeed worse than almost anyone thought possible not long ago
The nation has lost 6.7 million jobs since the recession began
Once you take into account the need to find employment for a growing working-age population , we 're probably around nine million jobs short of where we should be
And the job market still has n't turned around that slight dip in the measured unemployment rate last month was probably a statistical fluke
We have n't yet reached the point at which things are actually improving ; for now , all we have to celebrate are indications that things are getting worse more slowly
For all that , however , the latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss
A few months ago the possibility of falling into the abyss seemed all too real
The financial panic of late 2008 was as severe , in some ways , as the banking panic of the early 1930s , and for a while key economic indicators world trade , world industrial production , even stock prices were falling as fast as or faster than they did in 1929-30
But in the 1930s the trend lines just kept heading down
This time , the plunge appears to be ending after just one terrible year
So what saved us from a full replay of the Great Depression
The answer , almost surely , lies in the very different role played by government
Probably the most important aspect of the government 's role in this crisis is n't what it has done , but what it has n't done : unlike the private sector , the federal government has n't slashed spending as its income has fallen
-LRB- State and local governments are a different story .
Tax receipts are way down , but Social Security checks are still going out ; Medicare is still covering hospital bills ; federal employees , from judges to park rangers to soldiers , are still being paid
All of this has helped support the economy in its time of need , in a way that did n't happen back in 1930 , when federal spending was a much smaller percentage of G.D.P. And yes , this means that budget deficits which are a bad thing in normal times are actually a good thing right now
In addition to having this `` automatic '' stabilizing effect , the government has stepped in to rescue the financial sector
You can argue -LRB- and I would -RRB- that the bailouts of financial firms could and should have been handled better , that taxpayers have paid too much and received too little
Yet it 's possible to be dissatisfied , even angry , about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse
The point is that this time , unlike in the 1930s , the government did n't take a hands-off attitude while much of the banking system collapsed
And that 's another reason we 're not living through Great Depression II
Last and probably least , but by no means trivial , have been the deliberate efforts of the government to pump up the economy
From the beginning , I argued that the American Recovery and Reinvestment Act , a k a the Obama stimulus plan , was too small
Nonetheless , reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan a number that will grow over time and that the stimulus has played a significant role in pulling the economy out of its free fall
All in all , then , the government has played a crucial stabilizing role in this economic crisis
Ronald Reagan was wrong : sometimes the private sector is the problem , and government is the solution
And are n't you glad that right now the government is being run by people who do n't hate government
We do n't know what the economic policies of a McCain-Palin administration would have been
We do know , however , what Republicans in opposition have been saying and it boils down to demanding that the government stop standing in the way of a possible depression
I 'm not just talking about opposition to the stimulus
Leading Republicans want to do away with automatic stabilizers , too
Back in March , John Boehner , the House minority leader , declared that since families were suffering , `` it 's time for government to tighten their belts and show the American people that we ` get ' it .
Fortunately , his advice was ignored
I 'm still very worried about the economy
There 's still , I fear , a substantial chance that unemployment will remain high for a very long time
But we appear to have averted the worst : utter catastrophe no longer seems likely
And Big Government , run by people who understand its virtues , is the reason why
The draft Democratic Party platform that was sent out last week puts health care reform front and center
`` If one thing came through in the platform hearings , '' says the document , `` it was that Democrats are united around a commitment to provide every American access to affordable , comprehensive health care .
Can Democrats deliver on that commitment
In principle , it should be easy
In practice , supporters of health care reform , myself included , will be hanging on by their fingernails until legislation is actually passed
What 's easy about guaranteed health care for all
For one thing , we know that it 's economically feasible : every wealthy country except the United States already has some form of guaranteed health care
The hazards Americans treat as facts of life the risk of losing your insurance , the risk that you wo n't be able to afford necessary care , the chance that you 'll be financially ruined by medical costs would be considered unthinkable in any other advanced nation
The politics of guaranteed care are also easy , at least in one sense : if the Democrats do manage to establish a system of universal coverage , the nation will love it
I know that 's not what everyone says ; some pundits claim that the United States has a uniquely individualistic culture , and that Americans wo n't accept any system that makes health care a collective responsibility
Those who say this , however , seem to forget that we already have a program you may have heard of it called Medicare
It 's a program that collects money from every worker 's paycheck and uses it to pay the medical bills of everyone 65 and older
And it 's immensely popular
There 's every reason to believe that a program that extends universal coverage to the nonelderly would soon become equally popular
Consider the case of Massachusetts , which passed a state-level plan for universal coverage two years ago
The Massachusetts plan has come in for a lot of criticism
It includes individual mandates that is , people are required to buy coverage , even if they 'd prefer to take their chances
And its costs are running much higher than expected , mainly because it turns out that there were more people without insurance than anyone realized
Yet recent polls show overwhelming support for the plan support that has grown stronger since it went into effect , despite the new system 's teething troubles
Once a system of universal health coverage exists , it seems , people want to keep it
So why be nervous about the prospects for reform
Because it 's hard to get universal care established in the first place
There are , I 'd argue , three big hurdles
First , the Democrats have to win the election and win it by enough to face down Republicans , who are still , 42 years after Medicare went into operation , denouncing `` socialized medicine .
Second , they have to overcome the public 's fear of change
Some health care reformers wanted the Democrats to endorse a single-payer , Medicare-type system for all
On the sheer economic merits , they 're right : single-payer would be more efficient than a system that preserves a role for private insurance companies
But it 's better to have an imperfect universal health care plan than none at all and the only way to get a universal health care plan passed soon is to inoculate it against Harry-and-Louise-type claims that people will be forced into plans `` designed by government bureaucrats .
So the Democratic platform emphasizes choice , declaring that Americans `` should have the option of keeping the coverage they have or choosing from a wide array of health insurance plans , including many private health insurance options and a public plan .
We 'll see if that 's enough
The final hurdle facing health care reform is the risk that the next president and Congress will lose focus
There will be many problems crying out for solutions , from a weak economy to foreign policy crises
It will be easy and tempting to put health care on the back burner for a bit and then forget about it
So I 'm nervous
The history of the pursuit of universal health care in America is one of missed chances , of political opportunities frittered away
Let 's hope that this time is different
One more thing : if we do get real health care reform , a lot of people will owe a debt of gratitude to none other than John Edwards
When Mr. Edwards dropped out of the presidential race , I credited him with making universal health care a `` possible dream for the next administration .
Mr. Edwards 's political career is over but perhaps he and his family can take some solace from the fact that his party is still trying to make that dream come true
Ten years ago , one of America 's leading economists delivered a stinging critique of the Bank of Japan , Japan 's equivalent of the Federal Reserve , titled `` Japanese Monetary Policy : A Case of Self-Induced Paralysis ?
With only a few changes in wording , the critique applies to the Fed today
At the time , the Bank of Japan faced a situation broadly similar to that facing the Fed now
The economy was deeply depressed and showed few signs of improvement , and one might have expected the bank to take forceful action
But short-term interest rates - the usual tool of monetary policy - were near zero and could go no lower
And the Bank of Japan used that fact as an excuse to do no more
That was malfeasance , declared the eminent U.S. economist : `` Far from being powerless , the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism .
He rebuked officials hiding `` behind minor institutional or technical difficulties in order to avoid taking action .
Who was that tough-talking economist
Ben Bernanke , now the chairman of the Federal Reserve
So why is the Bernanke Fed being just as passive now as the Bank of Japan was a decade ago
Now , America 's current economic troubles are n't exactly identical to those of Japan in 1999-2000 : Japan was experiencing outright deflation , while we are n't - yet
But inflation is well below the Fed 's target of around 2 percent , and it is continuing to slide
And Americans face a level of unemployment , and sheer human misery , far worse than anything Japan went through
Yet the Fed is doing almost nothing to confront these troubles
What could the Fed be doing
Back when , Mr. Bernanke suggested , among other things , that the Bank of Japan could get traction by buying large quantities of `` nonstandard '' assets - that is , assets other than the short-term government debt central banks normally hold
The Fed actually put that idea into practice during the most acute phase of the financial crisis , acquiring , in particular , large amounts of mortgage-backed securities
However , it stopped those purchases in March
Since then , the economic news has grown steadily worse
And earlier this week , the Fed changed course - but barely
It now says that it will reinvest the proceeds from maturing securities in long-term government bonds
That 's a trivial change , basically the least the Fed could get away with without facing a firestorm of criticism - and far short of the major asset-purchase program the Fed should be undertaking
Back in 2000 , Mr. Bernanke also suggested that the Bank of Japan could move expectations by making announcements about its future policies
In particular , he argued that it could make private-sector borrowing more attractive by announcing that it would keep interest rates low until deflation had given way to 3 percent or 4 percent inflation - an idea originally suggested by yours truly
Since we are , if anything , in worse shape now than Japan was in 2000 , an inflation target of at least 3 percent would very much be in America 's interest
But as chairman of the Fed , Mr. Bernanke has explicitly rejected any such move
What 's going on here
Has Mr. Bernanke been intellectually assimilated by the Fed Borg
I prefer to believe that he 's being political , unwilling to engage in open confrontation with other Fed officials - especially those regional Fed presidents who fear inflation , even with deflation the clear and present danger , and are evidently unmoved by the plight of the unemployed
And in fairness to Mr. Bernanke , discord among senior officials also makes it difficult for policy to change expectations : it would be hard to credibly commit to higher inflation if this commitment were constantly being undercut by speeches out of the Richmond or Dallas Feds
In fact , I 'd argue that loose talk by some Fed officials is already having a negative economic impact
But while Mr. Bernanke does n't have the authority to stop that loose talk , he could make it clear that it does n't represent overall Fed policy
Last , but not least , policy is suffering from an act of neglect by President Obama , who waited until his 16th month in office before offering a full slate of nominees to fill vacancies on the Federal Reserve Board
If he had filled those slots quickly - his nominees still are n't in place - the Fed might be less passive
But whatever the reasons , the fact is that the Fed - which is required by statute to promote `` maximum employment '' - is n't doing its job
Instead , like the rest of Washington , it 's inventing reasons to dither in the face of mass unemployment
And while the Fed sits there in its self-inflicted paralysis , millions of Americans are losing their jobs , their homes and their hopes for the future
`` I am in this race because I do n't want to see us spend the next year re-fighting the Washington battles of the 1990s
I do n't want to pit Blue America against Red America ; I want to lead a United States of America .
So declared Barack Obama in November 2007 , making the case that Democrats should nominate him , rather than one of his rivals , because he could free the nation from the bitter partisanship of the past
Some of us were skeptical
A couple of months after Mr. Obama gave that speech , I warned that his vision of a `` different kind of politics '' was a vain hope , that any Democrat who made it to the White House would face `` an unending procession of wild charges and fake scandals , dutifully given credence by major media organizations that somehow ca n't bring themselves to declare the accusations unequivocally false .
So , how 's it going
Sure enough , President Obama is now facing the same kind of opposition that President Bill Clinton had to deal with : an enraged right that denies the legitimacy of his presidency , that eagerly seizes on every wild rumor manufactured by the right-wing media complex
This opposition can not be appeased
Some pundits claim that Mr. Obama has polarized the country by following too liberal an agenda
But the truth is that the attacks on the president have no relationship to anything he is actually doing or proposing
Right now , the charge that 's gaining the most traction is the claim that health care reform will create `` death panels '' -LRB- in Sarah Palin 's words -RRB- that will shuffle the elderly and others off to an early grave
It 's a complete fabrication , of course
The provision requiring that Medicare pay for voluntary end-of-life counseling was introduced by Senator Johnny Isakson , Republican yes , Republican of Georgia , who says that it 's `` nuts '' to claim that it has anything to do with euthanasia
And not long ago , some of the most enthusiastic peddlers of the euthanasia smear , including Newt Gingrich , the former speaker of the House , and Mrs. Palin herself , were all for `` advance directives '' for medical care in the event that you are incapacitated or comatose
That 's exactly what was being proposed and has now , in the face of all the hysteria , been dropped from the bill
Yet the smear continues to spread
And as the example of Mr. Gingrich shows , it 's not a fringe phenomenon : Senior G.O.P. figures , including so-called moderates , have endorsed the lie
Senator Chuck Grassley , Republican of Iowa , is one of these supposed moderates
I 'm not sure where his centrist reputation comes from he did , after all , compare critics of the Bush tax cuts to Hitler
But in any case , his role in the health care debate has been flat-out despicable
Last week , Mr. Grassley claimed that his colleague Ted Kennedy 's brain tumor would n't have been treated properly in other countries because they prefer to `` spend money on people who can contribute more to the economy .
This week , he told an audience that `` you have every right to fear , '' that we `` should not have a government-run plan to decide when to pull the plug on grandma .
Again , that 's what a supposedly centrist Republican , a member of the Gang of Six trying to devise a bipartisan health plan , sounds like
So much , then , for Mr. Obama 's dream of moving beyond divisive politics
The truth is that the factors that made politics so ugly in the Clinton years the paranoia of a significant minority of Americans and the cynical willingness of leading Republicans to cater to that paranoia are as strong as ever
In fact , the situation may be even worse than it was in the 1990s because the collapse of the Bush administration has left the G.O.P. with no real leaders other than Rush Limbaugh
The question now is how Mr. Obama will deal with the death of his postpartisan dream
So far , at least , the Obama administration 's response to the outpouring of hate on the right has had a deer-in-the-headlights quality
It 's as if officials still ca n't wrap their minds around the fact that things like this can happen to people who are n't named Clinton , as if they keep expecting the nonsense to just go away
What , then , should Mr. Obama do
It would certainly help if he gave clearer and more concise explanations of his health care plan
To be fair , he 's gotten much better at that over the past couple of weeks
What 's still missing , however , is a sense of passion and outrage passion for the goal of ensuring that every American gets the health care he or she needs , outrage at the lies and fear-mongering that are being used to block that goal
So can Mr. Obama , who can be so eloquent when delivering a message of uplift , rise to the challenge of unreasoning , unappeasable opposition
Only time will tell
So far , the international economic consequences of the war in the Caucasus have been fairly minor , despite Georgia 's role as a major corridor for oil shipments
But as I was reading the latest bad news , I found myself wondering whether this war is an omen a sign that the second great age of globalization may share the fate of the first
If you 're wondering what I 'm talking about , here 's what you need to know : our grandfathers lived in a world of largely self-sufficient , inward-looking national economies but our great-great grandfathers lived , as we do , in a world of large-scale international trade and investment , a world destroyed by nationalism
Writing in 1919 , the great British economist John Maynard Keynes described the world economy as it was on the eve of World War I. `` The inhabitant of London could order by telephone , sipping his morning tea in bed , the various products of the whole earth ... he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world .
And Keynes 's Londoner `` regarded this state of affairs as normal , certain , and permanent , except in the direction of further improvement ... The projects and politics of militarism and imperialism , of racial and cultural rivalries , of monopolies , restrictions , and exclusion ... appeared to exercise almost no influence at all on the ordinary course of social and economic life , the internationalization of which was nearly complete in practice .
But then came three decades of war , revolution , political instability , depression and more war
By the end of World War II , the world was fragmented economically as well as politically
And it took a couple of generations to put it back together
So , can things fall apart again
Yes , they can
Consider how things have played out in the current food crisis
For years we were told that self-sufficiency was an outmoded concept , and that it was safe to rely on world markets for food supplies
But when the prices of wheat , rice and corn soared , Keynes 's `` projects and politics '' of `` restrictions and exclusion '' made a comeback : many governments rushed to protect domestic consumers by banning or limiting exports , leaving food-importing countries in dire straits
And now comes `` militarism and imperialism .
By itself , as I said , the war in Georgia is n't that big a deal economically
But it does mark the end of the Pax Americana the era in which the United States more or less maintained a monopoly on the use of military force
And that raises some real questions about the future of globalization
Most obviously , Europe 's dependence on Russian energy , especially natural gas , now looks very dangerous more dangerous , arguably , than its dependence on Middle Eastern oil
After all , Russia has already used gas as a weapon : in 2006 , it cut off supplies to Ukraine amid a dispute over prices
And if Russia is willing and able to use force to assert control over its self-declared sphere of influence , wo n't others do the same
Just think about the global economic disruption that would follow if China which is about to surpass the United States as the world 's largest manufacturing nation were to forcibly assert its claim to Taiwan
Some analysts tell us not to worry : global economic integration itself protects us against war , they argue , because successful trading economies wo n't risk their prosperity by engaging in military adventurism
But this , too , raises unpleasant historical memories
Shortly before World War I another British author , Norman Angell , published a famous book titled `` The Great Illusion , '' in which he argued that war had become obsolete , that in the modern industrial era even military victors lose far more than they gain
He was right but wars kept happening anyway
So are the foundations of the second global economy any more solid than those of the first
In some ways , yes
For example , war among the nations of Western Europe really does seem inconceivable now , not so much because of economic ties as because of shared democratic values
Much of the world , however , including nations that play a key role in the global economy , does n't share those values
Most of us have proceeded on the belief that , at least as far as economics goes , this does n't matter that we can count on world trade continuing to flow freely simply because it 's so profitable
But that 's not a safe assumption
Angell was right to describe the belief that conquest pays as a great illusion
But the belief that economic rationality always prevents war is an equally great illusion
And today 's high degree of global economic interdependence , which can be sustained only if all major governments act sensibly , is more fragile than we imagine
Social Security turned 75 last week
It should have been a joyous occasion , a time to celebrate a program that has brought dignity and decency to the lives of older Americans
But the program is under attack , with some Democrats as well as nearly all Republicans joining the assault
Rumor has it that President Obama 's deficit commission may call for deep benefit cuts , in particular a sharp rise in the retirement age
Social Security 's attackers claim that they 're concerned about the program 's financial future
But their math does n't add up , and their hostility is n't really about dollars and cents
Instead , it 's about ideology and posturing
And underneath it all is ignorance of or indifference to the realities of life for many Americans
About that math : Legally , Social Security has its own , dedicated funding , via the payroll tax -LRB- `` FICA '' on your pay statement -RRB-
But it 's also part of the broader federal budget
This dual accounting means that there are two ways Social Security could face financial problems
First , that dedicated funding could prove inadequate , forcing the program either to cut benefits or to turn to Congress for aid
Second , Social Security costs could prove unsupportable for the federal budget as a whole
But neither of these potential problems is a clear and present danger
Social Security has been running surpluses for the last quarter-century , banking those surpluses in a special account , the so-called trust fund
The program wo n't have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted , which the program 's actuaries do n't expect to happen until 2037 - and there 's a significant chance , according to their estimates , that that day will never come
Meanwhile , an aging population will eventually -LRB- over the course of the next 20 years -RRB- cause the cost of paying Social Security benefits to rise from its current 4.8 percent of G.D.P. to about 6 percent of G.D.P. To give you some perspective , that 's a significantly smaller increase than the rise in defense spending since 2001 , which Washington certainly did n't consider a crisis , or even a reason to rethink some of the Bush tax cuts
So where do claims of crisis come from
To a large extent they rely on bad-faith accounting
In particular , they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century do n't count - because hey , the program does n't have any independent existence ; it 's just part of the general federal budget - while future Social Security deficits are unacceptable - because hey , the program has to stand on its own
It would be easy to dismiss this bait-and-switch as obvious nonsense , except for one thing : many influential people - including Alan Simpson , co-chairman of the president 's deficit commission - are peddling this nonsense
And having invented a crisis , what do Social Security 's attackers want to do
They do n't propose cutting benefits to current retirees ; invariably the plan is , instead , to cut benefits many years in the future
So think about it this way : In order to avoid the possibility of future benefit cuts , we must cut future benefits
O.K. What 's really going on here
Conservatives hate Social Security for ideological reasons : its success undermines their claim that government is always the problem , never the solution
But they receive crucial support from Washington insiders , for whom a declared willingness to cut Social Security has long served as a badge of fiscal seriousness , never mind the arithmetic
And neither wing of the anti-Social-Security coalition seems to know or care about the hardship its favorite proposals would cause
The currently fashionable idea of raising the retirement age even more than it will rise under existing law - it has already gone from 65 to 66 , it 's scheduled to rise to 67 , but now some are proposing that it go to 70 - is usually justified with assertions that life expectancy has risen , so people can easily work later into life
But that 's only true for affluent , white-collar workers - the people who need Social Security least
I 'm not just talking about the fact that it 's a lot easier to imagine working until you 're 70 if you have a comfortable office job than if you 're engaged in manual labor
America is becoming an increasingly unequal society - and the growing disparities extend to matters of life and death
Life expectancy at age 65 has risen a lot at the top of the income distribution , but much less for lower-income workers
And remember , the retirement age is already scheduled to rise under current law
So let 's beat back this unnecessary , unfair and - let 's not mince words - cruel attack on working Americans
Big cuts in Social Security should not be on the table
It was the blooper heard round the world
In an editorial denouncing Democratic health reform plans , Investor 's Business Daily tried to frighten its readers by declaring that in Britain , where the government runs health care , the handicapped physicist Stephen Hawking `` would n't have a chance , '' because the National Health Service would consider his life `` essentially worthless .
A new blog from The New York Times that tracks the health care debate as it unfolds
More Health Care Overhaul News Professor Hawking , who was born in Britain , has lived there all his life , and has been well cared for by the National Health Service , was not amused
Besides being vile and stupid , however , the editorial was beside the point
Investor 's Business Daily would like you to believe that Obamacare would turn America into Britain or , rather , a dystopian fantasy version of Britain
The screamers on talk radio and Fox News would have you believe that the plan is to turn America into the Soviet Union
But the truth is that the plans on the table would , roughly speaking , turn America into Switzerland which may be occupied by lederhosen-wearing holey-cheese eaters , but was n't a socialist hellhole the last time I looked
Let 's talk about health care around the advanced world
Every wealthy country other than the United States guarantees essential care to all its citizens
There are , however , wide variations in the specifics , with three main approaches taken
In Britain , the government itself runs the hospitals and employs the doctors
We 've all heard scare stories about how that works in practice ; these stories are false
Like every system , the National Health Service has problems , but over all it appears to provide quite good care while spending only about 40 percent as much per person as we do
By the way , our own Veterans Health Administration , which is run somewhat like the British health service , also manages to combine quality care with low costs
The second route to universal coverage leaves the actual delivery of health care in private hands , but the government pays most of the bills
That 's how Canada and , in a more complex fashion , France do it
It 's also a system familiar to most Americans , since even those of us not yet on Medicare have parents and relatives who are
Again , you hear a lot of horror stories about such systems , most of them false
French health care is excellent
Canadians with chronic conditions are more satisfied with their system than their U.S. counterparts
And Medicare is highly popular , as evidenced by the tendency of town-hall protesters to demand that the government keep its hands off the program
Finally , the third route to universal coverage relies on private insurance companies , using a combination of regulation and subsidies to ensure that everyone is covered
Switzerland offers the clearest example : everyone is required to buy insurance , insurers ca n't discriminate based on medical history or pre-existing conditions , and lower-income citizens get government help in paying for their policies
In this country , the Massachusetts health reform more or less follows the Swiss model ; costs are running higher than expected , but the reform has greatly reduced the number of uninsured
And the most common form of health insurance in America , employment-based coverage , actually has some `` Swiss '' aspects : to avoid making benefits taxable , employers have to follow rules that effectively rule out discrimination based on medical history and subsidize care for lower-wage workers
So where does Obamacare fit into all this
Basically , it 's a plan to Swissify America , using regulation and subsidies to ensure universal coverage
If we were starting from scratch we probably would n't have chosen this route
True `` socialized medicine '' would undoubtedly cost less , and a straightforward extension of Medicare-type coverage to all Americans would probably be cheaper than a Swiss-style system
That 's why I and others believe that a true public option competing with private insurers is extremely important : otherwise , rising costs could all too easily undermine the whole effort
But a Swiss-style system of universal coverage would be a vast improvement on what we have now
And we already know that such systems work
So we can do this
At this point , all that stands in the way of universal health care in America are the greed of the medical-industrial complex , the lies of the right-wing propaganda machine , and the gullibility of voters who believe those lies
Correction : In Friday 's column I mistakenly asserted that Senator Johnny Isakson was responsible for a provision in a House bill that would allow Medicare to pay for end-of-life counseling
In fact , he is responsible for a provision in a Senate bill that would allow a different , newly created government program to pay for such counseling
Roger Cohen is on vacation
After all , Mr. McCain proposes continuing the policies of a president who 's had a truly dismal economic record job growth under the current administration has been the slowest in 60 years , even slower than job growth under the first President Bush
And the public blames the White House , giving Mr. Bush spectacularly low ratings on his handling of the economy
Meanwhile , The Times reports that , according to associates , Mr. McCain still `` dials up '' Phil Gramm , the former senator who resigned as co-chairman of the campaign after calling America a `` nation of whiners '' and dismissing the country 's economic woes as nothing more than a `` mental recession .
And Mr. Gramm is still considered a top pick for Treasury secretary
So Mr. McCain would seem to offer a target a mile wide : a die-hard supporter of failed economic policies who takes his advice from people completely out of touch with the lives of working Americans
But while polls continue to show that the public , by a large margin , trusts Democrats more than Republicans to handle the economy , recent polling shows that Barack Obama has at best a small edge over Mr. McCain on the issue four points in a recent Time magazine poll , and he is one point behind according to Rasmussen Reports , which does automated polling
And Mr. Obama 's failure to achieve a decisive edge on economic policy is central to his failure to open up a big lead in overall polling
Why is n't the Obama campaign getting more traction on economic issues
It 's not the Republican offensive on offshore drilling
It 's true that many Americans have apparently been misled by bogus claims about gas price relief
But as I 've already pointed out , Democrats in general retain a large edge on economic issues
Nor is there any valid basis for the complaints , highlighted in Sunday 's Times , that Mr. Obama is n't offering enough policy specifics
Delve into the Obama campaign Web site and you 'll find plenty of policy detail
And the campaign 's ads reel off lots of specific policy proposals too many , if you ask me
No , the problem is n't lack of specifics it 's lack of passion
When it comes to the economy , Mr. Obama 's campaign seems oddly lethargic
I was astonished at the flatness of the big economy speech he gave in St. Petersburg at the beginning of this month a speech that was billed as the start of a new campaign focus on economic issues
Mr. Obama is a great orator , yet he began that speech with a litany of statistics that were probably meaningless to most listeners
Worse yet , he seemed to go out of his way to avoid scoring political points
`` Back in the 1990s , '' he declared , `` your incomes grew by $ 6,000 , and over the last several years , they 've actually fallen by nearly $ 1,000 .
Um , not quite : real median household income did n't rise $ 6,000 during `` the 1990s , '' it did so during the Clinton years , after falling under the first Bush administration
Income has n't fallen $ 1,000 in `` recent years , '' it 's fallen under George Bush , with all of the decline taking place before 2005
Obama surrogates have shown a similar inclination to go for the capillaries rather than the jugular
A recent Wall Street Journal op-ed by two Obama advisers offered another blizzard of statistics almost burying the key point that most Americans would pay lower taxes under the Obama tax plan than under the McCain plan
All this makes a stark contrast with the campaign of the last Democrat to make it to the White House , who had no trouble conveying passion over matters economic
In his speech accepting the Democratic nomination in 1992 , a year in which economic conditions somewhat resembled those today , Bill Clinton denounced his opponent as someone `` caught in the grip of a failed economic theory .
Where Mr. Obama spoke cryptically in St. Petersburg about a `` reckless few '' who `` game the system , as we 've seen in this housing crisis '' I know what he meant , I think , but how many voters got it
Mr. Clinton declared that `` those who play by the rules and keep the faith have gotten the shaft , and those who cut corners and cut deals have been rewarded .
That 's the kind of hard-hitting populism that 's been absent from the Obama campaign so far
Of course , Mr. Obama has n't given his own acceptance speech yet
Al Gore found a new populist fervor in August 2000 , and surged in the polls
A comparable surge by Mr. Obama would give him a landslide victory this year
But it 's up to him
If Mr. Obama ca n't find the passion on economic matters that has been lacking in his campaign so far , he may yet lose this election
Recently the Web site The Politico asked Nancy Pelosi , the speaker of the House , why she was blocking attempts to tack offshore drilling amendments onto appropriations bills
`` I 'm trying to save the planet ; I 'm trying to save the planet , '' she replied
I 'm glad to hear it
But I 'm still worried about the planet 's prospects
True , Ms. Pelosi 's remark was a happy reminder that environmental policy is no longer in the hands of crazy people
Remember , less than two years ago Senator James Inhofe a conspiracy theorist who insists that global warming is a `` gigantic hoax '' perpetrated by the scientific community was the chairman of the Senate 's Environment and Public Works Committee
Beyond that , Ms. Pelosi 's response shows that she understands the deeper issues behind the current energy debate
Most criticism of John McCain 's decision to follow the Bush administration 's lead and embrace offshore drilling as the answer to high gas prices has focused on the accusation that it 's junk economics which it is
A McCain campaign ad says that gas prices are high right now because `` some in Washington are still saying no to drilling in America .
That 's just plain dishonest : the U.S. government 's own Energy Information Administration says that removing restrictions on offshore drilling would n't lead to any additional domestic oil production until 2017 , and that even at its peak the extra production would have an `` insignificant '' impact on oil prices
What 's even more important than Mr. McCain 's bad economics , however , is what his reversal on this issue he was against offshore drilling before he was for it says about his priorities
Back when he was cultivating a maverick image , Mr. McCain portrayed himself as more environmentally aware than the rest of his party
He even co-sponsored a bill calling for a cap-and-trade system to limit greenhouse gas emissions -LRB- although his remarks on several recent occasions suggest that he does n't understand his own proposal -RRB-
But the lure of a bit of political gain , it turns out , was all it took to transform him back into a standard drill-and-burn Republican
And the planet ca n't afford that kind of cynicism
In themselves , limits on offshore drilling are only a modest-sized issue
But the skirmish over drilling is the opening stage of a much bigger fight over environmental policy
What 's at stake in that fight , above all , is the question of whether we 'll take action against climate change before it 's utterly too late
It 's true that scientists do n't know exactly how much world temperatures will rise if we persist with business as usual
But that uncertainty is actually what makes action so urgent
While there 's a chance that we 'll act against global warming only to find that the danger was overstated , there 's also a chance that we 'll fail to act only to find that the results of inaction were catastrophic
Which risk would you rather run
Martin Weitzman , a Harvard economist who has been driving much of the recent high-level debate , offers some sobering numbers
Surveying a wide range of climate models , he argues that , over all , they suggest about a 5 percent chance that world temperatures will eventually rise by more than 10 degrees Celsius -LRB- that is , world temperatures will rise by 18 degrees Fahrenheit -RRB-
As Mr. Weitzman points out , that 's enough to `` effectively destroy planet Earth as we know it .
It 's sheer irresponsibility not to do whatever we can to eliminate that threat
Now for the bad news : sheer irresponsibility may be a winning political strategy
Mr. McCain 's claim that opponents of offshore drilling are responsible for high gas prices is ridiculous and to their credit , major news organizations have pointed this out
Yet Mr. McCain 's gambit seems nonetheless to be working : public support for ending restrictions on drilling has risen sharply , with roughly half of voters saying that increased offshore drilling would reduce gas prices within a year
Hence my concern : if a completely bogus claim that environmental protection is raising energy prices can get this much political traction , what are the chances of getting serious action against global warming
After all , a cap-and-trade system would in effect be a tax on carbon -LRB- though Mr. McCain apparently does n't know that -RRB- , and really would raise energy prices
The only way we 're going to get action , I 'd suggest , is if those who stand in the way of action come to be perceived as not just wrong but immoral
Incidentally , that 's why I was disappointed with Barack Obama 's response to Mr. McCain 's energy posturing that it was `` the same old politics .
Mr. Obama was dismissive when he should have been outraged
So as I said , I 'm very glad to know that Nancy Pelosi is trying to save the planet
I just wish I had more confidence that she 's going to succeed
As I look at what passes for responsible economic policy these days , there 's an analogy that keeps passing through my mind
I know it 's over the top , but here it is anyway : the policy elite - central bankers , finance ministers , politicians who pose as defenders of fiscal virtue - are acting like the priests of some ancient cult , demanding that we engage in human sacrifices to appease the anger of invisible gods
Hey , I told you it was over the top
But bear with me for a minute
Late last year the conventional wisdom on economic policy took a hard right turn
Even though the world 's major economies had barely begun to recover , even though unemployment remained disastrously high across much of America and Europe , creating jobs was no longer on the agenda
Instead , we were told , governments had to turn all their attention to reducing budget deficits
Skeptics pointed out that slashing spending in a depressed economy does little to improve long-run budget prospects , and may actually make them worse by depressing economic growth
But the apostles of austerity - sometimes referred to as `` austerians '' - brushed aside all attempts to do the math
Never mind the numbers , they declared : immediate spending cuts were needed to ward off the `` bond vigilantes , '' investors who would pull the plug on spendthrift governments , driving up their borrowing costs and precipitating a crisis
Look at Greece , they said
The skeptics countered that Greece is a special case , trapped by its use of the euro , which condemns it to years of deflation and stagnation whatever it does
The interest rates paid by major nations with their own currencies - not just the United States , but also Britain and Japan - showed no sign that the bond vigilantes were about to attack , or even that they existed
Just you wait , said the austerians : the bond vigilantes may be invisible , but they must be feared all the same
This was a strange argument even a few months ago , when the U.S. government could borrow for 10 years at less than 4 percent interest
We were being told that it was necessary to give up on job creation , to inflict suffering on millions of workers , in order to satisfy demands that investors were not , in fact , actually making , but which austerians claimed they would make in the future
But the argument has become even stranger recently , as it has become clear that investors are n't worried about deficits ; they 're worried about stagnation and deflation
And they 've been signaling that concern by driving interest rates on the debt of major economies lower , not higher
On Thursday , the rate on 10-year U.S. bonds was only 2.58 percent
So how do austerians deal with the reality of interest rates that are plunging , not soaring
The latest fashion is to declare that there 's a bubble in the bond market : investors are n't really concerned about economic weakness ; they 're just getting carried away
It 's hard to convey the sheer audacity of this argument : first we were told that we must ignore economic fundamentals and instead obey the dictates of financial markets ; now we 're being told to ignore what those markets are actually saying because they 're confused
You see , then , why I find myself thinking in terms of strange and savage cults , demanding human sacrifices to appease unseen forces
And , yes , we are talking about sacrifices
Anyone who doubts the suffering caused by slashing spending in a weak economy should look at the catastrophic effects of austerity programs in Greece and Ireland
Maybe those countries had no choice in the matter - although it 's worth noting that all the suffering being imposed on their populations does n't seem to have done anything to improve investor confidence in their governments
But , in America , we do have a choice
The markets are n't demanding that we give up on job creation
On the contrary , they seem worried about the lack of action - about the fact that , as Bill Gross of the giant bond fund Pimco put it earlier this week , we 're `` approaching a cul-de-sac of stimulus , '' which he warns `` will slow to a snail 's pace , incapable of providing sufficient job growth going forward .
It seems almost superfluous , given all that , to mention the final insult : many of the most vocal austerians are , of course , hypocrites
Notice , in particular , how suddenly Republicans lost interest in the budget deficit when they were challenged about the cost of retaining tax cuts for the wealthy
But that wo n't stop them from continuing to pose as deficit hawks whenever anyone proposes doing something to help the unemployed
So here 's the question I find myself asking : What will it take to break the hold of this cruel cult on the minds of the policy elite
When , if ever , will we get back to the job of rebuilding the economy
According to news reports , the Obama administration which seemed , over the weekend , to be backing away from the `` public option '' for health insurance is shocked and surprised at the furious reaction from progressives
A backlash in the progressive base which pushed President Obama over the top in the Democratic primary and played a major role in his general election victory has been building for months
The fight over the public option involves real policy substance , but it 's also a proxy for broader questions about the president 's priorities and overall approach
The idea of letting individuals buy insurance from a government-run plan was introduced in 2007 by Jacob Hacker of Yale , was picked up by John Edwards during the Democratic primary , and became part of the original Obama health care plan
One purpose of the public option is to save money
Experience with Medicare suggests that a government-run plan would have lower costs than private insurers ; in addition , it would introduce more competition and keep premiums down
And let 's be clear : the supposed alternative , nonprofit co-ops , is a sham
That 's not just my opinion ; it 's what the market says : stocks of health insurance companies soared on news that the Gang of Six senators trying to negotiate a bipartisan approach to health reform were dropping the public plan
Clearly , investors believe that co-ops would offer little real competition to private insurers
Also , and importantly , the public option offered a way to reconcile differing views among Democrats
Until the idea of the public option came along , a significant faction within the party rejected anything short of true single-payer , Medicare-for-all reform , viewing anything less as perpetuating the flaws of our current system
The public option , which would force insurance companies to prove their usefulness or fade away , settled some of those qualms
That said , it 's possible to have universal coverage without a public option several European nations do it and some who want a public option might be willing to forgo it if they had confidence in the overall health care strategy
Unfortunately , the president 's behavior in office has undermined that confidence
On the issue of health care itself , the inspiring figure progressives thought they had elected comes across , far too often , as a dry technocrat who talks of `` bending the curve '' but has only recently begun to make the moral case for reform
Mr. Obama 's explanations of his plan have gotten clearer , but he still seems unable to settle on a simple , pithy formula ; his speeches and op-eds still read as if they were written by a committee
Meanwhile , on such fraught questions as torture and indefinite detention , the president has dismayed progressives with his reluctance to challenge or change Bush administration policy
And then there 's the matter of the banks
I do n't know if administration officials realize just how much damage they 've done themselves with their kid-gloves treatment of the financial industry , just how badly the spectacle of government supported institutions paying giant bonuses is playing
But I 've had many conversations with people who voted for Mr. Obama , yet dismiss the stimulus as a total waste of money
When I press them , it turns out that they 're really angry about the bailouts rather than the stimulus but that 's a distinction lost on most voters
So there 's a growing sense among progressives that they have , as my colleague Frank Rich suggests , been punked
And that 's why the mixed signals on the public option created such an uproar
Now , politics is the art of the possible
Mr. Obama was never going to get everything his supporters wanted
But there 's a point at which realism shades over into weakness , and progressives increasingly feel that the administration is on the wrong side of that line
It seems as if there is nothing Republicans can do that will draw an administration rebuke : Senator Charles E. Grassley feeds the death panel smear , warning that reform will `` pull the plug on grandma , '' and two days later the White House declares that it 's still committed to working with him
It 's hard to avoid the sense that Mr. Obama has wasted months trying to appease people who ca n't be appeased , and who take every concession as a sign that he can be rolled
Indeed , no sooner were there reports that the administration might accept co-ops as an alternative to the public option than G.O.P. leaders announced that co-ops , too , were unacceptable
So progressives are now in revolt
Mr. Obama took their trust for granted , and in the process lost it
And now he needs to win it back
Last weekend , Pastor Rick Warren asked both presidential candidates to define the income at which `` you move from middle class to rich .
The context of the question was , of course , the difference in the candidates ' tax policies
Barack Obama wants to put tax rates on higher-income Americans more or less back to what they were under Bill Clinton ; John McCain , who was against the Bush tax cuts before he was for them , says that means raising taxes on the middle class
Mr. Obama answered the question seriously , defining middle class as meaning an income below $ 150,000
Mr. McCain , at first , made it into a joke , saying `` how about $ 5 million ?
Then he declared that it did n't matter because he would n't raise anyone 's taxes
That was n't just an evasion , it was a falsehood : Mr. McCain 's health care plan , by limiting the deductibility of employer-paid insurance premiums , would effectively raise taxes on a number of people
The real problem , however , was with the question itself
When we think about the middle class , we tend to think of Americans whose lives are decent but not luxurious : they have houses , cars and health insurance , but they still worry about making ends meet , especially when the time comes to send the kids to college
Meanwhile , when we think about the rich , we tend to think about the handful of people who are really , really rich people with servants , people with so much money that , like Mr. McCain , they do n't know how many houses they own
-LRB- Remember how Republicans jeered at John Kerry for being too rich ?
The trouble with Mr. Warren 's question was that it seemed to imply that everyone except the poor belongs to one of these two categories : either you 're clearly rich , or you 're an ordinary member of the middle class
And that 's just wrong
In his entertaining book `` Richistan , '' Robert Frank of The Wall Street Journal declares that the rich are n't just different from you and me , they live in a different , parallel country
But that country is divided into levels , and only the inhabitants of upper Richistan live like aristocrats ; the inhabitants of middle Richistan lead ample but not gilded lives ; and lower Richistanis live in McMansions , drive around in S.U.V. 's , and are likely to think of themselves as `` affluent '' rather than rich
Even these arguably not-rich , however , live in a different financial universe from that inhabited by ordinary members of the middle class : they have lots of disposable income after paying for the essentials , and they do n't lose sleep over expenses , like insurance co-pays and tuition bills , that can seem daunting to many working American families
Which brings us to the dispute about tax policy
Mr. McCain wants to preserve almost all the Bush tax cuts , and add to them by cutting taxes on corporations
Mr. Obama wants to roll back the high-end Bush tax cuts the cuts in tax rates on the top two income brackets and the cuts in tax rates on income from dividends and capital gains and use some of that money to reduce taxes lower down the scale
According to estimates prepared by the nonpartisan Tax Policy Center , those Obama tax increases would fall overwhelmingly on people with incomes of more than $ 200,000 a year
Are such people rich
Well , maybe not : some of those Mr. Obama proposes taxing are only denizens of lower Richistan , although the really big tax increases would fall on upper Richistan
But one thing 's for sure : Mr. Obama is n't planning to raise taxes on the middle class , by any reasonable definition even that of the Bush administration
O.K. , the Bush administration has n't actually offered a definition of `` middle class .
But in May , the Treasury Department which used to do serious tax studies , but these days just churns out Bush administration propaganda released a report purporting to show , by looking at the tax bills of four hypothetical families , how the middle and working class would be hurt if the Bush tax cuts are n't made permanent
And when the Center on Budget and Policy Priorities looked at the report , it made an interesting catch
It turns out that Treasury 's hypothetical families got all their gains from the so-called middle-class provisions of the Bush tax cuts : the Child Tax Credit , the reduced tax bracket for lower incomes and marriage penalty relief
These all happen to be provisions that Mr. Obama proposes leaving in place
In other words , the Bush administration itself implicitly defines the middle class as consisting of people making too little to end up paying additional taxes under the Obama plan
Of course , all the evidence in the world wo n't stop Republicans from claiming , as they always do , that Democrats are going to impose a crippling tax burden on ordinary hard-working Americans
But it just ai n't so
We need to pinch pennies these days
Do n't you know we have a budget deficit
For months that has been the word from Republicans and conservative Democrats , who have rejected every suggestion that we do more to avoid deep cuts in public services and help the ailing economy
But these same politicians are eager to cut checks averaging $ 3 million each to the richest 120,000 people in the country
What - you have n't heard about this proposal
Actually , you have : I 'm talking about demands that we make all of the Bush tax cuts , not just those for the middle class , permanent
Some background : Back in 2001 , when the first set of Bush tax cuts was rammed through Congress , the legislation was written with a peculiar provision - namely , that the whole thing would expire , with tax rates reverting to 2000 levels , on the last day of 2010
Why the cutoff date
In part , it was used to disguise the fiscal irresponsibility of the tax cuts : lopping off that last year reduced the headline cost of the cuts , because such costs are normally calculated over a 10-year period
It also allowed the Bush administration to pass the tax cuts using reconciliation - yes , the same procedure that Republicans denounced when it was used to enact health reform - while sidestepping rules designed to prevent the use of that procedure to increase long-run budget deficits
Obviously , the idea was to go back at a later date and make those tax cuts permanent
But things did n't go according to plan
And now the witching hour is upon us
So what 's the choice now
The Obama administration wants to preserve those parts of the original tax cuts that mainly benefit the middle class - which is an expensive proposition in its own right - but to let those provisions benefiting only people with very high incomes expire on schedule
Republicans , with support from some conservative Democrats , want to keep the whole thing
And there 's a real chance that Republicans will get what they want
That 's a demonstration , if anyone needed one , that our political culture has become not just dysfunctional but deeply corrupt
What 's at stake here
According to the nonpartisan Tax Policy Center , making all of the Bush tax cuts permanent , as opposed to following the Obama proposal , would cost the federal government $ 680 billion in revenue over the next 10 years
For the sake of comparison , it took months of hard negotiations to get Congressional approval for a mere $ 26 billion in desperately needed aid to state and local governments
And where would this $ 680 billion go
Nearly all of it would go to the richest 1 percent of Americans , people with incomes of more than $ 500,000 a year
But that 's the least of it : the policy center 's estimates say that the majority of the tax cuts would go to the richest one-tenth of 1 percent
Take a group of 1,000 randomly selected Americans , and pick the one with the highest income ; he 's going to get the majority of that group 's tax break
And the average tax break for those lucky few - the poorest members of the group have annual incomes of more than $ 2 million , and the average member makes more than $ 7 million a year - would be $ 3 million over the course of the next decade
How can this kind of giveaway be justified at a time when politicians claim to care about budget deficits
Well , history is repeating itself
The original campaign for the Bush tax cuts relied on deception and dishonesty
In fact , my first suspicions that we were being misled into invading Iraq were based on the resemblance between the campaign for war and the campaign for tax cuts the previous year
And sure enough , that same trademark deception and dishonesty is being deployed on behalf of tax cuts for the wealthiest Americans
So , for example , we 're told that it 's all about helping small business ; but only a tiny fraction of small-business owners would receive any tax break at all
And how many small-business owners do you know making several million a year
Or we 're told that it 's about helping the economy recover
But it 's hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty , and are n't likely to spend a windfall
No , this has nothing to do with sound economic policy
Instead , as I said , it 's about a dysfunctional and corrupt political culture , in which Congress wo n't take action to revive the economy , pleads poverty when it comes to protecting the jobs of schoolteachers and firefighters , but declares cost no object when it comes to sparing the already wealthy even the slightest financial inconvenience
So far , the Obama administration is standing firm against this outrage
Let 's hope that it prevails in its fight
Otherwise , it will be hard not to lose all faith in America 's future
The debate over the `` public option '' in health care has been dismaying in many ways
Perhaps the most depressing aspect for progressives , however , has been the extent to which opponents of greater choice in health care have gained traction in Congress , if not with the broader public simply by repeating , over and over again , that the public option would be , horrors , a government program
A new blog from The New York Times that tracks the health care debate as it unfolds
More Health Care Overhaul News Washington , it seems , is still ruled by Reaganism by an ideology that says government intervention is always bad , and leaving the private sector to its own devices is always good
Call me na ve , but I actually hoped that the failure of Reaganism in practice would kill it
It turns out , however , to be a zombie doctrine : even though it should be dead , it keeps on coming
Let 's talk for a moment about why the age of Reagan should be over
First of all , even before the current crisis Reaganomics had failed to deliver what it promised
Remember how lower taxes on high incomes and deregulation that unleashed the `` magic of the marketplace '' were supposed to lead to dramatically better outcomes for everyone
Well , it did n't happen
To be sure , the wealthy benefited enormously : the real incomes of the top .01 percent of Americans rose sevenfold between 1980 and 2007
But the real income of the median family rose only 22 percent , less than a third its growth over the previous 27 years
Moreover , most of whatever gains ordinary Americans achieved came during the Clinton years
President George W. Bush , who had the distinction of being the first Reaganite president to also have a fully Republican Congress , also had the distinction of presiding over the first administration since Herbert Hoover in which the typical family failed to see any significant income gains
And then there 's the small matter of the worst recession since the 1930s
There 's a lot to be said about the financial disaster of the last two years , but the short version is simple : politicians in the thrall of Reaganite ideology dismantled the New Deal regulations that had prevented banking crises for half a century , believing that financial markets could take care of themselves
The effect was to make the financial system vulnerable to a 1930s-style crisis and the crisis came
`` We have always known that heedless self-interest was bad morals , '' said Franklin Delano Roosevelt in 1937
`` We know now that it is bad economics .
And last year we learned that lesson all over again
Or did we
The astonishing thing about the current political scene is the extent to which nothing has changed
The debate over the public option has , as I said , been depressing in its inanity
Opponents of the option not just Republicans , but Democrats like Senator Kent Conrad and Senator Ben Nelson have offered no coherent arguments against it
Mr. Nelson has warned ominously that if the option were available , Americans would choose it over private insurance which he treats as a self-evidently bad thing , rather than as what should happen if the government plan was , in fact , better than what private insurers offer
But it 's much the same on other fronts
Efforts to strengthen bank regulation appear to be losing steam , as opponents of reform declare that more regulation would lead to less financial innovation this just months after the wonders of innovation brought our financial system to the edge of collapse , a collapse that was averted only with huge infusions of taxpayer funds
So why wo n't these zombie ideas die
Part of the answer is that there 's a lot of money behind them
`` It is difficult to get a man to understand something , '' said Upton Sinclair , `` when his salary '' or , I would add , his campaign contributions `` depend upon his not understanding it .
In particular , vast amounts of insurance industry money have been flowing to obstructionist Democrats like Mr. Nelson and Senator Max Baucus , whose Gang of Six negotiations have been a crucial roadblock to legislation
But some of the blame also must rest with President Obama , who famously praised Reagan during the Democratic primary , and has n't used the bully pulpit to confront government-is-bad fundamentalism
That 's ironic , in a way , since a large part of what made Reagan so effective , for better or for worse , was the fact that he sought to change America 's thinking as well as its tax code
How will this all work out
I do n't know
But it 's hard to avoid the sense that a crucial opportunity is being missed , that we 're at what should be a turning point but are failing to make the turn
In my column last Monday , I made a joke about the Swiss that fell flat with some readers
Also , the Swiss do n't wear lederhosen
So the Obama campaign has turned to the politics of personal destruction , attempting to make a campaign issue out of John McCain 's inability to remember how many houses he has
And the turn comes not a moment too soon
Over the past month or so many Democrats have had the sick feeling that once again their candidate brought a knife to a gunfight
Barack Obama 's campaign , inexplicably , was unprepared for the inevitable Republican attack on the candidate 's character
By the middle of last week , Mr. Obama 's once formidable lead , both in national polls and in electoral college projections based on state-level polls , had virtually evaporated
Mr. Obama 's waning advantage brought back bad memories of the 2004 campaign , whose key lesson was that there are no limits to the form G.O.P. character attacks can take
You might think , for example , that a party claiming to support the troops would shy away from attacking a war hero 's military record but back in 2004 the Swift-boat lies were enthusiastically embraced by Republican activists , and helped neutralize the advantage John Kerry was supposed to get from his biography
And you might think that a party committed to tax cuts for the rich , a party that routinely castigates those who engage in `` class warfare , '' would shy away from attacking a Democrat for his wealth
But raw class envy played an important role in the attacks on Mr. Kerry , whom Rush Limbaugh described repeatedly as a `` gigolo '' with a `` sugar daddy wife , '' and G.O.P. supporters do n't seem to have experienced any cognitive dissonance
It was predictable , then , that Mr. Obama would find himself on the receiving end of an all-out character attack , much of it nonsensical : he 's un-American because he vacations in Hawaii , where his grandmother lives
It was also predictable that responding by repeating what a great guy the candidate is , or denouncing the attacks as unfair , would be ineffective
So now the Obama campaign has responded with its own character attack
Is it fair to attack Mr. McCain for having too many houses
In an ideal world , politicians would be judged by their actions , not by their wealth or lack thereof
Franklin Delano Roosevelt was born to wealth , but that did n't stop him from doing more for working Americans than any president before or since
Conversely , Joseph Biden 's hardscrabble life story , though inspiring , did n't stop him from supporting the odious 2005 bankruptcy bill
But in the world we actually live in , pro-corporate , inequality-increasing Republicans argue that you should vote for them because they 're regular guys you 'd like to have a beer with , while Democrats who want to raise taxes on top earners , expand health care and raise the minimum wage are snooty elitists
And in that world , stripping away the regular-guy facade pointing out that everything Rush Limbaugh said about Mr. Kerry applies equally to Mr. McCain , that Mr. McCain lives in a material world few Americans can imagine is only fair
Yes , Mr. Obama vacations in Hawaii and Cindy McCain says that `` In Arizona , the only way to get around the state is by small private plane .
The squealing from the usual suspects demonstrates how much the Obama counterattack has the G.O.P. worried
Back in 2004 Fox News described John Kerry as `` one of the haves '' with a `` billionaire wife '' ; now it asks whether raising the issue of Mr. McCain 's houses is `` bashing the American dream .
And the McCain campaign , after initially mumbling something about how Mr. Obama eats arugula , quickly resorted to its all-purpose answer : you ca n't criticize the candidate because he 's a former P.O.W. Maybe the campaign hopes that the Obama people will fall into a reflexive cringe , the same way they did when Wesley Clark made the entirely reasonable point that having been a P.O.W. , while it makes you a hero , does n't necessarily qualify you to become president
Assuming that the Obama campaign is n't scared off by the P.O.W. thing , can it really win in an exchange of character attacks
Probably not but it does n't have to
The central fact of this year 's election is that voters are fed up with Republican rule
The only way Mr. McCain can win the presidential race is if it becomes a contest of personalities rather than parties and if his campaign can instill in voters the perception that Mr. Obama is a suspicious character while Mr. McCain is a fine , upstanding gentleman
The Obama campaign , on the other hand , does n't need to convince voters either that he 's the awesomest candidate ever or that Mr. McCain is a villain
All it has to do is tarnish Mr. McCain 's image enough so that voters see this as a race between a Democrat and a Republican
And that 's a race the Democrat will easily win
But we can safely predict what he and other officials will say about where we are right now : that the economy is continuing to recover , albeit more slowly than they would like
Unfortunately , that 's not true : this is n't a recovery , in any sense that matters
And policy makers should be doing everything they can to change that fact
The small sliver of truth in claims of continuing recovery is the fact that G.D.P. is still rising : we 're not in a classic recession , in which everything goes down
But so what
The important question is whether growth is fast enough to bring down sky-high unemployment
We need about 2.5 percent growth just to keep unemployment from rising , and much faster growth to bring it significantly down
Yet growth is currently running somewhere between 1 and 2 percent , with a good chance that it will slow even further in the months ahead
Will the economy actually enter a double dip , with G.D.P. shrinking
Who cares
If unemployment rises for the rest of this year , which seems likely , it wo n't matter whether the G.D.P. numbers are slightly positive or slightly negative
All of this is obvious
Yet policy makers are in denial
After its last monetary policy meeting , the Fed released a statement declaring that it `` anticipates a gradual return to higher levels of resource utilization '' - Fedspeak for falling unemployment
Nothing in the data supports that kind of optimism
Meanwhile , Tim Geithner , the Treasury secretary , says that `` we 're on the road to recovery .
No , we are n't
Why are people who know better sugar-coating economic reality
The answer , I 'm sorry to say , is that it 's all about evading responsibility
In the case of the Fed , admitting that the economy is n't recovering would put the institution under pressure to do more
And so far , at least , the Fed seems more afraid of the possible loss of face if it tries to help the economy and fails than it is of the costs to the American people if it does nothing , and settles for a recovery that is n't
In the case of the Obama administration , officials seem loath to admit that the original stimulus was too small
True , it was enough to limit the depth of the slump - a recent analysis by the Congressional Budget Office says unemployment would probably be well into double digits now without the stimulus - but it was n't big enough to bring unemployment down significantly
Now , it 's arguable that even in early 2009 , when President Obama was at the peak of his popularity , he could n't have gotten a bigger plan through the Senate
And he certainly could n't pass a supplemental stimulus now
So officials could , with considerable justification , place the onus for the non-recovery on Republican obstructionism
But they 've chosen , instead , to draw smiley faces on a grim picture , convincing nobody
And the likely result in November - big gains for the obstructionists - will paralyze policy for years to come
So what should officials be doing , aside from telling the truth about the economy
The Fed has a number of options
It can buy more long-term and private debt ; it can push down long-term interest rates by announcing its intention to keep short-term rates low ; it can raise its medium-term target for inflation , making it less attractive for businesses to simply sit on their cash
Nobody can be sure how well these measures would work , but it 's better to try something that might not work than to make excuses while workers suffer
The administration has less freedom of action , since it ca n't get legislation past the Republican blockade
But it still has options
It can revamp its deeply unsuccessful attempt to aid troubled homeowners
It can use Fannie Mae and Freddie Mac , the government-sponsored lenders , to engineer mortgage refinancing that puts money in the hands of American families - yes , Republicans will howl , but they 're doing that anyway
It can finally get serious about confronting China over its currency manipulation : how many times do the Chinese have to promise to change their policies , then renege , before the administration decides that it 's time to act
Which of these options should policy makers pursue
If I had my way , all of them
I know what some players both at the Fed and in the administration will say : they 'll warn about the risks of doing anything unconventional
But we 've already seen the consequences of playing it safe , and waiting for recovery to happen all by itself : it 's landed us in what looks increasingly like a permanent state of stagnation and high unemployment
It 's time to admit that what we have now is n't a recovery , and do whatever we can to change that situation
So new budget projections show a cumulative deficit of $ 9 trillion over the next decade
According to many commentators , that 's a terrifying number , requiring drastic action in particular , of course , canceling efforts to boost the economy and calling off health care reform
Go to Columnist Page Blog : The Conscience of a Liberal The truth is more complicated and less frightening
Right now deficits are actually helping the economy
In fact , deficits here and in other major economies saved the world from a much deeper slump
The longer-term outlook is worrying , but it 's not catastrophic
The only real reason for concern is political
The United States can deal with its debts if politicians of both parties are , in the end , willing to show at least a bit of maturity
Need I say more
Let 's start with the effects of this year 's deficit
There are two main reasons for the surge in red ink
First , the recession has led both to a sharp drop in tax receipts and to increased spending on unemployment insurance and other safety-net programs
Second , there have been large outlays on financial rescues
These are counted as part of the deficit , although the government is acquiring assets in the process and will eventually get at least part of its money back
What this tells us is that right now it 's good to run a deficit
Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s
It 's a scary thought
If governments had raised taxes or slashed spending in the face of the slump , if they had refused to rescue distressed financial institutions , we could all too easily have seen a full replay of the Great Depression
As I said , deficits saved the world
In fact , we would be better off if governments were willing to run even larger deficits over the next year or two
The official White House forecast shows a nation stuck in purgatory for a prolonged period , with high unemployment persisting for years
If that 's at all correct and I fear that it will be we should be doing more , not less , to support the economy
But what about all that debt we 're incurring
That 's a bad thing , but it 's important to have some perspective
Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $ 9 trillion is a huge sum , we also have a huge economy , which means that things are n't as scary as you might think
Here 's one way to look at it : We 're looking at a rise in the debt\/G
D.P. ratio of about 40 percentage points
The real interest on that additional debt -LRB- you want to subtract off inflation -RRB- will probably be around 1 percent of G.D.P. , or 5 percent of federal revenue
That does n't sound like an overwhelming burden
Now , this assumes that the U.S. government 's credit will remain good so that it 's able to borrow at relatively low interest rates
So far , that 's still true
Despite the prospect of big deficits , the government is able to borrow money long term at an interest rate of less than 3.5 percent , which is low by historical standards
People making bets with real money do n't seem to be worried about U.S. solvency
The numbers tell you why
According to the White House projections , by 2019 , net federal debt will be around 70 percent of G.D.P. That 's not good , but it 's within a range that has historically proved manageable for advanced countries , even those with relatively weak governments
In the early 1990s , Belgium which is deeply divided along linguistic lines had a net debt of 118 percent of G.D.P. , while Italy which is , well , Italy had a net debt of 114 percent of G.D.P. Neither faced a financial crisis
So is there anything to worry about
Yes , but the dangers are political , not economic
As I 've said , those 10-year projections are n't as bad as you may have heard
Over the really long term , however , the U.S. government will have big problems unless it makes some major changes
In particular , it has to rein in the growth of Medicare and Medicaid spending
That should n't be hard in the context of overall health care reform
After all , America spends far more on health care than other advanced countries , without better results , so we should be able to make our system more cost-efficient
But that wo n't happen , of course , if even the most modest attempts to improve the system are successfully demagogued by conservatives
as efforts to `` pull the plug on grandma .
So do n't fret about this year 's deficit ; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery
And the extra debt should be manageable
If we face a potential problem , it 's not because the economy ca n't handle the extra debt
Instead , it 's the politics , stupid
My first reaction to Bill Clinton 's convention speech was sheer professional jealousy : nobody , but nobody , has his ability to translate economic wonkery into plain , forceful English
In effect , Mr. Clinton provided an executive summary of the new Census report on income , poverty and health insurance but he did it so eloquently , so seamlessly , that there was no sense that he was giving his audience a lecture
My second reaction was that in Mr. Clinton 's speech as in the speeches by Hillary Clinton and Joe Biden -LRB- this column was filed before Barack Obama spoke on Thursday night -RRB- one heard the fundamental difference between the two parties
Democrats say and , as far as I can tell , really believe that working Americans are getting a raw deal ; Republicans , despite occasional attempts to sound sympathetic , basically believe that people have nothing to complain about
As it happens , the numbers support the Democrats
That Census report gives a snapshot of the economic status of American families in 2007 that is , before the financial crisis started dragging the economy down and the unemployment rate up
It 's a given that 2008 will look much worse , so last year was as good as it will get in the Bush years
Yet working-age Americans had significantly lower median income in 2007 than they did in 2000
-LRB- The elderly , whose income is supported by Social Security the program the Bush administration tried to kill saw modest gains .
Meanwhile , poverty was up , and health insurance especially the employment-based insurance on which most middle-class Americans depend was down
But Republicans , very much including John McCain and his advisers , do n't believe there 's a problem
Former Senator Phil Gramm made headlines , and stepped down as co-chairman of the McCain campaign , after he described America as a `` nation of whiners .
But how different was that remark , really , from Mr. McCain 's own declaration that `` there 's been great progress economically '' progress that 's mysteriously invisible in the actual data during the Bush years
And Mr. Gramm , by all accounts , remains a key economic adviser to Mr. McCain
Last week John Goodman , an influential figure in Republican health care circles , explained that we should n't worry about the growing number of Americans without health insurance , because there 's no such thing as being uninsured
After all , you can always get treatment at an emergency room
And Mr. Goodman he 's the president of the National Center for Policy Analysis , an important conservative think tank , and is often described as the `` father of health savings accounts , '' a central feature of the Bush administration 's health policy wants the next president to issue an executive order prohibiting the Census Bureau from classifying anyone as uninsured
`` Voil !
he says
`` Problem solved .
The truth , of course , is that visiting the emergency room in a medical crisis is no substitute for regular care
Furthermore , while a hospital will treat you whether or not you can pay , it will also bill you and the bill wo n't be waived unless you 're destitute
As a result , uninsured working Americans avoid visiting emergency rooms if at all possible , because they 're terrified by the potential cost : medical expenses are one of the prime causes of personal bankruptcy
Mr. Goodman has in the past , including in an op-ed for The Wall Street Journal , described himself as an adviser to the McCain campaign on health policy
The campaign now claims that he is not , in fact , an adviser
But it 's a good bet that Mr. McCain 's inner circle shares Mr. Goodman 's views
You see , Mr. Goodman 's assertion that lack of health insurance is no problem precisely echoed what President Bush said a year ago : `` I mean , people have access to health care in America
After all , you just go to an emergency room .
That 's because both men like Mr. Gramm were just saying in public what modern Republicans say when they talk to each other
Despite attempts to feign sympathy , the leaders of today 's G.O.P. fundamentally feel that Americans complaining about their economic and health care difficulties are , well , just a bunch of whiners
And that , ultimately , even more than their policy proposals , is what defines the difference between the parties
It 's true that elected Democrats are often too cautious and too beholden to major donors to be as progressive as the party 's activists would like
But even in the face of a Republican Congress , Mr. Clinton succeeded in pushing forward policies , like the State Children 's Health Insurance Program , that did a lot to help working families
And what one sees on the other side is a total lack of empathy for and understanding of the problems working Americans face
Mr. Clinton , famously , felt our pain
Republicans , manifestly , do n't
And it 's hard to fix a problem if you do n't even think it exists
I 'm starting to have a sick feeling about prospects for American workers - but not , or not entirely , for the reasons you might think
Yes , growth is slowing , and the odds are that unemployment will rise , not fall , in the months ahead
That 's bad
But what 's worse is the growing evidence that our governing elite just does n't care - that a once-unthinkable level of economic distress is in the process of becoming the new normal
And I worry that those in power , rather than taking responsibility for job creation , will soon declare that high unemployment is `` structural , '' a permanent part of the economic landscape - and that by condemning large numbers of Americans to long-term joblessness , they 'll turn that excuse into dismal reality
Not long ago , anyone predicting that one in six American workers would soon be unemployed or underemployed , and that the average unemployed worker would have been jobless for 35 weeks , would have been dismissed as outlandishly pessimistic - in part because if anything like that happened , policy makers would surely be pulling out all the stops on behalf of job creation
But now it has happened , and what do we see
First , we see Congress sitting on its hands , with Republicans and conservative Democrats refusing to spend anything to create jobs , and unwilling even to mitigate the suffering of the jobless
We 're told that we ca n't afford to help the unemployed - that we must get budget deficits down immediately or the `` bond vigilantes '' will send U.S. borrowing costs sky-high
Some of us have tried to point out that those bond vigilantes are , as far as anyone can tell , figments of the deficit hawks ' imagination - far from fleeing U.S. debt , investors have been buying it eagerly , driving interest rates to historic lows
But the fearmongers are unmoved : fighting deficits , they insist , must take priority over everything else - everything else , that is , except tax cuts for the rich , which must be extended , no matter how much red ink they create
The point is that a large part of Congress - large enough to block any action on jobs - cares a lot about taxes on the richest 1 percent of the population , but very little about the plight of Americans who ca n't find work
Well , if Congress wo n't act , what about the Federal Reserve
The Fed , after all , is supposed to pursue two goals : full employment and price stability , usually defined in practice as an inflation rate of about 2 percent
Since unemployment is very high and inflation well below target , you might expect the Fed to be taking aggressive action to boost the economy
But it is n't
It 's true that the Fed has already pushed one pedal to the metal : short-term interest rates , its usual policy tool , are near zero
Still , Ben Bernanke , the Fed chairman , has assured us that he has other options , like holding more mortgage-backed securities and promising to keep short-term rates low
And a large body of research suggests that the Fed could boost the economy by committing to an inflation target higher than 2 percent
But the Fed has n't done any of these things
Instead , some officials are defining success down
For example , last week Richard Fisher , president of the Federal Reserve Bank of Dallas , argued that the Fed bears no responsibility for the economy 's weakness , which he attributed to business uncertainty about future regulations - a view that 's popular in conservative circles , but completely at odds with all the actual evidence
In effect , he responded to the Fed 's failure to achieve one of its two main goals by taking down the goalpost
He then moved the other goalpost , defining the Fed 's aim not as roughly 2 percent inflation , but rather as that of `` keeping inflation extremely low and stable .
In short , it 's all good
And I predict - having seen this movie before , in Japan - that if and when prices start falling , when below-target inflation becomes deflation , some Fed officials will explain that that 's O.K. , too
What lies down this path
Here 's what I consider all too likely : Two years from now unemployment will still be extremely high , quite possibly higher than it is now
But instead of taking responsibility for fixing the situation , politicians and Fed officials alike will declare that high unemployment is structural , beyond their control
And as I said , over time these excuses may turn into a self-fulfilling prophecy , as the long-term unemployed lose their skills and their connections with the work force , and become unemployable
I 'd like to imagine that public outrage will prevent this outcome
But while Americans are indeed angry , their anger is unfocused
And so I worry that our governing elite , which just is n't all that into the unemployed , will allow the jobs slump to go on and on and on
The last time a Democrat sat in the White House , he faced a nonstop witch hunt by his political opponents
Prominent figures on the right accused Bill and Hillary Clinton of everything from drug smuggling to murder
And once Republicans took control of Congress , they subjected the Clinton administration to unrelenting harassment - at one point taking 140 hours of sworn testimony over accusations that the White House had misused its Christmas card list
Now it 's happening again - except that this time it 's even worse
Let 's turn the floor over to Rush Limbaugh : `` Imam Hussein Obama , '' he recently declared , is `` probably the best anti-American president we 've ever had .
To get a sense of how much it matters when people like Mr. Limbaugh talk like this , bear in mind that he 's an utterly mainstream figure within the Republican Party ; bear in mind , too , that unless something changes the political dynamics , Republicans will soon control at least one house of Congress
This is going to be very , very ugly
So where is this rage coming from
Why is it flourishing
What will it do to America
Anyone who remembered the 1990s could have predicted something like the current political craziness
What we learned from the Clinton years is that a significant number of Americans just do n't consider government by liberals - even very moderate liberals - legitimate
Mr. Obama 's election would have enraged those people even if he were white
Of course , the fact that he is n't , and has an alien-sounding name , adds to the rage
By the way , I 'm not talking about the rage of the excluded and the dispossessed : Tea Partiers are relatively affluent , and nobody is angrier these days than the very , very rich
Wall Street has turned on Mr. Obama with a vengeance : last month Steve Schwarzman , the billionaire chairman of the Blackstone Group , the private equity giant , compared proposals to end tax loopholes for hedge fund managers with the Nazi invasion of Poland
And powerful forces are promoting and exploiting this rage
Jane Mayer 's new article in The New Yorker about the superrich Koch brothers and their war against Mr. Obama has generated much-justified attention , but as Ms. Mayer herself points out , only the scale of their effort is new : billionaires like Richard Mellon Scaife waged a similar war against Bill Clinton
Meanwhile , the right-wing media are replaying their greatest hits
In the 1990s , Mr. Limbaugh used innuendo to feed anti-Clinton mythology , notably the insinuation that Hillary Clinton was complicit in the death of Vince Foster
Now , as we 've just seen , he 's doing his best to insinuate that Mr. Obama is a Muslim
Again , though , there 's an extra level of craziness this time around : Mr. Limbaugh is the same as he always was , but now seems tame compared with Glenn Beck
And where , in all of this , are the responsible Republicans , leaders who will stand up and say that some partisans are going too far
Nowhere to be found
To take a prime example : the hysteria over the proposed Islamic center in lower Manhattan almost makes one long for the days when former President George W. Bush tried to soothe religious hatred , declaring Islam a religion of peace
There were good reasons for his position : there are a billion Muslims in the world , and America ca n't afford to make all of them its enemies
But here 's the thing : Mr. Bush is still around , as are many of his former officials
Where are the statements , from the former president or those in his inner circle , preaching tolerance and denouncing anti-Islam hysteria
On this issue , as on many others , the G.O.P. establishment is offering a nearly uniform profile in cowardice
So what will happen if , as expected , Republicans win control of the House
We already know part of the answer : Politico reports that they 're gearing up for a repeat performance of the 1990s , with a `` wave of committee investigations '' - several of them over supposed scandals that we already know are completely phony
We can expect the G.O.P. to play chicken over the federal budget , too ; I 'd put even odds on a 1995-type government shutdown sometime over the next couple of years
It will be an ugly scene , and it will be dangerous , too
The 1990s were a time of peace and prosperity ; this is a time of neither
In particular , we 're still suffering the after-effects of the worst economic crisis since the 1930s , and we ca n't afford to have a federal government paralyzed by an opposition with no interest in helping the president govern
But that 's what we 're likely to get
If I were President Obama , I 'd be doing all I could to head off this prospect , offering some major new initiatives on the economic front in particular , if only to shake up the political dynamic
But my guess is that the president will continue to play it safe , all the way into catastrophe
Many of the retrospectives on Ted Kennedy 's life mention his regret that he did n't accept Richard Nixon 's offer of a bipartisan health care deal
The moral some commentators take from that regret is that today 's health care reformers should do what Mr. Kennedy balked at doing back then , and reach out to the other side
A blog from The New York Times that tracks the health care debate as it unfolds
More Health Care Overhaul News But it 's a bad analogy , because today 's political scene is nothing like that of the early 1970s
In fact , surveying current politics , I find myself missing Richard Nixon
No , I have n't lost my mind
Nixon was surely the worst person other than Dick Cheney ever to control the executive branch
But the Nixon era was a time in which leading figures in both parties were capable of speaking rationally about policy , and in which policy decisions were n't as warped by corporate cash as they are now
America is a better country in many ways than it was 35 years ago , but our political system 's ability to deal with real problems has been degraded to such an extent that I sometimes wonder whether the country is still governable
As many people have pointed out , Nixon 's proposal for health care reform looks a lot like Democratic proposals today
In fact , in some ways it was stronger
Right now , Republicans are balking at the idea of requiring that large employers offer health insurance to their workers ; Nixon proposed requiring that all employers , not just large companies , offer insurance
Nixon also embraced tighter regulation of insurers , calling on states to `` approve specific plans , oversee rates , ensure adequate disclosure , require an annual audit and take other appropriate measures .
No illusions there about how the magic of the marketplace solves all problems
So what happened to the days when a Republican president could sound so nonideological , and offer such a reasonable proposal
Part of the answer is that the right-wing fringe , which has always been around as an article by the historian Rick Perlstein puts it , `` crazy is a pre-existing condition '' has now , in effect , taken over one of our two major parties
Moderate Republicans , the sort of people with whom one might have been able to negotiate a health care deal , have either been driven out of the party or intimidated into silence
Whom are Democrats supposed to reach out to , when Senator Chuck Grassley of Iowa , who was supposed to be the linchpin of any deal , helped feed the `` death panel '' lies
But there 's another reason health care reform is much harder now than it would have been under Nixon : the vast expansion of corporate influence
We tend to think of the way things are now , with a huge army of lobbyists permanently camped in the corridors of power , with corporations prepared to unleash misleading ads and organize fake grass-roots protests against any legislation that threatens their bottom line , as the way it always was
But our corporate-cash-dominated system is a relatively recent creation , dating mainly from the late 1970s
And now that this system exists , reform of any kind has become extremely difficult
That 's especially true for health care , where growing spending has made the vested interests far more powerful than they were in Nixon 's day
The health insurance industry , in particular , saw its premiums go from 1.5 percent of G.D.P. in 1970 to 5.5 percent in 2007 , so that a once minor player has become a political behemoth , one that is currently spending $ 1.4 million a day lobbying Congress
That spending fuels debates that otherwise seem incomprehensible
Why are `` centrist '' Democrats like Senator Kent Conrad of North Dakota so opposed to letting a public plan , in which Americans can buy their insurance directly from the government , compete with private insurers
Never mind their often incoherent arguments ; what it comes down to is the money
Given the combination of G.O.P. extremism and corporate power , it 's now doubtful whether health reform , even if we get it which is by no means certain will be anywhere near as good as Nixon 's proposal , even though Democrats control the White House and have a large Congressional majority
And what about other challenges
Every desperately needed reform I can think of , from controlling greenhouse gases to restoring fiscal balance , will have to run the same gantlet of lobbying and lies
I 'm not saying that reformers should give up
They do , however , have to realize what they 're up against
There was a lot of talk last year about how Barack Obama would be a `` transformational '' president but true transformation , it turns out , requires a lot more than electing one telegenic leader
Actually turning this country around is going to take years of siege warfare against deeply entrenched interests , defending a deeply dysfunctional political system
Americans are angry at Wall Street , and rightly so
First the financial industry plunged us into economic crisis , then it was bailed out at taxpayer expense
And now , with the economy still deeply depressed , the industry is paying itself gigantic bonuses
If you are n't outraged , you have n't been paying attention
But crashing the economy and fleecing the taxpayer are n't Wall Street 's only sins
Even before the crisis and the bailouts , many financial-industry high-fliers made fortunes through activities that were worthless if not destructive from a social point of view
And they 're still at it
Consider two recent news stories
One involves the rise of high-speed trading : some institutions , including Goldman Sachs , have been using superfast computers to get the jump on other investors , buying or selling stocks a tiny fraction of a second before anyone else can react
Profits from high-frequency trading are one reason Goldman is earning record profits and likely to pay record bonuses
On a seemingly different front , Sunday 's Times reported on the case of Andrew J. Hall , who leads an arm of Citigroup that speculates on oil and other commodities
His operation has made a lot of money recently , and according to his contract Mr. Hall is owed $ 100 million
What do these stories have in common
The politically salient answer , for now at least , is that in both cases we 're looking at huge payouts by firms that were major recipients of federal aid
Citi has received around $ 45 billion from taxpayers ; Goldman has repaid the $ 10 billion it received in direct aid , but it has benefited enormously both from federal guarantees and from bailouts of other financial institutions
What are taxpayers supposed to think when these welfare cases cut nine-figure paychecks
But suppose we grant that both Goldman and Mr. Hall are very good at what they do , and might have earned huge profits even without all that aid
Even so , what they do is bad for America
Just to be clear : financial speculation can serve a useful purpose
It 's good , for example , that futures markets provide an incentive to stockpile heating oil before the weather gets cold and stockpile gasoline ahead of the summer driving season
But speculation based on information not available to the public at large is a very different matter
As the U.C.L.A. economist Jack Hirshleifer showed back in 1971 , such speculation often combines `` private profitability '' with `` social uselessness .
It 's hard to imagine a better illustration than high-frequency trading
The stock market is supposed to allocate capital to its most productive uses , for example by helping companies with good ideas raise money
But it 's hard to see how traders who place their orders one-thirtieth of a second faster than anyone else do anything to improve that social function
What about Mr. Hall
The Times report suggests that he makes money mainly by outsmarting other investors , rather than by directing resources to where they 're needed
Again , it 's hard to see the social value of what he does
And there 's a good case that such activities are actually harmful
For example , high-frequency trading probably degrades the stock market 's function , because it 's a kind of tax on investors who lack access to those superfast computers which means that the money Goldman spends on those computers has a negative effect on national wealth
As the great Stanford economist Kenneth Arrow put it in 1973 , speculation based on private information imposes a `` double social loss '' : it uses up resources and undermines markets
Now , you might be tempted to dismiss destructive speculation as a minor issue and 30 years ago you would have been right
Since then , however , high finance securities and commodity trading , as opposed to run-of-the-mill banking has become a vastly more important part of our economy , increasing its share of G.D.P. by a factor of six
And soaring incomes in the financial industry have played a large role in sharply rising income inequality
What should be done
Last week the House passed a bill setting rules for pay packages at a wide range of financial institutions
That would be a step in the right direction
But it really should be accompanied by much broader regulation of financial practices and , I would argue , by higher tax rates on supersized incomes
Unfortunately , the House measure is opposed by the Obama administration , which still seems to operate on the principle that what 's good for Wall Street is good for America
Neither the administration , nor our political system in general , is ready to face up to the fact that we 've become a society in which the big bucks go to bad actors , a society that lavishly rewards those who make us poorer
A year ago , as the outlines of the current financial crisis were just becoming clear , I suggested that this crisis , unlike a superficially similar crisis in 1998 , would n't end quickly
The good news , I guess , is that we 've been experiencing a sort of slow-motion meltdown , lacking in dramatic Black Fridays and such
The gradual way the crisis has unfolded has led to an angels-on-the-head-of-a-pin debate among economists about whether what we 're suffering really deserves to be called a recession
Yet even a slo-mo crisis can do a lot of damage if it goes on for a year and counting
Home prices are down about 16 percent over the past year , and show no sign of stabilizing
The pain from this bust is widely spread : there are millions of American families who did n't buy mortgage-backed securities and have n't lost their houses , but have nonetheless been impoverished by the destruction of much or all of their home equity
Meanwhile , the job market has deteriorated even more than you 'd guess from the jump in the headline unemployment rate
The broadest measure of unemployment , which takes into account the rapidly rising number of workers forced to take cuts in paid hours and wages , has risen from 8.3 percent to 10.3 percent over the past year , roughly matching its high point five years ago
And there 's no end to the pain in sight
Ben Bernanke and his colleagues at the Federal Reserve have cut the interest rates they control repeatedly since last September
But they have n't managed to reduce borrowing costs for the private sector
Mortgage rates are about the same as they were last summer , and the interest rates many corporations have to pay have actually gone up
So Fed policy has n't done anything to encourage private investment
The problem is fear : private-sector finance has dried up because investors , burned by their losses on securities that were supposed to be safe , are now reluctant to buy anything that is n't guaranteed by the U.S. government
And the proliferation of special rescue packages the TAF , the TSLF , the Bear Stearns deal , the Fannie-Freddie thing may have staved off blind panic , but has fallen far short of restoring confidence
Oh , and those tax rebates Congress and the White House agreed to mail out have already done whatever good they 're going to do
Looking forward , it 's hard to see how consumers can keep spending even at their current rate which means that things will probably get considerably worse before they get better
What more can policy do
The Fed has pretty much used up its ammunition : nobody thinks that additional interest-rate cuts would accomplish much -LRB- and there 's a faction at the Fed that wants to raise rates to fight inflation -RRB-
And nothing much can or should be done to support home prices , which are still much too high in inflation-adjusted terms
Nor can Washington prevent a continuing credit crunch : overextended , undercapitalized financial institutions have to rein in their lending , and it 's not realistic to expect the public sector to pick up all the slack especially when quasipublic institutions like Fannie and Freddie are also in trouble
There is , however , a case for another , more serious fiscal stimulus package , as a way to sustain employment while the markets work off the aftereffects of the housing bubble
The `` emergency economic plan '' Barack Obama announced last week is a move in the right direction , although I wish it had been bigger and bolder
Still , Mr. Obama is offering more than John McCain , whose economic policy mainly amounts to `` stay the course .
Incidentally , it 's surprising that the lousy economy has n't yet had more impact on the campaign
Mr. McCain essentially proposes continuing the policies of a president whose approval rating on economics is only 20 percent
So why is n't Mr. Obama further ahead in the polls
One answer may be that Mr. Obama , perhaps inhibited by his desire to transcend partisanship -LRB- and avoid praising the last Democratic president ?
, has been surprisingly diffident about attacking the Bush economic record
An illustration : if you go to the official Obama Web site and click on the economic issues page , what you see first is n't a call for change what you see is a long quote from the candidate extolling the wonders of the free market , which could just as easily have come from a speech by President Bush
Anyway , back to the economy
I titled that column about the early stages of the financial crisis `` Very Scary Things .
A year later , with the crisis still rolling , it 's clear that I was right to be afraid
One depressing aspect of American politics is the susceptibility of the political and media establishment to charlatans
You might have thought , given past experience , that D.C. insiders would be on their guard against conservatives with grandiose plans
But no : as long as someone on the right claims to have bold new proposals , he 's hailed as an innovative thinker
And nobody checks his arithmetic
Which brings me to the innovative thinker du jour : Representative Paul Ryan of Wisconsin
Mr. Ryan has become the Republican Party 's poster child for new ideas thanks to his `` Roadmap for America 's Future , '' a plan for a major overhaul of federal spending and taxes
News media coverage has been overwhelmingly favorable ; on Monday , The Washington Post put a glowing profile of Mr. Ryan on its front page , portraying him as the G.O.P. 's fiscal conscience
He 's often described with phrases like `` intellectually audacious .
But it 's the audacity of dopes
Mr. Ryan is n't offering fresh food for thought ; he 's serving up leftovers from the 1990s , drenched in flimflam sauce
Mr. Ryan 's plan calls for steep cuts in both spending and taxes
He 'd have you believe that the combined effect would be much lower budget deficits , and , according to that Washington Post report , he speaks about deficits `` in apocalyptic terms .
And The Post also tells us that his plan would , indeed , sharply reduce the flow of red ink : `` The Congressional Budget Office has estimated that Rep. Paul Ryan 's plan would cut the budget deficit in half by 2020 .
But the budget office has done no such thing
At Mr. Ryan 's request , it produced an estimate of the budget effects of his proposed spending cuts - period
It did n't address the revenue losses from his tax cuts
The nonpartisan Tax Policy Center has , however , stepped into the breach
Its numbers indicate that the Ryan plan would reduce revenue by almost $ 4 trillion over the next decade
If you add these revenue losses to the numbers The Post cites , you get a much larger deficit in 2020 , roughly $ 1.3 trillion
And that 's about the same as the budget office 's estimate of the 2020 deficit under the Obama administration 's plans
That is , Mr. Ryan may speak about the deficit in apocalyptic terms , but even if you believe that his proposed spending cuts are feasible - which you should n't - the Roadmap would n't reduce the deficit
All it would do is cut benefits for the middle class while slashing taxes on the rich
And I do mean slash
The Tax Policy Center finds that the Ryan plan would cut taxes on the richest 1 percent of the population in half , giving them 117 percent of the plan 's total tax cuts
That 's not a misprint
Even as it slashed taxes at the top , the plan would raise taxes for 95 percent of the population
Finally , let 's talk about those spending cuts
In its first decade , most of the alleged savings in the Ryan plan come from assuming zero dollar growth in domestic discretionary spending , which includes everything from energy policy to education to the court system
This would amount to a 25 percent cut once you adjust for inflation and population growth
How would such a severe cut be achieved
What specific programs would be slashed
Mr. Ryan does n't say
After 2020 , the main alleged saving would come from sharp cuts in Medicare , achieved by dismantling Medicare as we know it , and instead giving seniors vouchers and telling them to buy their own insurance
Does this sound familiar
It should
It 's the same plan Newt Gingrich tried to sell in 1995
And we already know , from experience with the Medicare Advantage program , that a voucher system would have higher , not lower , costs than our current system
The only way the Ryan plan could save money would be by making those vouchers too small to pay for adequate coverage
Wealthy older Americans would be able to supplement their vouchers , and get the care they need ; everyone else would be out in the cold
In practice , that probably would n't happen : older Americans would be outraged - and they vote
But this means that the supposed budget savings from the Ryan plan are a sham
So why have so many in Washington , especially in the news media , been taken in by this flimflam
It 's not just inability to do the math , although that 's part of it
There 's also the unwillingness of self-styled centrists to face up to the realities of the modern Republican Party ; they want to pretend , in the teeth of overwhelming evidence , that there are still people in the G.O.P. making sense
And last but not least , there 's deference to power - the G.O.P. is a resurgent political force , so one must n't point out that its intellectual heroes have no clothes
But they do n't
The Ryan plan is a fraud that makes no useful contribution to the debate over America 's fiscal future
There 's a famous Norman Rockwell painting titled `` Freedom of Speech , '' depicting an idealized American town meeting
The painting , part of a series illustrating F.D.R. 's `` Four Freedoms , '' shows an ordinary citizen expressing an unpopular opinion
His neighbors obviously do n't like what he 's saying , but they 're letting him speak his mind
That 's a far cry from what has been happening at recent town halls , where angry protesters some of them , with no apparent sense of irony , shouting `` This is America !
have been drowning out , and in some cases threatening , members of Congress trying to talk about health reform
Some commentators have tried to play down the mob aspect of these scenes , likening the campaign against health reform to the campaign against Social Security privatization back in 2005
But there 's no comparison
I 've gone through many news reports from 2005 , and while anti-privatization activists were sometimes raucous and rude , I ca n't find any examples of congressmen shouted down , congressmen hanged in effigy , congressmen surrounded and followed by taunting crowds
And I ca n't find any counterpart to the death threats at least one congressman has received
So this is something new and ugly
What 's behind it
Robert Gibbs , the White House press secretary , has compared the scenes at health care town halls to the `` Brooks Brothers riot '' in 2000 the demonstration that disrupted the vote count in Miami and arguably helped send George W. Bush to the White House
Portrayed at the time as local protesters , many of the rioters were actually G.O.P. staffers flown in from Washington
But Mr. Gibbs is probably only half right
Yes , well-heeled interest groups are helping to organize the town hall mobs
Key organizers include two Astroturf -LRB- fake grass-roots -RRB- organizations : FreedomWorks , run by the former House majority leader Dick Armey , and a new organization called Conservatives for Patients ' Rights
The latter group , by the way , is run by Rick Scott , the former head of Columbia\/HCA , a for-profit hospital chain
Mr. Scott was forced out of that job amid a fraud investigation ; the company eventually pleaded guilty to charges of overbilling state and federal health plans , paying $ 1.7 billion yes , that 's `` billion '' in fines
You ca n't make this stuff up
But while the organizers are as crass as they come , I have n't seen any evidence that the people disrupting those town halls are Florida-style rent-a-mobs
For the most part , the protesters appear to be genuinely angry
The question is , what are they angry about
There was a telling incident at a town hall held by Representative Gene Green , D-Tex
An activist turned to his fellow attendees and asked if they `` oppose any form of socialized or government-run health care .
Nearly all did
Then Representative Green asked how many of those present were on Medicare
Almost half raised their hands
Now , people who do n't know that Medicare is a government program probably are n't reacting to what President Obama is actually proposing
They may believe some of the disinformation opponents of health care reform are spreading , like the claim that the Obama plan will lead to euthanasia for the elderly
-LRB- That particular claim is coming straight from House Republican leaders .
But they 're probably reacting less to what Mr. Obama is doing , or even to what they 've heard about what he 's doing , than to who he is
That is , the driving force behind the town hall mobs is probably the same cultural and racial anxiety that 's behind the `` birther '' movement , which denies Mr. Obama 's citizenship
Senator Dick Durbin has suggested that the birthers and the health care protesters are one and the same ; we do n't know how many of the protesters are birthers , but it would n't be surprising if it 's a substantial fraction
And cynical political operators are exploiting that anxiety to further the economic interests of their backers
Does this sound familiar
It should : it 's a strategy that has played a central role in American politics ever since Richard Nixon realized that he could advance Republican fortunes by appealing to the racial fears of working-class whites
Many people hoped that last year 's election would mark the end of the `` angry white voter '' era in America
Indeed , voters who can be swayed by appeals to cultural and racial fear are a declining share of the electorate
But right now Mr. Obama 's backers seem to lack all conviction , perhaps because the prosaic reality of his administration is n't living up to their dreams of transformation
Meanwhile , the angry right is filled with a passionate intensity
And if Mr. Obama ca n't recapture some of the passion of 2008 , ca n't inspire his supporters to stand up and be heard , health care reform may well fail
So the G.O.P. has found its issue for the 2008 election
For the next three months the party plans to keep chanting : `` Drill here
Drill now
Drill here
Drill now
Four legs good , two legs bad !
O.K. , I added that last part
And the debate on energy policy has helped me find the words for something I 've been thinking about for a while
Republicans , once hailed as the `` party of ideas , '' have become the party of stupid
Now , I do n't mean that G.O.P. politicians are , on average , any dumber than their Democratic counterparts
And I certainly do n't mean to question the often frightening smarts of Republican political operatives
What I mean , instead , is that know-nothingism the insistence that there are simple , brute-force , instant-gratification answers to every problem , and that there 's something effeminate and weak about anyone who suggests otherwise has become the core of Republican policy and political strategy
The party 's de facto slogan has become : `` Real men do n't think things through .
In the case of oil , this takes the form of pretending that more drilling would produce fast relief at the gas pump
In fact , earlier this week Republicans in Congress actually claimed credit for the recent fall in oil prices : `` The market is responding to the fact that we are here talking , '' said Representative John Shadegg
What about the experts at the Department of Energy who say that it would take years before offshore drilling would yield any oil at all , and that even then the effect on prices at the pump would be `` insignificant ''
Presumably they 're just a bunch of wimps , probably Democrats
And the Democrats , as Representative Michele Bachmann assures us , `` want Americans to move to the urban core , live in tenements , take light rail to their government jobs .
Is this political pitch too dumb to succeed
Do n't count on it
Remember how the Iraq war was sold
The stuff about aluminum tubes and mushroom clouds was just window dressing
The main political argument was , `` They attacked us , and we 're going to strike back '' and anyone who tried to point out that Saddam and Osama were n't the same person was an effete snob who hated America , and probably looked French
Let 's also not forget that for years President Bush was the center of a cult of personality that lionized him as a real-world Forrest Gump , a simple man who prevails through his gut instincts and moral superiority
`` Mr. Bush is the triumph of the seemingly average American man , '' declared Peggy Noonan , writing in The Wall Street Journal in 2004
`` He 's not an intellectual
Intellectuals start all the trouble in the world .
It was n't until Hurricane Katrina when the heckuva job done by the man of whom Ms. Noonan said , `` if there 's a fire on the block , he 'll run out and help '' revealed the true costs of obliviousness that the cult began to fade
What 's more , the politics of stupidity did n't just appeal to the poorly informed
Bear in mind that members of the political and media elites were more pro-war than the public at large in the fall of 2002 , even though the flimsiness of the case for invading Iraq should have been even more obvious to those paying close attention to the issue than it was to the average voter
Why were the elite so hawkish
Well , I heard a number of people express privately the argument that some influential commentators made publicly that the war was a good idea , not because Iraq posed a real threat , but because beating up someone in the Middle East , never mind who , would show Muslims that we mean business
In other words , even alleged wise men bought into the idea of macho posturing as policy
All this is in the past
But the state of the energy debate shows that Republicans , despite Mr. Bush 's plunge into record unpopularity and their defeat in 2006 , still think that know-nothing politics works
And they may be right
Sad to say , the current drill-and-burn campaign is getting some political traction
According to one recent poll , 69 percent of Americans now favor expanded offshore drilling and 51 percent of them believe that removing restrictions on drilling would reduce gas prices within a year
The headway Republicans are making on this issue wo n't prevent Democrats from expanding their majority in Congress , but it might limit their gains and could conceivably swing the presidential election , where the polls show a much closer race
In any case , remember this the next time someone calls for an end to partisanship , for working together to solve the country 's problems
It 's not going to happen not as long as one of America 's two great parties believes that when it comes to politics , stupidity is the best policy
The lights are going out all over America - literally
Colorado Springs has made headlines with its desperate attempt to save money by turning off a third of its streetlights , but similar things are either happening or being contemplated across the nation , from Philadelphia to Fresno
Meanwhile , a country that once amazed the world with its visionary investments in transportation , from the Erie Canal to the Interstate Highway System , is now in the process of unpaving itself : in a number of states , local governments are breaking up roads they can no longer afford to maintain , and returning them to gravel
And a nation that once prized education - that was among the first to provide basic schooling to all its children - is now cutting back
Teachers are being laid off ; programs are being canceled ; in Hawaii , the school year itself is being drastically shortened
And all signs point to even more cuts ahead
We 're told that we have no choice , that basic government functions - essential services that have been provided for generations - are no longer affordable
And it 's true that state and local governments , hit hard by the recession , are cash-strapped
But they would n't be quite as cash-strapped if their politicians were willing to consider at least some tax increases
And the federal government , which can sell inflation-protected long-term bonds at an interest rate of only 1.04 percent , is n't cash-strapped at all
It could and should be offering aid to local governments , to protect the future of our infrastructure and our children
But Washington is providing only a trickle of help , and even that grudgingly
We must place priority on reducing the deficit , say Republicans and `` centrist '' Democrats
And then , virtually in the next breath , they declare that we must preserve tax cuts for the very affluent , at a budget cost of $ 700 billion over the next decade
In effect , a large part of our political class is showing its priorities : given the choice between asking the richest 2 percent or so of Americans to go back to paying the tax rates they paid during the Clinton-era boom , or allowing the nation 's foundations to crumble - literally in the case of roads , figuratively in the case of education - they 're choosing the latter
It 's a disastrous choice in both the short run and the long run
In the short run , those state and local cutbacks are a major drag on the economy , perpetuating devastatingly high unemployment
It 's crucial to keep state and local government in mind when you hear people ranting about runaway government spending under President Obama
Yes , the federal government is spending more , although not as much as you might think
But state and local governments are cutting back
And if you add them together , it turns out that the only big spending increases have been in safety-net programs like unemployment insurance , which have soared in cost thanks to the severity of the slump
That is , for all the talk of a failed stimulus , if you look at government spending as a whole you see hardly any stimulus at all
And with federal spending now trailing off , while big state and local cutbacks continue , we 're going into reverse
But is n't keeping taxes for the affluent low also a form of stimulus
Not so you 'd notice
When we save a schoolteacher 's job , that unambiguously aids employment ; when we give millionaires more money instead , there 's a good chance that most of that money will just sit idle
And what about the economy 's future
Everything we know about economic growth says that a well-educated population and high-quality infrastructure are crucial
Emerging nations are making huge efforts to upgrade their roads , their ports and their schools
Yet in America we 're going backward
How did we get to this point
It 's the logical consequence of three decades of antigovernment rhetoric , rhetoric that has convinced many voters that a dollar collected in taxes is always a dollar wasted , that the public sector ca n't do anything right
The antigovernment campaign has always been phrased in terms of opposition to waste and fraud - to checks sent to welfare queens driving Cadillacs , to vast armies of bureaucrats uselessly pushing paper around
But those were myths , of course ; there was never remotely as much waste and fraud as the right claimed
And now that the campaign has reached fruition , we 're seeing what was actually in the firing line : services that everyone except the very rich need , services that government must provide or nobody will , like lighted streets , drivable roads and decent schooling for the public as a whole
So the end result of the long campaign against government is that we 've taken a disastrously wrong turn
America is now on the unlit , unpaved road to nowhere
By Bush administration standards , Henry Paulson , the Treasury secretary , is a good guy
He is n't conspicuously incompetent ; and he is n't trying to mislead us into war , justify torture or protect corrupt contractors
But Mr. Paulson 's actions reflect the priorities of the administration he serves
And that , ultimately , is what 's wrong with the mortgage relief plan he unveiled last week
The plan is , as a Times editorial put it yesterday , `` too little , too late and too voluntary .
But from the administration 's point of view these failings are n't bugs , they 're features
In fact , there 's a growing consensus among financial observers that the Paulson plan is n't mainly intended to achieve real results
The point is , instead , to create the appearance of action , thereby undercutting political support for actual attempts to help families in trouble
In particular , the Paulson plan is probably an attempt to take the wind out of Barney Frank 's sails
Mr. Frank , the Democratic chairman of the House Financial Services Committee , has sponsored legislation that would give judges in bankruptcy cases the ability to rewrite mortgage loan terms
But `` Bankers Hope Bush Subprime Plan Will Scuttle House Bill , '' as a headline in CongressDaily put it
As Elizabeth Warren , the Harvard bankruptcy expert , puts it , `` The administration 's subprime mortgage plan is the bank lobby 's dream .
Given the Bush record , that should come as no surprise
There are , in fact , three distinct concerns associated with the rising tide of foreclosures in America
One is financial stability : as banks and other institutions take huge losses on their mortgage-related investments , the financial system as a whole is getting wobbly
Another is human suffering : hundreds of thousands , and probably millions , of American families will lose their homes
Finally , there 's injustice : the subprime boom involved predatory lending high-interest loans foisted on borrowers who qualified for lower rates on an epic scale
The Wall Street Journal found that more than 55 percent of subprime loans made at the height of the housing bubble `` went to people with credit scores high enough to often qualify for conventional loans with far better terms .
And in a declining housing market , these victims are stuck , unable to refinance
So there are three problems
But Mr. Paulson 's plan or , to use its official name , the Hope Now Alliance plan is entirely focused on reducing investor losses
Any minor relief it might provide to troubled borrowers is clearly incidental
And it is does nothing for the victims of predatory lending
The plan sets voluntary guidelines under which some , but only some , borrowers whose mortgage payments are set to rise may get temporary relief
This is supposed to help investors , because foreclosing on a house is expensive : there are big legal fees , and the house normally sells for less than the value of the mortgage
`` Foreclosure is to no one 's benefit , '' said Mr. Paulson in a White House interactive forum
`` I 've heard estimates that mortgage investors lose 40 to 50 percent on their investment if it goes into foreclosure .
But wo n't the borrowers gain , too
Not if the planners can help it
Relief is restricted to borrowers whose mortgage debt is at least 97 percent of the house 's value which means that in many , perhaps most , cases those who get debt relief will be borrowers who owe more than their house is worth
These people would be nearly as well off in financial terms if they simply walked away
And what about people with good credit who were misled into bad mortgage deals , who should have been steered to loans with better terms
They get nothing : the Paulson plan specifically excludes borrowers with good credit scores
In fact , the plan actually provides an incentive for some people to miss debt payments , because that would make them look like bad credit risks and eligible for relief
Now , Mr. Paulson 's attempt to help investors , while doing little or nothing for distressed and defrauded borrowers , might make sense if his plan would reduce investor losses enough to seriously improve the overall financial situation
But only a small fraction of subprime borrowers will qualify for relief , and many of these borrowers will eventually face foreclosure anyway
So the plan is unlikely to reduce overall mortgage-related losses by more than a few percent , at most not enough to make any real difference to financial stability
Indeed , interest-rate spreads that have been signaling a crisis of confidence in the financial system did n't narrow at all when the plan was announced
Still , you might say that the Paulson plan is better than nothing
But the relevant alternative is n't nothing ; it 's a plan that like Barney Frank 's proposal would actually help working families
And that 's what the administration is trying to avoid
Obama s Hostage Deal I 've spent the past couple of days trying to make my peace with the Obama-McConnell tax-cut deal
President Obama did , after all , extract more concessions than most of us expected
Yet I remain deeply uneasy - not because I 'm one of those `` purists '' Mr. Obama denounced on Tuesday but because this is n't the end of the story
Specifically : Mr. Obama has bought the release of some hostages only by providing the G.O.P. with new hostages
About the deal : Republicans got what they wanted - an extension of all the Bush tax cuts , including those for the wealthy
This part of the deal was bad all around
Yes , some of those tax cuts would be spent , boosting the economy to some extent
But a large part of the tax cuts , especially those for the wealthy , would not be spent , so the tax-cut extension increases the budget deficit a lot while doing little to reduce unemployment
And by stringing things along , the extension increases the chances that the Bush tax cuts will be made permanent , with devastating effects on the budget and the long-term prospects for Social Security and Medicare
In return for this bad stuff , Mr. Obama got a significant amount of short-term stimulus
Unemployment benefits were extended ; there was a temporary cut in the payroll tax ; and there were tax breaks for investment
Incidentally : how , exactly , did we get to the point where Democrats must plead with Republicans to accept lower corporate taxes
Unemployment benefits aside , all of this is very much second-best policy : consumers would probably spend only part of the payroll tax break , and it 's unclear whether the business break would do much to spur investment given the excess capacity in the economy
Still , it would be a noticeable net positive for the economy next year
But here 's the thing : while the bad stuff in the deal lasts for two years , the not-so-bad stuff expires at the end of 2011
This means that we 're talking about a boost to growth next year - but growth in 2012 that would actually be slower than in the absence of the deal
This has big political implications
Political scientists tell us that voting is much more strongly affected by the economy 's direction in the year or less preceding an election than by how well the nation is doing in some absolute sense
When Ronald Reagan ran for re-election in 1984 , the unemployment rate was almost exactly the same as it had been just before the 1980 election - but because the economic trend in 1980 was down while the trend in 1984 was up , an unemployment rate that spelled defeat for Jimmy Carter translated into landslide victory for Reagan
This political reality makes the tax deal a bad bargain for Democrats
Think of it this way : The deal essentially sets up 2011-2012 to be a repeat of 2009-2010
Once again , there would be initial benefits from the stimulus , and decent growth a year before the election
But as the stimulus faded , growth would tend to stall - and this stall would , once again , come in the months leading up to the election , with seriously negative consequences for Mr. Obama and his party
You may say that economic policy should n't be affected by partisan considerations
But even if you believe that - how 's the weather on your planet
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Would n't there be pressure on Democrats to offer Republicans something , anything , to improve economic prospects for 2012
And would n't that be a recipe for another bad deal
Surely the answer to both questions is yes
And that means that Mr. Obama is , as I said , paying for the release of some hostages - getting an extension of unemployment benefits and some more stimulus - by giving Republicans new hostages , which they may well use to make new , destructive demands a year from now
One big concern : Republicans may try using the prospect of a rise in the payroll tax to undermine Social Security finances
Which brings me back to Mr. Obama 's press conference , where - showing much more passion than he seems able to muster against Republicans - he denounced purists on the left , who supposedly refuse to accept compromises in the national interest
Well , concerns about the tax deal reflect realism , not purism : Mr. Obama is setting up another hostage situation a year down the road
And given that fact , the last thing we need is the kind of self-indulgent behavior he showed by lashing out at progressives who he feels are n't giving him enough credit
The point is that by seeming angrier at worried supporters than he is at the hostage-takers , Mr. Obama is already signaling weakness , giving Republicans every reason to believe that they can extract another ransom
And they can be counted on to act accordingly
Ben Bernanke , the Federal Reserve chairman , recently had some downbeat things to say about our economic prospects
The economy , he warned , `` confronts some formidable headwinds .
All we can expect , he said , is `` modest economic growth next year sufficient to bring down the unemployment rate , but at a pace slower than we would like .
Actually , he may have been too optimistic : There 's a good chance that unemployment will rise , not fall , over the next year
But even if it does inch down , one has to ask : Why is n't the Fed trying to bring it down faster
Some background : I do n't think many people grasp just how much job creation we need to climb out of the hole we 're in
You ca n't just look at the eight million jobs that America has lost since the recession began , because the nation needs to keep adding jobs more than 100,000 a month to keep up with a growing population
And that means that we need really big job gains , month after month , if we want to see America return to anything that feels like full employment
How big
My back of the envelope calculation says that we need to add around 18 million jobs over the next five years , or 300,000 jobs a month
This puts last week 's employment report , which showed job losses of `` only '' 11,000 in November , in perspective
It was basically a terrible report , which was reported as good news only because we 've been down so long that it looks like up to the financial press
So if we 're going to have any real good news , someone has to take responsibility for creating a lot of additional jobs
And at this point , that someone almost has to be the Federal Reserve
I do n't mean to absolve the Obama administration of all responsibility
Clearly , the administration proposed a stimulus package that was too small to begin with and was whittled down further by `` centrists '' in the Senate
And the measures President Obama proposed earlier this week , while they would create a significant number of additional jobs , fall far short of what the economy needs
But while economic analysis says that we should have a large second stimulus , the political reality is that the president faced with total obstruction from Republicans , while receiving only lukewarm support from some in his own party probably ca n't get enough votes in Congress to do more than tinker at the edges of the employment problem
The Fed , however , can do more
Mr. Bernanke has received a great deal of credit , and rightly so , for his use of unorthodox strategies to contain the damage after Lehman Brothers failed
But both the Fed 's actions , as measured by its expansion of credit , and Mr. Bernanke 's words suggest that the urgency of late 2008 and early 2009 has given way to a curious mix of complacency and fatalism a sense that the Fed has done enough now that the financial system has stepped back from the brink , even though its own forecasts predict that unemployment will remain punishingly high for at least the next three years
The most specific , persuasive case I 've seen for more Fed action comes from Joseph Gagnon , a former Fed staffer now at the Peterson Institute for International Economics
Basing his analysis on the prior work of none other than Mr. Bernanke himself , in his previous incarnation as an economic researcher , Mr. Gagnon urges the Fed to expand credit by buying a further $ 2 trillion in assets
Such a program could do a lot to promote faster growth , while having hardly any downside
So why is n't the Fed doing it
Part of the answer may be political : Ideological opponents of government activism tend to be as critical of the Fed 's credit expansion as they are of the Obama administration 's fiscal stimulus
And this has probably made the Fed reluctant to use its powers to their fullest extent
Meanwhile , a significant number of Fed officials , especially at the regional banks , are obsessed with the fear of 1970s-style inflation , which they see lurking just around the bend even though there 's not a hint of it in the actual data
But there 's also , I believe , a question of priorities
The Fed sprang into action when faced with the prospect of wrecked banks ; it does n't seem equally concerned about the prospect of wrecked lives
And that is what we 're talking about here
The kind of sustained high unemployment envisaged in the Fed 's own forecasts is a recipe for immense human suffering millions of families losing their savings and their homes , millions of young Americans never getting their working lives properly started because there are no jobs available when they graduate
If we do n't get unemployment down soon , we 'll be paying the price for a generation
So it 's time for the Fed to lose that complacency , shrug off that fatalism and start lending a hand to job creation
Block Those Economic Metaphors Like it or not - and I do n't - the Obama-McConnell tax-cut deal , with its mixture of very bad stuff and sort-of-kind-of good stuff , is likely to pass Congress
Then what
The deal will , without question , give the economy a short-term boost
The prevailing view , as far as I can tell - and that includes within the Obama administration - is that this short-term boost is all we need
The deal , we 're told , will jump-start the economy ; it will give a fragile recovery time to strengthen
I say , block those metaphors
America 's economy is n't a stalled car , nor is it an invalid who will soon return to health if he gets a bit more rest
Our problems are longer-term than either metaphor implies
And bad metaphors make for bad policy
The idea that the economic engine is going to catch or the patient rise from his sickbed any day now encourages policy makers to settle for sloppy , short-term measures when the economy really needs well-designed , sustained support
The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble
Twenty years ago , the average American household 's debt was 83 percent of its income ; by a decade ago , that had crept up to 92 percent ; but by late 2007 , debts were 130 percent of income
All this borrowing took place both because banks had abandoned any notion of sound lending and because everyone assumed that house prices would never fall
And then the bubble burst
What we 've been dealing with ever since is a painful process of `` deleveraging '' : highly indebted Americans not only ca n't spend the way they used to , they 're having to pay down the debts they ran up in the bubble years
This would be fine if someone else were taking up the slack
But what 's actually happening is that some people are spending much less while nobody is spending more - and this translates into a depressed economy and high unemployment
What the government should be doing in this situation is spending more while the private sector is spending less , supporting employment while those debts are paid down
And this government spending needs to be sustained : we 're not talking about a brief burst of aid ; we 're talking about spending that lasts long enough for households to get their debts back under control
The original Obama stimulus was n't just too small ; it was also much too short-lived , with much of the positive effect already gone
It 's true that we 're making progress on deleveraging
Household debt is down to 118 percent of income , and a strong recovery would bring that number down further
But we 're still at least several years from the point at which households will be in good enough shape that the economy no longer needs government support
But would n't it be expensive to have the government support the economy for years to come
Yes , it would - which is why the stimulus should be done well , getting as much bang for the buck as possible
Which brings me back to the Obama-McConnell deal
I 'm often asked how I can oppose that deal given my consistent position in favor of more stimulus
The answer is that yes , I believe that stimulus can have major benefits in our current situation - but these benefits have to be weighed against the costs
And the tax-cut deal is likely to deliver relatively small benefits in return for very large costs
The point is that while the deal will cost a lot - adding more to federal debt than the original Obama stimulus - it 's likely to get very little bang for the buck
Tax cuts for the wealthy will barely be spent at all ; even middle-class tax cuts wo n't add much to spending
And the business tax break will , I believe , do hardly anything to spur investment given the excess capacity businesses already have
The actual stimulus in the plan comes from the other measures , mainly unemployment benefits and the payroll tax break
And these measures -LRB- a -RRB- wo n't make more than a modest dent in unemployment and -LRB- b -RRB- will fade out quickly , with the good stuff going away at the end of 2011
The question , then , is whether a year of modestly better performance is worth $ 850 billion in additional debt , plus a significantly raised probability that those tax cuts for the rich will become permanent
And I say no.
The Obama team obviously disagrees
As I understand it , the administration believes that all it needs is a little more time and money , that any day now the economic engine will catch and we 'll be on the road back to prosperity
I hope it 's right , but I do n't think it is
What I expect , instead , is that we 'll be having this same conversation all over again in 2012 , with unemployment still high and the economy suffering as the good parts of the current deal go away
The White House may think it has struck a good bargain , but I believe it 's in for a rude shock
On Wednesday , the Federal Reserve announced plans to lend $ 40 billion to banks
By my count , it 's the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago
Maybe this one will do the trick , but I would n't count on it
In past financial crises the stock market crash of 1987 , the aftermath of Russia 's default in 1998 the Fed has been able to wave its magic wand and make market turmoil disappear
But this time the magic is n't working
Why not
Because the problem with the markets is n't just a lack of liquidity there 's also a fundamental problem of solvency
Let me explain the difference with a hypothetical example
Suppose that there 's a nasty rumor about the First Bank of Pottersville : people say that the bank made a huge loan to the president 's brother-in-law , who squandered the money on a failed business venture
Even if the rumor is false , it can break the bank
If everyone , believing that the bank is about to go bust , demands their money out at the same time , the bank would have to raise cash by selling off assets at fire-sale prices and it may indeed go bust even though it did n't really make that bum loan
And because loss of confidence can be a self-fulfilling prophecy , even depositors who do n't believe the rumor would join in the bank run , trying to get their money out while they can
But the Fed can come to the rescue
If the rumor is false , the bank has enough assets to cover its debts ; all it lacks is liquidity the ability to raise cash on short notice
And the Fed can solve that problem by giving the bank a temporary loan , tiding it over until things calm down
Matters are very different , however , if the rumor is true : the bank really did make a big bad loan
Then the problem is n't how to restore confidence ; it 's how to deal with the fact that the bank is really , truly insolvent , that is , busted
My story about a basically sound bank beset by a crisis of confidence , which can be rescued with a temporary loan from the Fed , is more or less what happened to the financial system as a whole in 1998
Russia 's default led to the collapse of the giant hedge fund Long Term Capital Management , and for a few weeks there was panic in the markets
But when all was said and done , not that much money had been lost ; a temporary expansion of credit by the Fed gave everyone time to regain their nerve , and the crisis soon passed
In August , the Fed tried again to do what it did in 1998 , and at first it seemed to work
But then the crisis of confidence came back , worse than ever
And the reason is that this time the financial system both banks and , probably even more important , nonbank financial institutions made a lot of loans that are likely to go very , very bad
It 's easy to get lost in the details of subprime mortgages , resets , collateralized debt obligations , and so on
But there are two important facts that may give you a sense of just how big the problem is
First , we had an enormous housing bubble in the middle of this decade
To restore a historically normal ratio of housing prices to rents or incomes , average home prices would have to fall about 30 percent from their current levels
Second , there was a tremendous amount of borrowing into the bubble , as new home buyers purchased houses with little or no money down , and as people who already owned houses refinanced their mortgages as a way of converting rising home prices into cash
As home prices come back down to earth , many of these borrowers will find themselves with negative equity owing more than their houses are worth
Negative equity , in turn , often leads to foreclosures and big losses for lenders
And the numbers are huge
The financial blog Calculated Risk , using data from First American CoreLogic , estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity
If prices fall 30 percent , that number would rise to more than 20 million
That translates into a lot of losses , and explains why liquidity has dried up
What 's going on in the markets is n't an irrational panic
It 's a wholly rational panic , because there 's a lot of bad debt out there , and you do n't know how much of that bad debt is held by the guy who wants to borrow your money
How will it all end
Markets wo n't start functioning normally until investors are reasonably sure that they know where the bodies I mean , the bad debts are buried
And that probably wo n't happen until house prices have finished falling and financial institutions have come clean about all their losses
All of this will probably take years
Meanwhile , anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed
When I first began writing for The Times , I was na ve about many things
But my biggest misconception was this : I actually believed that influential people could be moved by evidence , that they would change their views if events completely refuted their beliefs
And to be fair , it does happen now and then
I 've been highly critical of Alan Greenspan over the years -LRB- since long before it was fashionable -RRB- , but give the former Fed chairman credit : he has admitted that he was wrong about the ability of financial markets to police themselves
But he 's a rare case
Just how rare was demonstrated by what happened last Friday in the House of Representatives , when with the meltdown caused by a runaway financial system still fresh in our minds , and the mass unemployment that meltdown caused still very much in evidence every single Republican and 27 Democrats voted against a quite modest effort to rein in Wall Street excesses
Let 's recall how we got into our current mess
America emerged from the Great Depression with a tightly regulated banking system
The regulations worked : the nation was spared major financial crises for almost four decades after World War II
But as the memory of the Depression faded , bankers began to chafe at the restrictions they faced
And politicians , increasingly under the influence of free-market ideology , showed a growing willingness to give bankers what they wanted
The first big wave of deregulation took place under Ronald Reagan and quickly led to disaster , in the form of the savings-and-loan crisis of the 1980s
Taxpayers ended up paying more than 2 percent of G.D.P. , the equivalent of around $ 300 billion today , to clean up the mess
But the proponents of deregulation were undaunted , and in the decade leading up to the current crisis politicians in both parties bought into the notion that New Deal-era restrictions on bankers were nothing but pointless red tape
In a memorable 2003 incident , top bank regulators staged a photo-op in which they used garden shears and a chainsaw to cut up stacks of paper representing regulations
And the bankers liberated both by legislation that removed traditional restrictions and by the hands-off attitude of regulators who did n't believe in regulation responded by dramatically loosening lending standards
The result was a credit boom and a monstrous real estate bubble , followed by the worst economic slump since the Great Depression
Ironically , the effort to contain the crisis required government intervention on a much larger scale than would have been needed to prevent the crisis in the first place : government rescues of troubled institutions , large-scale lending by the Federal Reserve to the private sector , and so on
Given this history , you might have expected the emergence of a national consensus in favor of restoring more-effective financial regulation , so as to avoid a repeat performance
But you would have been wrong
Talk to conservatives about the financial crisis and you enter an alternative , bizarro universe in which government bureaucrats , not greedy bankers , caused the meltdown
It 's a universe in which government-sponsored lending agencies triggered the crisis , even though private lenders actually made the vast majority of subprime loans
It 's a universe in which regulators coerced bankers into making loans to unqualified borrowers , even though only one of the top 25 subprime lenders was subject to the regulations in question
Oh , and conservatives simply ignore the catastrophe in commercial real estate : in their universe the only bad loans were those made to poor people and members of minority groups , because bad loans to developers of shopping malls and office towers do n't fit the narrative
In part , the prevalence of this narrative reflects the principle enunciated by Upton Sinclair : `` It is difficult to get a man to understand something when his salary depends on his not understanding it .
As Democrats have pointed out , three days before the House vote on banking reform Republican leaders met with more than 100 financial-industry lobbyists to coordinate strategies
But it also reflects the extent to which the modern Republican Party is committed to a bankrupt ideology , one that wo n't let it face up to the reality of what happened to the U.S. economy
So it 's up to the Democrats and more specifically , since the House has passed its bill , it 's up to `` centrist '' Democrats in the Senate
Are they willing to learn something from the disaster that has overtaken the U.S. economy , and get behind financial reform
Let 's hope so
For one thing is clear : if politicians refuse to learn from the history of the recent financial crisis , they will condemn all of us to repeat it
So here 's the situation : the economy is facing its worst slump in decades
The usual response to an economic downturn , cutting interest rates , is n't working
Large-scale government aid looks like the only way to end the economic nosedive
But there 's a problem : conservative politicians , clinging to an out-of-date ideology and , perhaps , betting -LRB- wrongly -RRB- that their constituents are relatively well positioned to ride out the storm are standing in the way of action
No , I 'm not talking about Bob Corker , the Senator from Nissan I mean Tennessee and his fellow Republicans , who torpedoed last week 's attempt to buy some time for the U.S. auto industry
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An e-mail message circulated among Senate Republicans declared that denying the auto industry a loan was an opportunity for Republicans to `` take their first shot against organized labor . ''
I am , instead , talking about Angela Merkel , the German chancellor , and her economic officials , who have become the biggest obstacles to a much-needed European rescue plan
The European economic mess is n't getting very much attention here , because we 're understandably focused on our own problems
But the world 's other economic superpower America and the European Union have roughly the same G.D.P. is arguably in as much trouble as we are
The most acute problems are on Europe 's periphery , where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia : Latvia is the new Argentina ; Ukraine is the new Indonesia
But the pain has also reached the big economies of Western Europe : Britain , France , Italy and , the biggest of all , Germany
As in the United States , monetary policy cutting interest rates in an effort to perk up the economy is rapidly reaching its limit
That leaves , as the only way to avert the worst slump since the Great Depression , the aggressive use of fiscal policy : increasing spending or cutting taxes to boost demand
Right now everyone sees the need for a large , pan-European fiscal stimulus
Everyone , that is , except the Germans
Mrs. Merkel has become Frau Nein : if there is to be a rescue of the European economy , she wants no part of it , telling a party meeting that `` we 're not going to participate in this senseless race for billions .
Last week Peer Steinbr ck , Mrs. Merkel 's finance minister , went even further
Not content with refusing to develop a serious stimulus plan for his own country , he denounced the plans of other European nations
He accused Britain , in particular , of engaging in `` crass Keynesianism .
Germany 's leaders seem to believe that their own economy is in good shape , and in no need of major help
They 're almost certainly wrong about that
The really bad thing , however , is n't their misjudgment of their own situation ; it 's the way Germany 's opposition is preventing a common European approach to the economic crisis
To understand the problem , think of what would happen if , say , New Jersey were to attempt to boost its economy through tax cuts or public works , without this state-level stimulus being part of a nationwide program
Clearly , much of the stimulus would `` leak '' away to neighboring states , so that New Jersey would end up with all of the debt while other states got many if not most of the jobs
Individual European countries are in much the same situation
Any one government acting unilaterally faces the strong possibility that it will run up a lot of debt without creating much domestic employment
For the European economy as a whole , however , this kind of leakage is much less of a problem : two-thirds of the average European Union member 's imports come from other European nations , so that the continent as a whole is no more import-dependent than the United States
This means that a coordinated stimulus effort , in which each country counts on its neighbors to match its own efforts , would offer much more bang for the euro than individual , uncoordinated efforts
But you ca n't have a coordinated European effort if Europe 's biggest economy not only refuses to go along , but heaps scorn on its neighbors ' attempts to contain the crisis
Germany 's big Nein wo n't last forever
Last week Ifo , a highly respected research institute , warned that Germany will soon be facing its worst economic crisis since the 1940s
If and when this happens , Mrs. Merkel and her ministers will surely reconsider their position
But in Europe , as in the United States , the issue is time
Across the world , economies are sinking fast , while we wait for someone , anyone , to offer an effective policy response
How much damage will be done before that response finally comes
Broadly speaking , the serious contenders for the Democratic nomination are offering similar policy proposals the dispute over health care mandates notwithstanding
But there are large differences among the candidates in their beliefs about what it will take to turn a progressive agenda into reality
At one extreme , Barack Obama insists that the problem with America is that our politics are so `` bitter and partisan , '' and insists that he can get things done by ushering in a `` different kind of politics .
At the opposite extreme , John Edwards blames the power of the wealthy and corporate interests for our problems , and says , in effect , that America needs another F.D.R. a polarizing figure , the object of much hatred from the right , who nonetheless succeeded in making big changes
Over the last few days Mr. Obama and Mr. Edwards have been conducting a long-range argument over health care that gets right to this issue
And I have to say that Mr. Obama comes off looking , well , na ve
The argument began during the Democratic debate , when the moderator Carolyn Washburn , the editor of The Des Moines Register suggested that Mr. Edwards should n't be so harsh on the wealthy and special interests , because `` the same groups are often responsible for getting things done in Washington .
Mr. Edwards replied , `` Some people argue that we 're going to sit at a table with these people and they 're going to voluntarily give their power away
I think it is a complete fantasy ; it will never happen .
This was pretty clearly a swipe at Mr. Obama , who has repeatedly said that health reform should be negotiated at a `` big table '' that would include insurance companies and drug companies
On Saturday Mr. Obama responded , this time criticizing Mr. Edwards by name
He declared that `` We want to reduce the power of drug companies and insurance companies and so forth , but the notion that they will have no say-so at all in anything is just not realistic .
Do Obama supporters who celebrate his hoped-for ability to bring us together realize that `` us '' includes the insurance and drug lobbies
O.K. , more seriously , it 's actually Mr. Obama who 's being unrealistic here , believing that the insurance and drug industries which are , in large part , the cause of our health care problems will be willing to play a constructive role in health reform
The fact is that there 's no way to reduce the gross wastefulness of our health system without also reducing the profits of the industries that generate the waste
As a result , drug and insurance companies backed by the conservative movement as a whole will be implacably opposed to any significant reforms
And what would Mr. Obama do then
`` I 'll get on television and say Harry and Louise are lying , '' he says
I 'm sure the lobbyists are terrified
As health care goes , so goes the rest of the progressive agenda
Anyone who thinks that the next president can achieve real change without bitter confrontation is living in a fantasy world
Which brings me to a big worry about Mr. Obama : in an important sense , he has in effect become the anti-change candidate
There 's a strong populist tide running in America right now
For example , a recent Democracy Corps survey of voter discontent found that the most commonly chosen phrase explaining what 's wrong with the country was `` Big businesses get whatever they want in Washington .
And there 's every reason to believe that the Democrats can win big next year if they run with that populist tide
The latest evidence came from focus groups run by both Fox News and CNN during last week 's Democratic debate : both declared Mr. Edwards the clear winner
But the news media recoil from populist appeals
The Des Moines Register , which endorsed Mr. Edwards in 2004 , rejected him this time on the grounds that his `` harsh anti-corporate rhetoric would make it difficult to work with the business community to forge change .
And while The Register endorsed Hillary Clinton , the prime beneficiary of media distaste for populism has clearly been Mr. Obama , with his message of reconciliation
According to a recent survey by the Project for Excellence in Journalism , Mr. Obama 's coverage has been far more favorable than that of any other candidate
So what happens if Mr. Obama is the nominee
He will probably win but not as big as a candidate who ran on a more populist platform
Let 's be blunt : pundits who say that what voters really want is a candidate who makes them feel good , that they want an end to harsh partisanship , are projecting their own desires onto the public
And nothing Mr. Obama has said suggests that he appreciates the bitterness of the battles he will have to fight if he does become president , and tries to get anything done
Wall Street Whitewash When the financial crisis struck , many people - myself included - considered it a teachable moment
Above all , we expected the crisis to remind everyone why banks need to be effectively regulated
How na ve we were
We should have realized that the modern Republican Party is utterly dedicated to the Reaganite slogan that government is always the problem , never the solution
And , therefore , we should have realized that party loyalists , confronted with facts that do n't fit the slogan , would adjust the facts
Which brings me to the case of the collapsing crisis commission
The bipartisan Financial Crisis Inquiry Commission was established by law to `` examine the causes , domestic and global , of the current financial and economic crisis in the United States .
The hope was that it would be a modern version of the Pecora investigation of the 1930s , which documented Wall Street abuses and helped pave the way for financial reform
Instead , however , the commission has broken down along partisan lines , unable to agree on even the most basic points
It 's not as if the story of the crisis is particularly obscure
First , there was a widely spread housing bubble , not just in the United States , but in Ireland , Spain , and other countries as well
This bubble was inflated by irresponsible lending , made possible both by bank deregulation and the failure to extend regulation to `` shadow banks , '' which were n't covered by traditional regulation but nonetheless engaged in banking activities and created bank-type risks
Then the bubble burst , with hugely disruptive consequences
It turned out that Wall Street had created a web of interconnection nobody understood , so that the failure of Lehman Brothers , a medium-size investment bank , could threaten to take down the whole world financial system
It 's a straightforward story , but a story that the Republican members of the commission do n't want told
Last week , reports Shahien Nasiripour of The Huffington Post , all four Republicans on the commission voted to exclude the following terms from the report : `` deregulation , '' `` shadow banking , '' `` interconnection , '' and , yes , `` Wall Street .
When Democratic members refused to go along with this insistence that the story of Hamlet be told without the prince , the Republicans went ahead and issued their own report , which did , indeed , avoid using any of the banned terms
That report is all of nine pages long , with few facts and hardly any numbers
Beyond that , it tells a story that has been widely and repeatedly debunked - without responding at all to the debunkers
In the world according to the G.O.P. commissioners , it 's all the fault of government do-gooders , who used various levers - especially Fannie Mae and Freddie Mac , the government-sponsored loan-guarantee agencies - to promote loans to low-income borrowers
Wall Street - I mean , the private sector - erred only to the extent that it got suckered into going along with this government-created bubble
It 's hard to overstate how wrongheaded all of this is
For one thing , as I 've already noted , the housing bubble was international - and Fannie and Freddie were n't guaranteeing mortgages in Latvia
Nor were they guaranteeing loans in commercial real estate , which also experienced a huge bubble
Beyond that , the timing shows that private players were n't suckered into a government-created bubble
It was the other way around
During the peak years of housing inflation , Fannie and Freddie were pushed to the sidelines ; they only got into dubious lending late in the game , as they tried to regain market share
But the G.O.P. commissioners are just doing their job , which is to sustain the conservative narrative
And a narrative that absolves the banks of any wrongdoing , that places all the blame on meddling politicians , is especially important now that Republicans are about to take over the House
Last week , Spencer Bachus , the incoming G.O.P. chairman of the House Financial Services Committee , told The Birmingham News that `` in Washington , the view is that the banks are to be regulated , and my view is that Washington and the regulators are there to serve the banks .
He later tried to walk the remark back , but there 's no question that he and his colleagues will do everything they can to block effective regulation of the people and institutions responsible for the economic nightmare of recent years
So they need a cover story saying that it was all the government 's fault
In the end , those of us who expected the crisis to provide a teachable moment were right , but not in the way we expected
Never mind relearning the case for bank regulation ; what we learned , instead , is what happens when an ideology backed by vast wealth and immense power confronts inconvenient facts
And the answer is , the facts lose
A message to progressives : By all means , hang Senator Joe Lieberman in effigy
Declare that you 're disappointed in and\/or disgusted with President Obama
Demand a change in Senate rules that , combined with the Republican strategy of total obstructionism , are in the process of making America ungovernable
Yes , the filibuster-imposed need to get votes from `` centrist '' senators has led to a bill that falls a long way short of ideal
Worse , some of those senators seem motivated largely by a desire to protect the interests of insurance companies with the possible exception of Mr. Lieberman , who seems motivated by sheer spite
But let 's all take a deep breath , and consider just how much good this bill would do , if passed and how much better it would be than anything that seemed possible just a few years ago
With all its flaws , the Senate health bill would be the biggest expansion of the social safety net since Medicare , greatly improving the lives of millions
Getting this bill would be much , much better than watching health care reform fail
At its core , the bill would do two things
First , it would prohibit discrimination by insurance companies on the basis of medical condition or history : Americans could no longer be denied health insurance because of a pre-existing condition , or have their insurance canceled when they get sick
Second , the bill would provide substantial financial aid to those who do n't get insurance through their employers , as well as tax breaks for small employers that do provide insurance
All of this would be paid for in large part with the first serious effort ever to rein in rising health care costs
The result would be a huge increase in the availability and affordability of health insurance , with more than 30 million Americans gaining coverage , and premiums for lower-income and lower-middle-income Americans falling dramatically
That 's an immense change from where we were just a few years ago : remember , not long ago the Bush administration and its allies in Congress successfully blocked even a modest expansion of health care for children
Bear in mind also the lessons of history : social insurance programs tend to start out highly imperfect and incomplete , but get better and more comprehensive as the years go by
Thus Social Security originally had huge gaps in coverage and a majority of African-Americans , in particular , fell through those gaps
But it was improved over time , and it 's now the bedrock of retirement stability for the vast majority of Americans
Look , I understand the anger here : supporting this weakened bill feels like giving in to blackmail because it is
Or to use an even more accurate metaphor suggested by Ezra Klein of The Washington Post , we 're paying a ransom to hostage-takers
Some of us , including a majority of senators , really , really want to cover the uninsured ; but to make that happen we need the votes of a handful of senators who see failure of reform as an acceptable outcome , and demand a steep price for their support
The question , then , is whether to pay the ransom by giving in to the demands of those senators , accepting a flawed bill , or hang tough and let the hostage that is , health reform die
Again , history suggests the answer
Whereas flawed social insurance programs have tended to get better over time , the story of health reform suggests that rejecting an imperfect deal in the hope of eventually getting something better is a recipe for getting nothing at all
Not to put too fine a point on it , America would be in much better shape today if Democrats had cut a deal on health care with Richard Nixon , or if Bill Clinton had cut a deal with moderate Republicans back when they still existed
But wo n't paying the ransom now encourage more hostage-taking in the future
But the next big fight , over the future of the financial system , will be very different
If the usual suspects try to water down financial reform , I say call their bluff : there 's not much to lose , since a merely cosmetic reform , by creating a false sense of security , could well end up being worse than nothing
Beyond that , we need to take on the way the Senate works
The filibuster , and the need for 60 votes to end debate , are n't in the Constitution
They 're a Senate tradition , and that same tradition said that the threat of filibusters should be used sparingly
Well , Republicans have already trashed the second part of the tradition : look at a list of cloture motions over time , and you 'll see that since the G.O.P. lost control of Congress it has pursued obstructionism on a literally unprecedented scale
So it 's time to revise the rules
But that 's for later
Right now , let 's pass the bill that 's on the table
The revelation that Bernard Madoff brilliant investor -LRB- or so almost everyone thought -RRB- , philanthropist , pillar of the community was a phony has shocked the world , and understandably so
The scale of his alleged $ 50 billion Ponzi scheme is hard to comprehend
Yet surely I 'm not the only person to ask the obvious question : How different , really , is Mr. Madoff 's tale from the story of the investment industry as a whole
The financial services industry has claimed an ever-growing share of the nation 's income over the past generation , making the people who run the industry incredibly rich
Yet , at this point , it looks as if much of the industry has been destroying value , not creating it
And it 's not just a matter of money : the vast riches achieved by those who managed other people 's money have had a corrupting effect on our society as a whole
Let 's start with those paychecks
Last year , the average salary of employees in `` securities , commodity contracts , and investments '' was more than four times the average salary in the rest of the economy
Earning a million dollars was nothing special , and even incomes of $ 20 million or more were fairly common
The incomes of the richest Americans have exploded over the past generation , even as wages of ordinary workers have stagnated ; high pay on Wall Street was a major cause of that divergence
But surely those financial superstars must have been earning their millions , right
No , not necessarily
The pay system on Wall Street lavishly rewards the appearance of profit , even if that appearance later turns out to have been an illusion
Consider the hypothetical example of a money manager who leverages up his clients ' money with lots of debt , then invests the bulked-up total in high-yielding but risky assets , such as dubious mortgage-backed securities
For a while say , as long as a housing bubble continues to inflate he -LRB- it 's almost always a he -RRB- will make big profits and receive big bonuses
Then , when the bubble bursts and his investments turn into toxic waste , his investors will lose big but he 'll keep those bonuses
O.K. , maybe my example was n't hypothetical after all
So , how different is what Wall Street in general did from the Madoff affair
Well , Mr. Madoff allegedly skipped a few steps , simply stealing his clients ' money rather than collecting big fees while exposing investors to risks they did n't understand
And while Mr. Madoff was apparently a self-conscious fraud , many people on Wall Street believed their own hype
Still , the end result was the same -LRB- except for the house arrest -RRB- : the money managers got rich ; the investors saw their money disappear
We 're talking about a lot of money here
In recent years the finance sector accounted for 8 percent of America 's G.D.P. , up from less than 5 percent a generation earlier
If that extra 3 percent was money for nothing and it probably was we 're talking about $ 400 billion a year in waste , fraud and abuse
But the costs of America 's Ponzi era surely went beyond the direct waste of dollars and cents
At the crudest level , Wall Street 's ill-gotten gains corrupted and continue to corrupt politics , in a nicely bipartisan way
From Bush administration officials like Christopher Cox , chairman of the Securities and Exchange Commission , who looked the other way as evidence of financial fraud mounted , to Democrats who still have n't closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms -LRB- hello , Senator Schumer -RRB- , politicians have walked when money talked
Meanwhile , how much has our nation 's future been damaged by the magnetic pull of quick personal wealth , which for years has drawn many of our best and brightest young people into investment banking , at the expense of science , public service and just about everything else
Most of all , the vast riches being earned or maybe that should be `` earned '' in our bloated financial industry undermined our sense of reality and degraded our judgment
Think of the way almost everyone important missed the warning signs of an impending crisis
How was that possible
How , for example , could Alan Greenspan have declared , just a few years ago , that `` the financial system as a whole has become more resilient '' thanks to derivatives , no less
The answer , I believe , is that there 's an innate tendency on the part of even the elite to idolize men who are making a lot of money , and assume that they know what they 're doing
After all , that 's why so many people trusted Mr. Madoff
Now , as we survey the wreckage and try to understand how things can have gone so wrong , so fast , the answer is actually quite simple : What we 're looking at now are the consequences of a world gone Madoff
Right now there 's intense debate about how aggressive the United States government should be in its attempts to turn the economy around
Many economists , myself included , are calling for a very large fiscal expansion to keep the economy from going into free fall
Others , however , worry about the burden that large budget deficits will place on future generations
But the deficit worriers have it all wrong
Under current conditions , there 's no trade-off between what 's good in the short run and what 's good for the long run ; strong fiscal expansion would actually enhance the economy 's long-run prospects
The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing `` crowds out '' private investment that the government , by issuing lots of debt , drives up interest rates , which makes businesses unwilling to spend on new plant and equipment , and that this in turn reduces the economy 's long-run rate of growth
Under normal circumstances there 's a lot to this argument
But circumstances right now are anything but normal
Consider what would happen next year if the Obama administration gave in to the deficit hawks and scaled back its fiscal plans
Would this lead to lower interest rates
It certainly would n't lead to a reduction in short-term interest rates , which are more or less controlled by the Federal Reserve
The Fed is already keeping those rates as low as it can virtually at zero and wo n't change that policy unless it sees signs that the economy is threatening to overheat
And that does n't seem like a realistic prospect any time soon
What about longer-term rates
These rates , which are already at a half-century low , mainly reflect expected future short-term rates
Fiscal austerity could push them even lower but only by creating expectations that the economy would remain deeply depressed for a long time , which would reduce , not increase , private investment
The idea that tight fiscal policy when the economy is depressed actually reduces private investment is n't just a hypothetical argument : it 's exactly what happened in two important episodes in history
The first took place in 1937 , when Franklin Roosevelt mistakenly heeded the advice of his own era 's deficit worriers
He sharply reduced government spending , among other things cutting the Works Progress Administration in half , and also raised taxes
The result was a severe recession , and a steep fall in private investment
The second episode took place 60 years later , in Japan
In 1996-97 the Japanese government tried to balance its budget , cutting spending and raising taxes
And again the recession that followed led to a steep fall in private investment
Just to be clear , I 'm not arguing that trying to reduce the budget deficit is always bad for private investment
You can make a reasonable case that Bill Clinton 's fiscal restraint in the 1990s helped fuel the great U.S. investment boom of that decade , which in turn helped cause a resurgence in productivity growth
What made fiscal austerity such a bad idea both in Roosevelt 's America and in 1990s Japan were special circumstances : in both cases the government pulled back in the face of a liquidity trap , a situation in which the monetary authority had cut interest rates as far as it could , yet the economy was still operating far below capacity
And we 're in the same kind of trap today which is why deficit worries are misplaced
One more thing : Fiscal expansion will be even better for America 's future if a large part of the expansion takes the form of public investment of building roads , repairing bridges and developing new technologies , all of which make the nation richer in the long run
Should the government have a permanent policy of running large budget deficits
Of course not
Although public debt is n't as bad a thing as many people believe it 's basically money we owe to ourselves in the long run the government , like private individuals , has to match its spending to its income
But right now we have a fundamental shortfall in private spending : consumers are rediscovering the virtues of saving at the same moment that businesses , burned by past excesses and hamstrung by the troubles of the financial system , are cutting back on investment
That gap will eventually close , but until it does , government spending must take up the slack
Otherwise , private investment , and the economy as a whole , will plunge even more
The bottom line , then , is that people who think that fiscal expansion today is bad for future generations have got it exactly wrong
The best course of action , both for today 's workers and for their children , is to do whatever it takes to get this economy on the road to recovery
When Zombies Win When historians look back at 2008-10 , what will puzzle them most , I believe , is the strange triumph of failed ideas
Free-market fundamentalists have been wrong about everything - yet they now dominate the political scene more thoroughly than ever
How did that happen
How , after runaway banks brought the economy to its knees , did we end up with Ron Paul , who says `` I do n't think we need regulators , '' about to take over a key House panel overseeing the Fed
How , after the experiences of the Clinton and Bush administrations - the first raised taxes and presided over spectacular job growth ; the second cut taxes and presided over anemic growth even before the crisis - did we end up with bipartisan agreement on even more tax cuts
The answer from the right is that the economic failures of the Obama administration show that big-government policies do n't work
But the response should be , what big-government policies
For the fact is that the Obama stimulus - which itself was almost 40 percent tax cuts - was far too cautious to turn the economy around
And that 's not 20-20 hindsight : many economists , myself included , warned from the beginning that the plan was grossly inadequate
Put it this way : A policy under which government employment actually fell , under which government spending on goods and services grew more slowly than during the Bush years , hardly constitutes a test of Keynesian economics
Now , maybe it was n't possible for President Obama to get more in the face of Congressional skepticism about government
But even if that 's true , it only demonstrates the continuing hold of a failed doctrine over our politics
It 's also worth pointing out that everything the right said about why Obamanomics would fail was wrong
For two years we 've been warned that government borrowing would send interest rates sky-high ; in fact , rates have fluctuated with optimism or pessimism about recovery , but stayed consistently low by historical standards
For two years we 've been warned that inflation , even hyperinflation , was just around the corner ; instead , disinflation has continued , with core inflation - which excludes volatile food and energy prices - now at a half-century low
The free-market fundamentalists have been as wrong about events abroad as they have about events in America - and suffered equally few consequences
`` Ireland , '' declared George Osborne in 2006 , `` stands as a shining example of the art of the possible in long-term economic policymaking .
But Mr. Osborne is now Britain 's top economic official
And in his new position , he 's setting out to emulate the austerity policies Ireland implemented after its bubble burst
After all , conservatives on both sides of the Atlantic spent much of the past year hailing Irish austerity as a resounding success
`` The Irish approach worked in 1987-89 - and it 's working now , '' declared Alan Reynolds of the Cato Institute last June
Whoops , again
But such failures do n't seem to matter
To borrow the title of a recent book by the Australian economist John Quiggin on doctrines that the crisis should have killed but did n't , we 're still - perhaps more than ever - ruled by `` zombie economics .
Part of the answer , surely , is that people who should have been trying to slay zombie ideas have tried to compromise with them instead
And this is especially , though not only , true of the president
People tend to forget that Ronald Reagan often gave ground on policy substance - most notably , he ended up enacting multiple tax increases
But he never wavered on ideas , never backed down from the position that his ideology was right and his opponents were wrong
President Obama , by contrast , has consistently tried to reach across the aisle by lending cover to right-wing myths
He has praised Reagan for restoring American dynamism -LRB- when was the last time you heard a Republican praising F.D.R. ?
, adopted G.O.P. rhetoric about the need for the government to tighten its belt even in the face of recession , offered symbolic freezes on spending and federal wages
None of this stopped the right from denouncing him as a socialist
But it helped empower bad ideas , in ways that can do quite immediate harm
Right now Mr. Obama is hailing the tax-cut deal as a boost to the economy - but Republicans are already talking about spending cuts that would offset any positive effects from the deal
And how effectively can he oppose these demands , when he himself has embraced the rhetoric of belt-tightening
Yes , politics is the art of the possible
We all understand the need to deal with one 's political enemies
But it 's one thing to make deals to advance your goals ; it 's another to open the door to zombie ideas
When you do that , the zombies end up eating your brain - and quite possibly your economy too
There was a definite Hirohito feel to the explanation Ben Bernanke , the Federal Reserve chairman , gave this week for the Fed 's locking-the-barn-door-after-the-horse-is-gone decision to modestly strengthen regulation of the mortgage industry : `` Market discipline has in some cases broken down , and the incentives to follow prudent lending procedures have , at times , eroded .
That 's quite an understatement
In fact , the explosion of `` innovative '' home lending that took place in the middle years of this decade was an unmitigated disaster
But maybe Mr. Bernanke was afraid to be blunt about just how badly things went wrong
After all , straight talk would have amounted to a direct rebuke of his predecessor , Alan Greenspan , who ignored pleas to lock the barn door while the horse was still inside that is , to regulate lending while it was booming , rather than after it had already collapsed
I use the words `` unmitigated disaster '' advisedly
Apologists for the mortgage industry claim , as Mr. Greenspan does in his new book , that `` the benefits of broadened home ownership '' justified the risks of unregulated lending
But homeownership did n't broaden
The great bulk of dubious subprime lending took place from 2004 to 2006 yet homeownership rates are already back down to mid-2003 levels
With millions more foreclosures likely , it 's a good bet that homeownership will be lower at the Bush administration 's end than it was at the start
Meanwhile , during the bubble years , the mortgage industry lured millions of people into borrowing more than they could afford , and simultaneously duped investors into investing vast sums in risky assets wrongly labeled AAA
Reasonable estimates suggest that more than 10 million American families will end up owing more than their homes are worth , and investors will suffer $ 400 billion or more in losses
So where were the regulators as one of the greatest financial disasters since the Great Depression unfolded
They were blinded by ideology
`` Fed shrugged as subprime crisis spread , '' was the headline on a New York Times report on the failure of regulators to regulate
This may have been a discreet dig at Mr. Greenspan 's history as a disciple of Ayn Rand , the high priestess of unfettered capitalism known for her novel `` Atlas Shrugged .
In a 1963 essay for Ms. Rand 's newsletter , Mr. Greenspan dismissed as a `` collectivist '' myth the idea that businessmen , left to their own devices , `` would attempt to sell unsafe food and drugs , fraudulent securities , and shoddy buildings .
On the contrary , he declared , `` it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product .
It 's no wonder , then , that he brushed off warnings about deceptive lending practices , including those of Edward M. Gramlich , a member of the Federal Reserve board
In Mr. Greenspan 's world , predatory lending like attempts to sell consumers poison toys and tainted seafood just does n't happen
But Mr. Greenspan was n't the only top official who put ideology above public protection
Consider the press conference held on June 3 , 2003 just about the time subprime lending was starting to go wild to announce a new initiative aimed at reducing the regulatory burden on banks
Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations
The fifth representative , James Gilleran of the Office of Thrift Supervision , wielded a chainsaw
Also in attendance were representatives of financial industry trade associations , which had been lobbying for deregulation
As far as I can tell from press reports , there were no representatives of consumer interests on the scene
Two months after that event the Office of the Comptroller of the Currency , one of the tree-shears-wielding agencies , moved to exempt national banks from state regulations that protect consumers against predatory lending
If , say , New York State wanted to protect its own residents well , sorry , that was n't allowed
Of course , now that it has all gone bad , people with ties to the financial industry are rethinking their belief in the perfection of free markets
Mr. Greenspan has come out in favor of , yes , a government bailout
`` Cash is available , '' he says meaning taxpayer money `` and we should use that in larger amounts , as is necessary , to solve the problems of the stress of this .
Given the role of conservative ideology in the mortgage disaster , it 's puzzling that Democrats have n't been more aggressive about making the disaster an issue for the 2008 election
They should be : It 's hard to imagine a more graphic demonstration of what 's wrong with their opponents ' economic beliefs
Unless some legislator pulls off a last-minute double-cross , health care reform will pass the Senate this week
Count me among those who consider this an awesome achievement
It 's a seriously flawed bill , we 'll spend years if not decades fixing it , but it 's nonetheless a huge step forward
It was , however , a close-run thing
And the fact that it was such a close thing shows that the Senate and , therefore , the U.S. government as a whole has become ominously dysfunctional
After all , Democrats won big last year , running on a platform that put health reform front and center
In any other advanced democracy this would have given them the mandate and the ability to make major changes
But the need for 60 votes to cut off Senate debate and end a filibuster a requirement that appears nowhere in the Constitution , but is simply a self-imposed rule turned what should have been a straightforward piece of legislating into a nail-biter
And it gave a handful of wavering senators extraordinary power to shape the bill
Now consider what lies ahead
We need fundamental financial reform
We need to deal with climate change
We need to deal with our long-run budget deficit
What are the chances that we can do all that or , I 'm tempted to say , any of it if doing anything requires 60 votes in a deeply polarized Senate
Some people will say that it has always been this way , and that we 've managed so far
But it was n't always like this
Yes , there were filibusters in the past most notably by segregationists trying to block civil rights legislation
But the modern system , in which the minority party uses the threat of a filibuster to block every bill it does n't like , is a recent creation
The political scientist Barbara Sinclair has done the math
In the 1960s , she finds , `` extended-debate-related problems '' threatened or actual filibusters affected only 8 percent of major legislation
By the 1980s , that had risen to 27 percent
But after Democrats retook control of Congress in 2006 and Republicans found themselves in the minority , it soared to 70 percent
Some conservatives argue that the Senate 's rules did n't stop former President George W. Bush from getting things done
But this is misleading , on two levels
First , Bush-era Democrats were n't nearly as determined to frustrate the majority party , at any cost , as Obama-era Republicans
Certainly , Democrats never did anything like what Republicans did last week : G.O.P. senators held up spending for the Defense Department which was on the verge of running out of money in an attempt to delay action on health care
More important , however , Mr. Bush was a buy-now-pay-later president
He pushed through big tax cuts , but never tried to pass spending cuts to make up for the revenue loss
He rushed the nation into war , but never asked Congress to pay for it
He added an expensive drug benefit to Medicare , but left it completely unfunded
Yes , he had legislative victories ; but he did n't show that Congress can make hard choices and act responsibly , because he never asked it to
So now that hard choices must be made , how can we reform the Senate to make such choices possible
Back in the mid-1990s two senators Tom Harkin and , believe it or not , Joe Lieberman introduced a bill to reform Senate procedures
-LRB- Management wants me to make it clear that in my last column I was n't endorsing inappropriate threats against Mr. Lieberman .
Sixty votes would still be needed to end a filibuster at the beginning of debate , but if that vote failed , another vote could be held a couple of days later requiring only 57 senators , then another , and eventually a simple majority could end debate
Mr. Harkin says that he 's considering reintroducing that proposal , and he should
But if such legislation is itself blocked by a filibuster which it almost surely would be reformers should turn to other options
Remember , the Constitution sets up the Senate as a body with majority not supermajority rule
So the rule of 60 can be changed
A Congressional Research Service report from 2005 , when a Republican majority was threatening to abolish the filibuster so it could push through Bush judicial nominees , suggests several ways this could happen for example , through a majority vote changing Senate rules on the first day of a new session
Nobody should meddle lightly with long-established parliamentary procedure
But our current situation is unprecedented : America is caught between severe problems that must be addressed and a minority party determined to block action on every front
Doing nothing is not an option not unless you want the nation to sit motionless , with an effectively paralyzed government , waiting for financial , environmental and fiscal crises to strike
Whatever the new administration does , we 're in for months , perhaps even a year , of economic hell
After that , things should get better , as President Obama 's stimulus plan O.K. , I 'm told that the politically correct term is now `` economic recovery plan '' begins to gain traction
Late next year the economy should begin to stabilize , and I 'm fairly optimistic about 2010
But what comes after that
Right now everyone is talking about , say , two years of economic stimulus which makes sense as a planning horizon
Too much of the economic commentary I 've been reading seems to assume , however , that that 's really all we 'll need that once a burst of deficit spending turns the economy around we can quickly go back to business as usual
In fact , however , things ca n't just go back to the way they were before the current crisis
And I hope the Obama people understand that
The prosperity of a few years ago , such as it was profits were terrific , wages not so much depended on a huge bubble in housing , which replaced an earlier huge bubble in stocks
And since the housing bubble is n't coming back , the spending that sustained the economy in the pre-crisis years is n't coming back either
To be more specific : the severe housing slump we 're experiencing now will end eventually , but the immense Bush-era housing boom wo n't be repeated
Consumers will eventually regain some of their confidence , but they wo n't spend the way they did in 2005-2007 , when many people were using their houses as ATMs , and the savings rate dropped nearly to zero
So what will support the economy if cautious consumers and humbled homebuilders are n't up to the job
A few months ago a headline in the satirical newspaper The Onion , on point as always , offered one possible answer : `` Recession-Plagued Nation Demands New Bubble to Invest In .
Something new could come along to fuel private demand , perhaps by generating a boom in business investment
But this boom would have to be enormous , raising business investment to a historically unprecedented percentage of G.D.P. , to fill the hole left by the consumer and housing pullback
While that could happen , it does n't seem like something to count on
A more plausible route to sustained recovery would be a drastic reduction in the U.S. trade deficit , which soared at the same time the housing bubble was inflating
By selling more to other countries and spending more of our own income on U.S.-produced goods , we could get to full employment without a boom in either consumption or investment spending
But it will probably be a long time before the trade deficit comes down enough to make up for the bursting of the housing bubble
For one thing , export growth , after several good years , has stalled , partly because nervous international investors , rushing into assets they still consider safe , have driven the dollar up against other currencies making U.S. production much less cost-competitive
Furthermore , even if the dollar falls again , where will the capacity for a surge in exports and import-competing production come from
Despite rising trade in services , most world trade is still in goods , especially manufactured goods and the U.S. manufacturing sector , after years of neglect in favor of real estate and the financial industry , has a lot of catching up to do
Anyway , the rest of the world may not be ready to handle a drastically smaller U.S. trade deficit
As my colleague Tom Friedman recently pointed out , much of China 's economy in particular is built around exporting to America , and will have a hard time switching to other occupations
In short , getting to the point where our economy can thrive without fiscal support may be a difficult , drawn-out process
And as I said , I hope the Obama team understands that
Right now , with the economy in free fall and everyone terrified of Great Depression 2.0 , opponents of a strong federal response are having a hard time finding support
John Boehner , the House Republican leader , has been reduced to using his Web site to seek `` credentialed American economists '' willing to add their names to a list of `` stimulus spending skeptics .
But once the economy has perked up a bit , there will be a lot of pressure on the new administration to pull back , to throw away the economy 's crutches
And if the administration gives in to that pressure too soon , the result could be a repeat of the mistake F.D.R. made in 1937 the year he slashed spending , raised taxes and helped plunge the United States into a serious recession
The point is that it may take a lot longer than many people think before the U.S. economy is ready to live without bubbles
And until then , the economy is going to need a lot of government help
Once upon a time , back when America had a strong middle class , it also had a strong union movement
These two facts were connected
Unions negotiated good wages and benefits for their workers , gains that often ended up being matched even by nonunion employers
They also provided an important counterbalance to the political influence of corporations and the economic elite
Today , however , the American union movement is a shadow of its former self , except among government workers
In 1973 , almost a quarter of private-sector employees were union members , but last year the figure was down to a mere 7.4 percent
Yet unions still matter politically
And right now they 're at the heart of a nasty political scuffle among Democrats
Before I get to that , however , let 's talk about what happened to American labor over the last 35 years
It 's often assumed that the U.S. labor movement died a natural death , that it was made obsolete by globalization and technological change
But what really happened is that beginning in the 1970s , corporate America , which had previously had a largely cooperative relationship with unions , in effect declared war on organized labor
Do n't take my word for it ; read Business Week , which published an article in 2002 titled `` How Wal-Mart Keeps Unions at Bay .
The article explained that `` over the past two decades , Corporate America has perfected its ability to fend off labor groups .
It then described the tactics some legal , some illegal , all involving a healthy dose of intimidation that Wal-Mart and other giant firms use to block organizing drives
These hardball tactics have been enabled by a political environment that has been deeply hostile to organized labor , both because politicians favored employers ' interests and because conservatives sought to weaken the Democratic Party
`` We 're going to crush labor as a political entity , '' Grover Norquist , the anti-tax activist , once declared
But the times may be changing
A newly energized progressive movement seems to be on the ascendant , and unions are a key part of that movement
Most notably , the Service Employees International Union has played a key role in pushing for health care reform
And unions will be an important force in the Democrats ' favor in next year 's election
Or maybe not which brings us to the latest from Iowa
Whoever receives the Democratic presidential nomination will receive labor 's support in the general election
Meanwhile , however , unions are supporting favored candidates
Hillary Clinton who for a time seemed the clear front-runner has received the most union support
John Edwards , whose populist message resonates with labor , has also received considerable labor support
But Barack Obama , though he has a solid pro-labor voting record , has not in part , perhaps , because his message of `` a new kind of politics '' that will transcend bitter partisanship does n't make much sense to union leaders who know , from the experience of confronting corporations and their political allies head on , that partisanship is n't going away anytime soon
O.K. , that 's politics
But now Mr. Obama has lashed out at Mr. Edwards because two 527s independent groups that are allowed to support candidates , but are legally forbidden from coordinating directly with their campaigns are running ads on his rival 's behalf
They are , Mr. Obama says , representative of the kind of `` special interests '' that `` have too much influence in Washington .
The thing , though , is that both of these 527s represent union groups in the case of the larger group , local branches of the S.E.I.U. who consider Mr. Edwards the strongest candidate on health reform
So Mr. Obama 's attack raises a couple of questions
First , does it make sense , in the current political and economic environment , for Democrats to lump unions in with corporate groups as examples of the special interests we need to stand up to
Second , is Mr. Obama saying that if nominated , he 'd be willing to run without support from labor 527s , which might be crucial to the Democrats
If not , how does he avoid having his own current words used against him by the Republican nominee
Part of what happened here , I think , is that Mr. Obama , looking for a stick with which to beat an opponent who has lately acquired some momentum , either carelessly or cynically failed to think about how his rhetoric would affect the eventual ability of the Democratic nominee , whoever he or she is , to campaign effectively
In this sense , his latest gambit resembles his previous echoing of G.O.P. talking points on Social Security
Beyond that , the episode illustrates what 's wrong with campaigning on generalities about political transformation and trying to avoid sounding partisan
It may be partisan to say that a 527 run by labor unions supporting health care reform is n't the same thing as a 527 run by insurance companies opposing it
But it 's also the simple truth
The Humbug Express I mean , consider the scene , early in the book , where Ebenezer Scrooge rightly refuses to contribute to a poverty relief fund
`` I 'm opposed to giving people money for doing nothing , '' he declares
Oh , wait
That was n't Scrooge
That was Newt Gingrich - last week
What Scrooge actually says is , `` Are there no prisons ?
But it 's pretty much the same thing
Anyway , instead of praising Scrooge for his principled stand against the welfare state , Charles Dickens makes him out to be some kind of bad guy
How leftist is that
As you can see , the fundamental issues of public policy have n't changed since Victorian times
Still , some things are different
In particular , the production of humbug - which was still a somewhat amateurish craft when Dickens wrote - has now become a systematic , even industrial , process
Let me walk you through a case in point , one that I 've been following lately
If you listen to the recent speeches of Republican presidential hopefuls , you 'll find several of them talking at length about the harm done by unionized government workers , who have , they say , multiplied under the Obama administration
A recent example was an op-ed article by the outgoing Minnesota governor Tim Pawlenty , who declared that `` thanks to President Obama , '' government is the only booming sector in our economy : `` Since January 2008 '' - silly me , I thought Mr. Obama was n't inaugurated until 2009 - `` the private sector has lost nearly eight million jobs , while local , state and federal governments added 590,000 .
Except that according to the Bureau of Labor Statistics , government employment has fallen , not risen , since January 2008
And since January 2009 , when Mr. Obama actually did take office , government employment has fallen by more than 300,000 as hard-pressed state and local governments have been forced to lay off teachers , police officers , firefighters and other workers
So how did the notion of a surge in government payrolls under Mr. Obama take hold
It turns out that last spring there was , in fact , a bulge in government employment
And both politicians and researchers at humbug factories - I mean , conservative think tanks - quickly seized on this bulge as evidence of an exploding public sector
Over the summer , articles and speeches began to appear highlighting the rise in government employment and issuing dire warnings about what it portended for America 's future
But anyone paying attention knew why public employment had risen - and it had nothing to do with Big Government
It was , instead , the fact that the federal government had to hire a lot of temporary workers to carry out the 2010 Census - workers who have almost all left the payroll now that the Census is done
Is it really possible that the authors of those articles and speeches about soaring public employment did n't know what was going on
Well , I guess we should never assume malice when ignorance remains a possibility
There has not , however , been any visible effort to retract those erroneous claims
And this is n't the only case of a claimed huge expansion in government that turns out to be nothing of the kind
Have you heard the one about how there 's been an explosion in the number of federal regulators
Mike Konczal of the Roosevelt Institute looked into the numbers behind that claim , and it turns out that almost all of those additional `` regulators '' work for the Department of Homeland Security , protecting us against terrorists
Still , why does it matter what some politicians and think tanks say
The answer is that there 's a well-developed right-wing media infrastructure in place to catapult the propaganda , as former President George W. Bush put it , to rapidly disseminate bogus analysis to a wide audience where it becomes part of what `` everyone knows .
-LRB- There 's nothing comparable on the left , which has fallen far behind in the humbug race .
And it 's a very effective process
When discussing the alleged huge expansion of government under Mr. Obama , I 've repeatedly found that people just wo n't believe me when I try to point out that it never happened
They assume that I 'm lying , or somehow cherry-picking the data
After all , they 've heard over and over again about that surge in government spending and employment , and they do n't realize that everything they 've heard was a special delivery from the Humbug Express
So in this holiday season , let 's remember the wisdom of Ebenezer Scrooge
Not the bit about denying food and medical care to those who need them : America 's failure to take care of its own less-fortunate citizens is a national disgrace
But Scrooge was right about the prevalence of humbug
And we 'd be much better off as a nation if more people had the courage to say `` Bah !
Indulge me while I tell you a story a near-future version of Charles Dickens 's `` A Christmas Carol .
It begins with sad news : young Timothy Cratchit , a k a Tiny Tim , is sick
And his treatment will cost far more than his parents can pay out of pocket
Fortunately , our story is set in 2014 , and the Cratchits have health insurance
Not from their employer : Ebenezer Scrooge does n't do employee benefits
And just a few years earlier they would n't have been able to buy insurance on their own because Tiny Tim has a pre-existing condition , and , anyway , the premiums would have been out of their reach
But reform legislation enacted in 2010 banned insurance discrimination on the basis of medical history and also created a system of subsidies to help families pay for coverage
Even so , insurance does n't come cheap but the Cratchits do have it , and they 're grateful
God bless us , everyone
O.K. , that was fiction , but there will be millions of real stories like that in the years to come
Imperfect as it is , the legislation that passed the Senate on Thursday and will probably , in a slightly modified version , soon become law will make America a much better country
So why are so many people complaining
There are three main groups of critics
First , there 's the crazy right , the tea party and death panel people a lunatic fringe that is no longer a fringe but has moved into the heart of the Republican Party
In the past , there was a general understanding , a sort of implicit clause in the rules of American politics , that major parties would at least pretend to distance themselves from irrational extremists
But those rules are no longer operative
No , Virginia , at this point there is no sanity clause
A second strand of opposition comes from what I think of as the Bah Humbug caucus : fiscal scolds who routinely issue sententious warnings about rising debt
By rights , this caucus should find much to like in the Senate health bill , which the Congressional Budget Office says would reduce the deficit , and which in the judgment of leading health economists does far more to control costs than anyone has attempted in the past
But , with few exceptions , the fiscal scolds have had nothing good to say about the bill
And in the process they have revealed that their alleged concern about deficits is , well , humbug
As Slate 's Daniel Gross says , what really motivates them is `` the haunting fear that someone , somewhere , is receiving social insurance .
Finally , there has been opposition from some progressives who are unhappy with the bill 's limitations
Some would settle for nothing less than a full , Medicare-type , single-payer system
Others had their hearts set on the creation of a public option to compete with private insurers
And there are complaints that the subsidies are inadequate , that many families will still have trouble paying for medical care
Unlike the tea partiers and the humbuggers , disappointed progressives have valid complaints
But those complaints do n't add up to a reason to reject the bill
Yes , it 's a hackneyed phrase , but politics is the art of the possible
The truth is that there is n't a Congressional majority in favor of anything like single-payer
There is a narrow majority in favor of a plan with a moderately strong public option
The House has passed such a plan
But given the way the Senate rules work , it takes 60 votes to do almost anything
And that fact , combined with total Republican opposition , has placed sharp limits on what can be enacted
If progressives want more , they 'll have to make changing those Senate rules a priority
They 'll also have to work long term on electing a more progressive Congress
But , meanwhile , the bill the Senate has just passed , with a few tweaks I 'd especially like to move the start date up from 2014 , if that 's at all possible is more or less what the Democratic leadership can get
And for all its flaws and limitations , it 's a great achievement
It will provide real , concrete help to tens of millions of Americans and greater security to everyone
And it establishes the principle even if it falls somewhat short in practice that all Americans are entitled to essential health care
Many people deserve credit for this moment
What really made it possible was the remarkable emergence of universal health care as a core principle during the Democratic primaries of 2007-2008 an emergence that , in turn , owed a lot to progressive activism
-LRB- For what it 's worth , the reform that 's being passed is closer to Hillary Clinton 's plan than to President Obama 's -RRB-
This made health reform a must-win for the next president
And it 's actually happening
So progressives should n't stop complaining , but they should congratulate themselves on what is , in the end , a big win for them and for America
Times have changed
In 1996 , President Bill Clinton , under siege from the right , declared that `` the era of big government is over .
But President-elect Barack Obama , riding a wave of revulsion over what conservatism has wrought , has said that he wants to `` make government cool again .
Before Mr. Obama can make government cool , however , he has to make it good
Indeed , he has to be a goo-goo
Goo-goo , in case you 're wondering , is a century-old term for `` good government '' types , reformers opposed to corruption and patronage
Franklin Roosevelt was a goo-goo extraordinaire
He simultaneously made government much bigger and much cleaner
Mr. Obama needs to do the same thing
Needless to say , the Bush administration offers a spectacular example of non-goo-gooism
But the Bushies did n't have to worry about governing well and honestly
Even when they failed on the job -LRB- as they so often did -RRB- , they could claim that very failure as vindication of their anti-government ideology , a demonstration that the public sector ca n't do anything right
The Obama administration , on the other hand , will find itself in a position very much like that facing the New Deal in the 1930s
Like the New Deal , the incoming administration must greatly expand the role of government to rescue an ailing economy
But also like the New Deal , the Obama team faces political opponents who will seize on any signs of corruption or abuse or invent them , if necessary in an attempt to discredit the administration 's program
F.D.R. managed to navigate these treacherous political waters safely , greatly improving government 's reputation even as he vastly expanded it
As a study recently published by the National Bureau of Economic Research puts it , `` Before 1932 , the administration of public relief was widely regarded as politically corrupt , '' and the New Deal 's huge relief programs `` offered an opportunity for corruption unique in the nation 's history .
Yet `` by 1940 , charges of corruption and political manipulation had diminished considerably .
How did F.D.R. manage to make big government so clean
A large part of the answer is that oversight was built into New Deal programs from the beginning
The Works Progress Administration , in particular , had a powerful , independent `` division of progress investigation '' devoted to investigating complaints of fraud
This division was so diligent that in 1940 , when a Congressional subcommittee investigated the W.P.A. , it could n't find a single serious irregularity that the division had missed
F.D.R. also made sure that Congress did n't stuff stimulus legislation with pork : there were no earmarks in the legislation that provided funding for the W.P.A. and other emergency measures
Last but not least , F.D.R. built an emotional bond with working Americans , which helped carry his administration through the inevitable setbacks and failures that beset its attempts to fix the economy
So what are the lessons for the Obama team
First , the administration of the economic recovery plan has to be squeaky clean
Purely economic considerations might suggest cutting a few corners in the interest of getting stimulus moving quickly , but the politics of the situation dictates great care in how money is spent
And enforcement is crucial : inspectors general have to be strong and independent , and whistle-blowers have to be rewarded , not punished as they were in the Bush years
Second , the plan has to be really , truly pork-free
Vice President-elect Joseph Biden recently promised that the plan `` will not become a Christmas tree '' ; the new administration needs to deliver on that promise
Finally , the Obama administration and Democrats in general need to do everything they can to build an F.D.R.-like bond with the public
Never mind Mr. Obama 's current high standing in the polls based on public hopes that he 'll succeed
He needs a solid base of support that will remain even when things are n't going well
And I have to say that Democrats are off to a bad start on that front
The attempted coronation of Caroline Kennedy as senator plays right into 40 years of conservative propaganda denouncing `` liberal elites .
And surely I was n't the only person who winced at reports about the luxurious beach house the Obamas have rented , not because there 's anything wrong with the first family-elect having a nice vacation , but because symbolism matters , and these were n't the images we should be seeing when millions of Americans are terrified about their finances
O.K. , these are early days
But that 's precisely the point
Fixing the economy is going to take time , and the Obama team needs to be thinking now , when hopes are high , about how to accumulate and preserve enough political capital to see the job through
The Finite World Oil is back above $ 90 a barrel
Copper and cotton have hit record highs
Wheat and corn prices are way up
Over all , world commodity prices have risen by a quarter in the past six months
Is it speculation run amok
Is it the result of excessive money creation , a harbinger of runaway inflation just around the corner
No and no.
What the commodity markets are telling us is that we 're living in a finite world , in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials , pushing up their prices
And America is , for the most part , just a bystander in this story
Some background : The last time the prices of oil and other commodities were this high , two and a half years ago , many commentators dismissed the price spike as an aberration driven by speculators
And they claimed vindication when commodity prices plunged in the second half of 2008
But that price collapse coincided with a severe global recession , which led to a sharp fall in demand for raw materials
The big test would come when the world economy recovered
Would raw materials once again become expensive
Well , it still feels like a recession in America
But thanks to growth in developing nations , world industrial production recently passed its previous peak - and , sure enough , commodity prices are surging again
This does n't necessarily mean that speculation played no role in 2007-2008
Nor should we reject the notion that speculation is playing some role in current prices ; for example , who is that mystery investor who has bought up much of the world 's copper supply
But the fact that world economic recovery has also brought a recovery in commodity prices strongly suggests that recent price fluctuations mainly reflect fundamental factors
What about commodity prices as a harbinger of inflation
Many commentators on the right have been predicting for years that the Federal Reserve , by printing lots of money - it 's not actually doing that , but that 's the accusation - is setting us up for severe inflation
Stagflation is coming , declared Representative Paul Ryan in February 2009 ; Glenn Beck has been warning about imminent hyperinflation since 2008
Yet inflation has remained low
What 's an inflation worrier to do
You do have to wonder what these people were thinking two years ago , when raw material prices were plunging
If the commodity-price rise of the past six months heralds runaway inflation , why did n't the 50 percent decline in the second half of 2008 herald runaway deflation
Inconsistency aside , however , the big problem with those blaming the Fed for rising commodity prices is that they 're suffering from delusions of U.S. economic grandeur
For commodity prices are set globally , and what America does just is n't that important a factor
In particular , today , as in 2007-2008 , the primary driving force behind rising commodity prices is n't demand from the United States
It 's demand from China and other emerging economies
As more and more people in formerly poor nations are entering the global middle class , they 're beginning to drive cars and eat meat , placing growing pressure on world oil and food supplies
And those supplies are n't keeping pace
Conventional oil production has been flat for four years ; in that sense , at least , peak oil has arrived
True , alternative sources , like oil from Canada 's tar sands , have continued to grow
But these alternative sources come at relatively high cost , both monetary and environmental
Also , over the past year , extreme weather - especially severe heat and drought in some important agricultural regions - played an important role in driving up food prices
And , yes , there 's every reason to believe that climate change is making such weather episodes more common
So what are the implications of the recent rise in commodity prices
It is , as I said , a sign that we 're living in a finite world , one in which resource constraints are becoming increasingly binding
This wo n't bring an end to economic growth , let alone a descent into Mad Max-style collapse
It will require that we gradually change the way we live , adapting our economy and our lifestyles to the reality of more expensive resources
But that 's for the future
Right now , rising commodity prices are basically the result of global recovery
They have no bearing , one way or another , on U.S. monetary policy
For this is a global story ; at a fundamental level , it 's not about us
While the United States has long imported oil and other raw materials from the third world , we used to import manufactured goods mainly from other rich countries like Canada , European nations and Japan
But recently we crossed an important watershed : we now import more manufactured goods from the third world than from other advanced economies
That is , a majority of our industrial trade is now with countries that are much poorer than we are and that pay their workers much lower wages
For the world economy as a whole and especially for poorer nations growing trade between high-wage and low-wage countries is a very good thing
Above all , it offers backward economies their best hope of moving up the income ladder
But for American workers the story is much less positive
In fact , it 's hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country
And that reality makes the politics of trade very difficult
Let 's talk for a moment about the economics
Trade between high-wage countries tends to be a modest win for all , or almost all , concerned
When a free-trade pact made it possible to integrate the U.S. and Canadian auto industries in the 1960s , each country 's industry concentrated on producing a narrower range of products at larger scale
The result was an all-round , broadly shared rise in productivity and wages
By contrast , trade between countries at very different levels of economic development tends to create large classes of losers as well as winners
Although the outsourcing of some high-tech jobs to India has made headlines , on balance , highly educated workers in the United States benefit from higher wages and expanded job opportunities because of trade
For example , ThinkPad notebook computers are now made by a Chinese company , Lenovo , but a lot of Lenovo 's research and development is conducted in North Carolina
But workers with less formal education either see their jobs shipped overseas or find their wages driven down by the ripple effect as other workers with similar qualifications crowd into their industries and look for employment to replace the jobs they lost to foreign competition
And lower prices at Wal-Mart are n't sufficient compensation
All this is textbook international economics : contrary to what people sometimes assert , economic theory says that free trade normally makes a country richer , but it does n't say that it 's normally good for everyone
Still , when the effects of third-world exports on U.S. wages first became an issue in the 1990s , a number of economists myself included looked at the data and concluded that any negative effects on U.S. wages were modest
The trouble now is that these effects may no longer be as modest as they were , because imports of manufactured goods from the third world have grown dramatically from just 2.5 percent of G.D.P. in 1990 to 6 percent in 2006
And the biggest growth in imports has come from countries with very low wages
The original `` newly industrializing economies '' exporting manufactured goods South Korea , Taiwan , Hong Kong and Singapore paid wages that were about 25 percent of U.S. levels in 1990
Since then , however , the sources of our imports have shifted to Mexico , where wages are only 11 percent of the U.S. level , and China , where they 're only about 3 percent or 4 percent
There are some qualifying aspects to this story
For example , many of those made-in-China goods contain components made in Japan and other high-wage economies
Still , there 's little doubt that the pressure of globalization on American wages has increased
So am I arguing for protectionism
Those who think that globalization is always and everywhere a bad thing are wrong
On the contrary , keeping world markets relatively open is crucial to the hopes of billions of people
But I am arguing for an end to the finger-wagging , the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements
It 's often claimed that limits on trade benefit only a small number of Americans , while hurting the vast majority
That 's still true of things like the import quota on sugar
But when it comes to manufactured goods , it 's at least arguable that the reverse is true
The highly educated workers who clearly benefit from growing trade with third-world economies are a minority , greatly outnumbered by those who probably lose
As I said , I 'm not a protectionist
For the sake of the world as a whole , I hope that we respond to the trouble with trade not by shutting trade down , but by doing things like strengthening the social safety net
But those who are worried about trade have a point , and deserve some respect
Maybe we knew , at some unconscious , instinctive level , that it would be an era best forgotten
Whatever the reason , we got through the first decade of the new millennium without ever agreeing on what to call it
The aughts
The naughties
-LRB- Yes , I know that strictly speaking the millennium did n't begin until 2001
Do we really care ?
But from an economic point of view , I 'd suggest that we call the decade past the Big Zero
It was a decade in which nothing good happened , and none of the optimistic things we were supposed to believe turned out to be true
It was a decade with basically zero job creation
O.K. , the headline employment number for December 2009 will be slightly higher than that for December 1999 , but only slightly
And private-sector employment has actually declined the first decade on record in which that happened
It was a decade with zero economic gains for the typical family
Actually , even at the height of the alleged `` Bush boom , '' in 2007 , median household income adjusted for inflation was lower than it had been in 1999
And you know what happened next
It was a decade of zero gains for homeowners , even if they bought early : right now housing prices , adjusted for inflation , are roughly back to where they were at the beginning of the decade
And for those who bought in the decade 's middle years when all the serious people ridiculed warnings that housing prices made no sense , that we were in the middle of a gigantic bubble well , I feel your pain
Almost a quarter of all mortgages in America , and 45 percent of mortgages in Florida , are underwater , with owners owing more than their houses are worth
Last and least for most Americans but a big deal for retirement accounts , not to mention the talking heads on financial TV it was a decade of zero gains for stocks , even without taking inflation into account
Remember the excitement when the Dow first topped 10,000 , and best-selling books like `` Dow 36,000 '' predicted that the good times would just keep rolling
Well , that was back in 1999
Last week the market closed at 10,520
So there was a whole lot of nothing going on in measures of economic progress or success
Funny how that happened
For as the decade began , there was an overwhelming sense of economic triumphalism in America 's business and political establishments , a belief that we more than anyone else in the world knew what we were doing
Let me quote from a speech that Lawrence Summers , then deputy Treasury secretary -LRB- and now the Obama administration 's top economist -RRB- , gave in 1999
`` If you ask why the American financial system succeeds , '' he said , `` at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles : it means that every investor gets to see information presented on a comparable basis ; that there is discipline on company managements in the way they report and monitor their activities .
And he went on to declare that there is `` an ongoing process that really is what makes our capital market work and work as stably as it does .
So here 's what Mr. Summers and , to be fair , just about everyone in a policy-making position at the time believed in 1999 : America has honest corporate accounting ; this lets investors make good decisions , and also forces management to behave responsibly ; and the result is a stable , well-functioning financial system
What percentage of all this turned out to be true
What was truly impressive about the decade past , however , was our unwillingness , as a nation , to learn from our mistakes
Even as the dot-com bubble deflated , credulous bankers and investors began inflating a new bubble in housing
Even after famous , admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting , analysts and investors believed banks ' claims about their own financial strength and bought into the hype about investments they did n't understand
Even after triggering a global economic collapse , and having to be rescued at taxpayers ' expense , bankers wasted no time going right back to the culture of giant bonuses and excessive leverage
Then there are the politicians
Even now , it 's hard to get Democrats , President Obama included , to deliver a full-throated critique of the practices that got us into the mess we 're in
And as for the Republicans : now that their policies of tax cuts and deregulation have led us into an economic quagmire , their prescription for recovery is tax cuts and deregulation
So let 's bid a not at all fond farewell to the Big Zero the decade in which we achieved nothing and learned nothing
Will the next decade be better
Stay tuned
Oh , and happy New Year
No modern American president would repeat the fiscal mistake of 1932 , in which the federal government tried to balance its budget in the face of a severe recession
The Obama administration will put deficit concerns on hold while it fights the economic crisis
But even as Washington tries to rescue the economy , the nation will be reeling from the actions of 50 Herbert Hoovers state governors who are slashing spending in a time of recession , often at the expense both of their most vulnerable constituents and of the nation 's economic future
These state-level cutbacks range from small acts of cruelty to giant acts of panic from cuts in South Carolina 's juvenile justice program , which will force young offenders out of group homes and into prison , to the decision by a committee that manages California state spending to halt all construction outlays for six months
Now , state governors are n't stupid -LRB- not all of them , anyway -RRB-
They 're cutting back because they have to because they 're caught in a fiscal trap
But let 's step back for a moment and contemplate just how crazy it is , from a national point of view , to be cutting public services and public investment right now
Think about it : is America not state governments , but the nation as a whole less able to afford help to troubled teens , medical care for families , or repairs to decaying roads and bridges than it was one or two years ago
Of course not
Our capacity has n't been diminished ; our workers have n't lost their skills ; our technological know-how is intact
Why ca n't we keep doing good things
It 's true that the economy is currently shrinking
But that 's the result of a slump in private spending
It makes no sense to add to the problem by cutting public spending , too
In fact , the true cost of government programs , especially public investment , is much lower now than in more prosperous times
When the economy is booming , public investment competes with the private sector for scarce resources for skilled construction workers , for capital
But right now many of the workers employed on infrastructure projects would otherwise be unemployed , and the money borrowed to pay for these projects would otherwise sit idle
And shredding the social safety net at a moment when many more Americans need help is n't just cruel
It adds to the sense of insecurity that is one important factor driving the economy down
So why are we doing this to ourselves
The answer , of course , is that state and local government revenues are plunging along with the economy and unlike the federal government , lower-level governments ca n't borrow their way through the crisis
Partly that 's because these governments , unlike the feds , are subject to balanced-budget rules
But even if they were n't , running temporary deficits would be difficult
Investors , driven by fear , are refusing to buy anything except federal debt , and those states that can borrow at all are being forced to pay punitive interest rates
Are governors responsible for their own predicament
To some extent
Arnold Schwarzenegger , in particular , deserves some jeers
He became governor in the first place because voters were outraged over his predecessor 's budget problems , but he did nothing to secure the state 's fiscal future and he now faces a projected budget deficit bigger than the one that did in Gray Davis
But even the best-run states are in deep trouble
Anyway , we should n't punish our fellow citizens and our economy to spite a few local politicians
What can be done
Ted Strickland , the governor of Ohio , is pushing for federal aid to the states on three fronts : help for the neediest , in the form of funding for food stamps and Medicaid ; federal funding of state - and local-level infrastructure projects ; and federal aid to education
That sounds right and if the numbers Mr. Strickland proposes are huge , so is the crisis
And once the crisis is behind us , we should rethink the way we pay for key public services
As a nation , we do n't believe that our fellow citizens should go without essential health care
Why , then , does a large share of funding for Medicaid come from state governments , which are forced to cut the program precisely when it 's needed most
An educated population is a national resource
Why , then , is basic education mainly paid for by local governments , which are forced to neglect the next generation every time the economy hits a rough patch
And why should investments in infrastructure , which will serve the nation for decades , be at the mercy of short-run fluctuations in local budgets
That 's for later
The priority right now is to fight off the attack of the 50 Herbert Hoovers , and make sure that the fiscal problems of the states do n't make the economic crisis even worse
Yesterday The Times published a highly informative chart laying out the positions of the presidential candidates on major issues
It was , I 'd argue , a useful reality check for those who believe that the next president can somehow usher in a new era of bipartisan cooperation
For what the chart made clear was the extent to which Democrats and Republicans live in separate moral and intellectual universes
On one side , the Democrats are all promising to get out of Iraq and offering strongly progressive policies on taxes , health care and the environment
That 's understandable : the public hates the war , and public opinion seems to be running in a progressive direction
What seems harder to understand is what 's happening on the other side the degree to which almost all the Republicans have chosen to align themselves closely with the unpopular policies of an unpopular president
And I 'm not just talking about their continuing enthusiasm for the Iraq war
The G.O.P. candidates are equally supportive of Bush economic policies
Why would politicians support Bushonomics
After all , the public is very unhappy with the state of the economy , for good reason
The `` Bush boom , '' such as it was , bypassed most Americans median family income , adjusted for inflation , has stagnated in the Bush years , and so have the real earnings of the typical worker
Meanwhile , insecurity has increased , with a declining fraction of Americans receiving health insurance from their employers
And things seem likely to get worse as the election approaches
For a few years , the economy was at least creating jobs at a respectable pace but as the housing slump and the associated credit crunch accelerate and spill over to the rest of the economy , most analysts expect employment to weaken , too
All in all , it 's an economic and political environment in which you 'd expect Republican politicians , as a sheer matter of calculation , to look for ways to distance themselves from the current administration 's economic policies and record say , by expressing some concern about rising income gaps and the fraying social safety net
In fact , however , except for Mike Huckabee a peculiar case who 'll deserve more discussion if he stays in contention the leading Republican contenders have gone out of their way to assure voters that they will not deviate an inch from the Bush path
Because the G.O.P. is still controlled by a conservative movement that does not tolerate deviations from tax-cutting , free-market , greed-is-good orthodoxy
To see the extent to which Republican politicians still cower before the power of movement conservatism , consider the sad case of John McCain
Mr. McCain 's lingering reputation as a maverick straight talker comes largely from his opposition to the Bush tax cuts of 2001 and 2003 , which he said at the time were too big and too skewed to the rich
Those objections would seem to have even more force now , with America facing the costs of an expensive war which Mr. McCain fervently supports and with income inequality reaching new heights
But Mr. McCain now says that he supports making the Bush tax cuts permanent
Not only that : he 's become a convert to crude supply-side economics , claiming that cutting taxes actually increases revenues
That 's an assertion even Bush administration officials concede is false
Oh , and what about his earlier opposition to tax cuts
Mr. McCain now says he opposed the Bush tax cuts only because they were n't offset by spending cuts
Aside from the logical problem here if tax cuts increase revenue , why do they need to be offset
even a cursory look at what Mr. McCain said at the time shows that he 's trying to rewrite history : he actually attacked the Bush tax cuts from the left , not the right
But he has clearly decided that it 's better to fib about his record than admit that he was n't always a rock-solid economic conservative
So what does the conversion of Mr. McCain into an avowed believer in voodoo economics and the comparable conversions of Mitt Romney and Rudy Giuliani tell us
That bitter partisanship and political polarization are n't going away anytime soon
There 's a fantasy , widely held inside the Beltway , that men and women of good will from both parties can be brought together to hammer out bipartisan solutions to the nation 's problems
If such a thing were possible , Mr. McCain , Mr. Romney and Mr. Giuliani a self-proclaimed maverick , the former governor of a liberal state and the former mayor of an equally liberal city would seem like the kind of men Democrats could deal with
-LRB- O.K. , maybe not Mr. Giuliani .
In fact , however , it 's not possible , not given the nature of today 's Republican Party , which has turned men like Mr. McCain and Mr. Romney into hard-line ideologues
On economics , and on much else , there is no common ground between the parties
The New Voodoo Hypocrisy never goes out of style , but , even so , 2010 was something special
For it was the year of budget doubletalk - the year of arsonists posing as firemen , of people railing against deficits while doing everything they could to make those deficits bigger
And I do n't just mean politicians
Did you notice the U-turn many political commentators and other Serious People made when the Obama-McConnell tax-cut deal was announced
One day deficits were the great evil and we needed fiscal austerity now now now , never mind the state of the economy
The next day $ 800 billion in debt-financed tax cuts , with the prospect of more to come , was the greatest thing since sliced bread , a triumph of bipartisanship
Still , it was the politicians - and , yes , that mainly meant Republicans - who took the lead on the hypocrisy front
In the first half of 2010 , impassioned speeches denouncing federal red ink were the G.O.P. norm
And concerns about the deficit were the stated reason for Republican opposition to extension of unemployment benefits , or for that matter any proposal to help Americans cope with economic hardship
But the tone changed during the summer , as B-day - the day when the Bush tax breaks for the wealthy were scheduled to expire - began to approach
My nomination for headline of the year comes from the newspaper Roll Call , on July 18 : `` McConnell Blasts Deficit Spending , Urges Extension of Tax Cuts .
How did Republican leaders reconcile their purported deep concern about budget deficits with their advocacy of large tax cuts
Was it that old voodoo economics - the belief , refuted by study after study , that tax cuts pay for themselves - making a comeback
No , it was something new and worse
To be sure , there were renewed claims that tax cuts lead to higher revenue
But 2010 marked the emergence of a new , even more profound level of magical thinking : the belief that deficits created by tax cuts just do n't matter
For example , Senator Jon Kyl of Arizona - who had denounced President Obama for running deficits - declared that `` you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans .
It 's an easy position to ridicule
After all , if you never have to offset the cost of tax cuts , why not just eliminate taxes altogether
But the joke 's on us because while this kind of magical thinking may not yet be the law of the land , it 's about to become part of the rules governing legislation in the House of Representatives
As the Center on Budget and Policy Priorities points out , the incoming House majority plans to make changes in the `` pay-as-you-go '' rules - rules that are supposed to enforce responsible budgeting - that effectively implement Mr. Kyl 's principle
Spending increases will have to be offset , but revenue losses from tax cuts wo n't
Oh , and revenue increases , even if they come from the elimination of tax loopholes , wo n't count either : any spending increase must be offset by spending cuts elsewhere ; it ca n't be paid for with additional taxes
So if taxes do n't matter , does the incoming majority have a realistic plan to cut spending
Of course not
Republicans say that they want to cut $ 100 billion in spending , which is itself small change in a $ 3.6 trillion federal budget
But they also say that defense , Medicare and Social Security - all the big-ticket items - are off the table
So they 're talking about a 20 percent cut in what 's left , which includes things like running the judicial system and operating the Centers for Disease Control and Prevention ; they have offered no specifics about where the cuts will fall
How will this all end
I have seen the future , and it 's on Long Island , where I grew up
Nassau County - the part of Long Island that directly abuts New York City - is one of the wealthiest counties in America and has an unemployment rate well below the national average
So it should be weathering the economic storm better than most places
But a year ago , in one of the first major Tea Party victories , the county elected a new executive who railed against budget deficits and promised both to cut taxes and to balance the budget
The tax cuts happened ; the promised spending cuts did n't
And now the county is in fiscal crisis
Now the federal government has a lot more flexibility than a county government : it need n't , and should n't , balance its budget each year
The deficits of the past two years have actually been a good thing , helping to support the economy in the aftermath of the 2008 financial crisis
But Nassau County shows how easily responsible government can collapse in this country , now that one of our major parties believes in budget magic
All it takes is disgruntled voters who do n't know what 's at stake - and we have plenty of those
Banana republic , here we come
The financial crisis that began late last summer , then took a brief vacation in September and October , is back with a vengeance
How bad is it
Well , I ve never seen financial insiders this spooked not even during the Asian crisis of 1997-98 , when economic dominoes seemed to be falling all around the world
This time , market players seem truly horrified because they ve suddenly realized that they don t understand the complex financial system they created
Before I get to that , however , let s talk about what s happening right now
Credit lending between market players is to the financial markets what motor oil is to car engines
The ability to raise cash on short notice , which is what people mean when they talk about liquidity , is an essential lubricant for the markets , and for the economy as a whole
But liquidity has been drying up
Some credit markets have effectively closed up shop
Interest rates in other markets like the London market , in which banks lend to each other have risen even as interest rates on U.S. government debt , which is still considered safe , have plunged
What we are witnessing , says Bill Gross of the bond manager Pimco , is essentially the breakdown of our modern-day banking system , a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August
The freezing up of the financial markets will , if it goes on much longer , lead to a severe reduction in overall lending , causing business investment to go the way of home construction and that will mean a recession , possibly a nasty one
Behind the disappearance of liquidity lies a collapse of trust : market players don t want to lend to each other , because they re not sure they ll be repaid
In a direct sense , this collapse of trust has been caused by the bursting of the housing bubble
The run-up of home prices made even less sense than the dot-com bubble I mean , there wasn t even a glamorous new technology to justify claims that old rules no longer applied but somehow financial markets accepted crazy home prices as the new normal
And when the bubble burst , a lot of investments that were labeled AAA turned out to be junk
Thus , super-senior claims against subprime mortgages that is , investments that have first dibs on whatever mortgage payments borrowers make , and were therefore supposed to pay off in full even if a sizable fraction of these borrowers defaulted on their debts have lost a third of their market value since July
But what has really undermined trust is the fact that nobody knows where the financial toxic waste is buried
Citigroup wasn t supposed to have tens of billions of dollars in subprime exposure ; it did
Florida s Local Government Investment Pool , which acts as a bank for the state s school districts , was supposed to be risk-free ; it wasn t -LRB- and now schools don t have the money to pay teachers -RRB-
How did things get so opaque
The answer is financial innovation two words that should , from now on , strike fear into investors hearts
O.K. , to be fair , some kinds of financial innovation are good
I don t want to go back to the days when checking accounts didn t pay interest and you couldn t withdraw cash on weekends
But the innovations of recent years the alphabet soup of C.D.O. s and S.I.V. s , R.M.B.S. and A.B.C.P. were sold on false pretenses
They were promoted as ways to spread risk , making investment safer
What they did instead aside from making their creators a lot of money , which they didn t have to repay when it all went bust was to spread confusion , luring investors into taking on more risk than they realized
Why was this allowed to happen
At a deep level , I believe that the problem was ideological : policy makers , committed to the view that the market is always right , simply ignored the warning signs
We know , in particular , that Alan Greenspan brushed aside warnings from Edward Gramlich , who was a member of the Federal Reserve Board , about a potential subprime crisis
And free-market orthodoxy dies hard
Just a few weeks ago Henry Paulson , the Treasury secretary , admitted to Fortune magazine that financial innovation got ahead of regulation but added , I don t think we d want it the other way around
Is that your final answer , Mr. Secretary
Now , Mr. Paulson s new proposal to help borrowers renegotiate their mortgage payments and avoid foreclosure sounds in principle like a good idea -LRB- although we have yet to hear any details -RRB-
Realistically , however , it won t make more than a small dent in the subprime problem
The bottom line is that policy makers left the financial industry free to innovate and what it did was to innovate itself , and the rest of us , into a big , nasty mess
Freezing Out Hope After the Democratic `` shellacking '' in the midterm elections , everyone wondered how President Obama would respond
Would he show what he was made of
Would he stand firm for the values he believes in , even in the face of political adversity
On Monday , we got the answer : he announced a pay freeze for federal workers
This was an announcement that had it all
It was transparently cynical ; it was trivial in scale , but misguided in direction ; and by making the announcement , Mr. Obama effectively conceded the policy argument to the very people who are seeking - successfully , it seems - to destroy him
So I guess we are , in fact , seeing what Mr. Obama is made of
About that pay freeze : the president likes to talk about `` teachable moments .
Well , in this case he seems eager to teach Americans something false
The truth is that America 's long-run deficit problem has nothing at all to do with overpaid federal workers
For one thing , those workers are n't overpaid
Federal salaries are , on average , somewhat less than those of private-sector workers with equivalent qualifications
And , anyway , employee pay is only a small fraction of federal expenses ; even cutting the payroll in half would reduce total spending less than 3 percent
So freezing federal pay is cynical deficit-reduction theater
It 's a -LRB- literally -RRB- cheap trick that only sounds impressive to people who do n't know anything about budget realities
The actual savings , about $ 5 billion over two years , are chump change given the scale of the deficit
Anyway , slashing federal spending at a time when the economy is depressed is exactly the wrong thing to do
Just ask Federal Reserve officials , who have lately been more or less pleading for some help in their efforts to promote faster job growth
Meanwhile , there 's a real deficit issue on the table : whether tax cuts for the wealthy will , as Republicans demand , be extended
Just as a reminder , over the next 75 years the cost of making those tax cuts permanent would be roughly equal to the entire expected financial shortfall of Social Security
Mr. Obama 's pay ploy might , just might , have been justified if he had used the announcement of a freeze as an occasion to take a strong stand against Republican demands - to declare that at a time when deficits are an important issue , tax breaks for the wealthiest are n't acceptable
But he did n't
Instead , he apparently intended the pay freeze announcement as a peace gesture to Republicans the day before a bipartisan summit
At that meeting , Mr. Obama , who has faced two years of complete scorched-earth opposition , declared that he had failed to reach out sufficiently to his implacable enemies
He did not , as far as anyone knows , wear a sign on his back saying `` Kick me , '' although he might as well have
There were no comparable gestures from the other side
Instead , Senate Republicans declared that none of the rest of the legislation on the table - legislation that includes such things as a strategic arms treaty that 's vital to national security - would be acted on until the tax-cut issue was resolved , presumably on their terms
It 's hard to escape the impression that Republicans have taken Mr. Obama 's measure - that they 're calling his bluff in the belief that he can be counted on to fold
And it 's also hard to escape the impression that they 're right
The real question is what Mr. Obama and his inner circle are thinking
Do they really believe , after all this time , that gestures of appeasement to the G.O.P. will elicit a good-faith response
What 's even more puzzling is the apparent indifference of the Obama team to the effect of such gestures on their supporters
One would have expected a candidate who rode the enthusiasm of activists to an upset victory in the Democratic primary to realize that this enthusiasm was an important asset
Instead , however , Mr. Obama almost seems as if he 's trying , systematically , to disappoint his once-fervent supporters , to convince the people who put him where he is that they made an embarrassing mistake
Whatever is going on inside the White House , from the outside it looks like moral collapse - a complete failure of purpose and loss of direction
So what are Democrats to do
The answer , increasingly , seems to be that they 'll have to strike out on their own
In particular , Democrats in Congress still have the ability to put their opponents on the spot - as they did on Thursday when they forced a vote on extending middle-class tax cuts , putting Republicans in the awkward position of voting against the middle class to safeguard tax cuts for the rich
It would be much easier , of course , for Democrats to draw a line if Mr. Obama would do his part
But all indications are that the party will have to look elsewhere for the leadership it needs
Health care reform hangs in the balance
Its fate rests with a handful of `` centrist '' senators senators who claim to be mainly worried about whether the proposed legislation is fiscally responsible
But if they 're really concerned with fiscal responsibility , they should n't be worried about what would happen if health reform passes
They should , instead , be worried about what would happen if it does n't pass
For America ca n't get control of its budget without controlling health care costs and this is our last , best chance to deal with these costs in a rational way
Some background : Long-term fiscal projections for the United States paint a grim picture
Unless there are major policy changes , expenditure will consistently grow faster than revenue , eventually leading to a debt crisis
What 's behind these projections
An aging population , which will raise the cost of Social Security , is part of the story
But the main driver of future deficits is the ever-rising cost of Medicare and Medicaid
If health care costs rise in the future as they have in the past , fiscal catastrophe awaits
You might think , given this picture , that extending coverage to those who would otherwise be uninsured would exacerbate the problem
But you 'd be wrong , for two reasons
First , the uninsured in America are , on average , relatively young and healthy ; covering them would n't raise overall health care costs very much
Second , the proposed health care reform links the expansion of coverage to serious cost-control measures for Medicare
Think of it as a grand bargain : coverage for -LRB- almost -RRB- everyone , tied to an effort to ensure that health care dollars are well spent
Are we talking about real savings , or just window dressing
Well , the health care economists I respect are seriously impressed by the cost-control measures in the Senate bill , which include efforts to improve incentives for cost-effective care , the use of medical research to guide doctors toward treatments that actually work , and more
This is `` the best effort anyone has made , '' says Jonathan Gruber of the Massachusetts Institute of Technology
A letter signed by 23 prominent health care experts including Mark McClellan , who headed Medicare under the Bush administration declares that the bill 's cost-control measures `` will reduce long-term deficits .
The fact that we 're seeing the first really serious attempt to control health care costs as part of a bill that tries to cover the uninsured seems to confirm what would-be reformers have been saying for years : The path to cost control runs through universality
We can only tackle out-of-control costs as part of a deal that also provides Americans with the security of guaranteed health care
That observation in itself should make anyone concerned with fiscal responsibility support this reform
Over the next decade , the Congressional Budget Office has concluded , the proposed legislation would reduce , not increase , the budget deficit
And by giving us a chance , finally , to rein in the ever-growing spending of Medicare , it would greatly improve our long-run fiscal prospects
But there 's another reason failure to pass reform would be devastating namely , the nature of the opposition
The Republican campaign against health care reform has rested in part on the traditional arguments , arguments that go back to the days when Ronald Reagan was trying to scare Americans into opposing Medicare denunciations of `` socialized medicine , '' claims that universal health coverage is the road to tyranny , etc.
But in the closing rounds of the health care fight , the G.O.P. has focused more and more on an effort to demonize cost-control efforts
The Senate bill would impose `` draconian cuts '' on Medicare , says Senator John McCain , who proposed much deeper cuts just last year as part of his presidential campaign
`` If you 're a senior and you 're on Medicare , you better be afraid of this bill , '' says Senator Tom Coburn
If these tactics work , and health reform fails , think of the message this would convey : It would signal that any effort to deal with the biggest budget problem we face will be successfully played by political opponents as an attack on older Americans
It would be a long time before anyone was willing to take on the challenge again ; remember that after the failure of the Clinton effort , it was 16 years before the next try at health reform
That 's why anyone who is truly concerned about fiscal policy should be anxious to see health reform succeed
If it fails , the demagogues will have won , and we probably wo n't deal with our biggest fiscal problem until we 're forced into action by a nasty debt crisis
So to the centrists still sitting on the fence over health reform : If you care about fiscal responsibility , you better be afraid of what will happen if reform fails
Let s Not Make a Deal Back in 2001 , former President George W. Bush pulled a fast one
He wanted to enact an irresponsible tax cut , largely for the benefit of the wealthiest Americans
But there were Senate rules in place designed to prevent that kind of irresponsibility
So Mr. Bush evaded the rules by making the tax cut temporary , with the whole thing scheduled to expire on the last day of 2010
The plan , of course , was to come back later and make the thing permanent , never mind the impact on the deficit
But that never happened
And so here we are , with 2010 almost over and nothing resolved
Democrats have tried to push a compromise : let tax cuts for the wealthy expire , but extend tax cuts for the middle class
Republicans , however , are having none of it
They have been filibustering Democratic attempts to separate tax cuts that mainly benefit a tiny group of wealthy Americans from those that mainly help the middle class
It 's all or nothing , they say : all the Bush tax cuts must be extended
What should Democrats do
The answer is that they should just say no.
If G.O.P. intransigence means that taxes rise at the end of this month , so be it
Think about the logic of the situation
Right now , the Republicans see themselves as successful blackmailers , holding a clear upper hand
President Obama , they believe , would n't dare preside over a broad tax increase while the economy is depressed
And they therefore believe that he will give in to their demands
But while raising taxes when unemployment is high is a bad thing , there are worse things
And a cold , hard look at the consequences of giving in to the G.O.P. now suggests that saying no , and letting the Bush tax cuts expire on schedule , is the lesser of two evils
Bear in mind that Republicans want to make those tax cuts permanent
They might agree to a two - or three-year extension - but only because they believe that this would set up the conditions for a permanent extension later
And they may well be right : if tax-cut blackmail works now , why should n't it work again later
America , however , can not afford to make those cuts permanent
We 're talking about almost $ 4 trillion in lost revenue just over the next decade ; over the next 75 years , the revenue loss would be more than three times the entire projected Social Security shortfall
So giving in to Republican demands would mean risking a major fiscal crisis - a crisis that could be resolved only by making savage cuts in federal spending
And we 're not talking about government programs nobody cares about : the only way to cut spending enough to pay for the Bush tax cuts in the long run would be to dismantle large parts of Social Security and Medicare
So the potential cost of giving in to Republican demands is high
What about the costs of letting the tax cuts expire
To be sure , letting taxes rise in a depressed economy would do damage - but not as much as many people seem to think
A few months ago , the Congressional Budget Office released a report on the impact of various tax options
A two-year extension of the Bush tax cuts , it estimated , would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire ; the effect would be about twice as large in 2012
Those are significant numbers , but not huge - certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule
Oh , and what about confidence
I 've been skeptical about claims that budget deficits hurt the economy even in the short run , because they undermine confidence in the government 's long-run solvency
Advanced countries , I 've argued , have a lot of fiscal leeway
But anything that makes permanent extension of obviously irresponsible tax cuts more likely also sends a strong signal to investors : it says , `` Hey , we are n't really an advanced country ; we 're a banana republic !
And that ca n't be good for the economy
Last but not least : if Democrats give in to the blackmailers now , they 'll just face more demands in the future
As long as Republicans believe that Mr. Obama will do anything to avoid short-term pain , they 'll have every incentive to keep taking hostages
If the president will endanger America 's fiscal future to avoid a tax increase , what will he give to avoid a government shutdown
So Mr. Obama should draw a line in the sand , right here , right now
If Republicans hold out , and taxes go up , he should tell the nation the truth , and denounce the blackmail attempt for what it is
Yes , letting taxes go up would be politically risky
But giving in would be risky , too - especially for a president whom voters are starting to write off as a man too timid to take a stand
Now is the time for him to prove them wrong
Imagine this : It 's the summer of 2009 , and President Barack Obama is about to unveil his plan for universal health care
But his health policy experts have done the math , and they 've concluded that the plan really needs to include a requirement that everyone have health insurance a so-called mandate
Without a mandate , they find , the plan will fall far short of universal coverage
Worse yet , without a mandate health insurance will be much more expensive than it should be for those who do choose to buy it
But Mr. Obama knows that if he tries to include a mandate in the plan , he 'll face a barrage of misleading attacks from conservatives who oppose universal health care in any form
And he 'll have trouble responding because he made the very same misleading attacks on Hillary Clinton and John Edwards during the race for the Democratic nomination
O.K. , before I go any further , let 's be clear : there is a huge divide between Republicans and Democrats on health care , and the Obama plan although weaker than the Edwards or Clinton plans is very much on the Democratic side of that divide
But lately Mr. Obama has been stressing his differences with his rivals by attacking their plans from the right which means that he has been giving credence to false talking points that will be used against any Democratic health care plan a couple of years from now
First is the claim that a mandate is unenforceable
Mr. Obama 's advisers have seized on the widely cited statistic that 15 percent of drivers are uninsured , even though insurance is legally required
But this statistic is known to be seriously overstated and some states have managed to get the number of uninsured drivers down to as little as 2 percent
Besides , while the enforcement of car insurance mandates is n't perfect , it does greatly increase the number of insured drivers
Anyway , why talk about car insurance rather than looking at direct evidence on how health care mandates perform
Other countries notably Switzerland and the Netherlands already have such mandates
And guess what
They work
The second false claim is that people wo n't be able to afford the insurance they 're required to have a claim usually supported with data about how expensive insurance is
But all the Democratic plans include subsidies to lower-income families to help them pay for insurance , plus a promise to increase the subsidies if they prove insufficient
In fact , the Edwards and Clinton plans contain more money for such subsidies than the Obama plan
If low-income families find insurance unaffordable under these plans , they 'll find it even less affordable under the Obama plan
By the way , the limitations of the Massachusetts plan to cover all the state 's uninsured which is actually doing much better than most reports suggest come not from the difficulty of enforcing mandates , but from the fact that the state has n't yet allocated enough money for subsidies
Finally , Mr. Obama is storing up trouble for health reformers by suggesting that there is something nasty about plans that `` force every American to buy health care .
Look , the point of a mandate is n't to dictate how people should live their lives it 's to prevent some people from gaming the system
Under the Obama plan , healthy people could choose not to buy insurance , then sign up for it if they developed health problems later
This would lead to higher premiums for everyone else
It would reward the irresponsible , while punishing those who did the right thing and bought insurance while they were healthy
Here 's an analogy
Suppose someone proposed making the Medicare payroll tax optional : you could choose not to pay the tax during your working years if you did n't think you 'd actually need Medicare when you got older except that you could change your mind and opt back in if you started to develop health problems
Can we all agree that this would fatally undermine Medicare 's finances
Yet Mr. Obama is proposing basically the same rules for his allegedly universal health care plan
So how much does all this matter
Mr. Obama 's health plan is weaker than those of his Democratic rivals , but it 's infinitely superior to , say , what Rudy Giuliani has been proposing
My main concern right now is with Mr. Obama 's rhetoric : by echoing the talking points of those who oppose any form of universal health care , he 's making the task of any future president who tries to deliver universal care considerably more difficult
I 'd add , however , a further concern : the debate over mandates has reinforced the uncomfortable sense among some health reformers that Mr. Obama just is n't that serious about achieving universal care that he introduced a plan because he had to , but that every time there 's a hard choice to be made he comes down on the side of doing less
Maybe I 'm na ve , but I 'm feeling optimistic about the climate talks starting in Copenhagen on Monday
President Obama now plans to address the conference on its last day , which suggests that the White House expects real progress
It 's also encouraging to see developing countries including China , the world 's largest emitter of carbon dioxide agreeing , at least in principle , that they need to be part of the solution
Of course , if things go well in Copenhagen , the usual suspects will go wild
We 'll hear cries that the whole notion of global warming is a hoax perpetrated by a vast scientific conspiracy , as demonstrated by stolen e-mail messages that show well , actually all they show is that scientists are human , but never mind
We 'll also , however , hear cries that climate-change policies will destroy jobs and growth
The truth , however , is that cutting greenhouse gas emissions is affordable as well as essential
Serious studies say that we can achieve sharp reductions in emissions with only a small impact on the economy 's growth
And the depressed economy is no reason to wait on the contrary , an agreement in Copenhagen would probably help the economy recover
Why should you believe that cutting emissions is affordable
First , because financial incentives work
Action on climate , if it happens , will take the form of `` cap and trade '' : businesses wo n't be told what to produce or how , but they will have to buy permits to cover their emissions of carbon dioxide and other greenhouse gases
So they 'll be able to increase their profits if they can burn less carbon and there 's every reason to believe that they 'll be clever and creative about finding ways to do just that
As a recent study by McKinsey & Company showed , there are many ways to reduce emissions at relatively low cost : improved insulation ; more efficient appliances ; more fuel-efficient cars and trucks ; greater use of solar , wind and nuclear power ; and much , much more
And you can be sure that given the right incentives , people would find many tricks the study missed
The truth is that conservatives who predict economic doom if we try to fight climate change are betraying their own principles
They claim to believe that capitalism is infinitely adaptable , that the magic of the marketplace can deal with any problem
But for some reason they insist that cap and trade a system specifically designed to bring the power of market incentives to bear on environmental problems ca n't work
Well , they 're wrong again
For we 've been here before
The acid rain controversy of the 1980s was in many respects a dress rehearsal for today 's fight over climate change
Then as now , right-wing ideologues denied the science
Then as now , industry groups claimed that any attempt to limit emissions would inflict grievous economic harm
But in 1990 the United States went ahead anyway with a cap-and-trade system for sulfur dioxide
And guess what
It worked , delivering a sharp reduction in pollution at lower-than-predicted cost
Curbing greenhouse gases will be a much bigger and more complex task but we 're likely to be surprised at how easy it is once we get started
The Congressional Budget Office has estimated that by 2050 the emissions limits in recent proposed legislation would reduce real G.D.P. by between 1 percent and 3.5 percent from what it would otherwise have been
If we split the difference , that says that emissions limits would slow the economy 's annual growth over the next 40 years by around one-twentieth of a percentage point from 2.37 percent to 2.32 percent
That 's not much
Yet if the acid rain experience is any guide , the true cost is likely to be even lower
Still , should we be starting a project like this when the economy is depressed
Yes , we should in fact , this is an especially good time to act , because the prospect of climate-change legislation could spur more investment spending
Consider , for example , the case of investment in office buildings
Right now , with vacancy rates soaring and rents plunging , there 's not much reason to start new buildings
But suppose that a corporation that already owns buildings learns that over the next few years there will be growing incentives to make those buildings more energy-efficient
Then it might well decide to start the retrofitting now , when construction workers are easy to find and material prices are low
The same logic would apply to many parts of the economy , so that climate change legislation would probably mean more investment over all
And more investment spending is exactly what the economy needs
So let 's hope my optimism about Copenhagen is justified
A deal there would save the planet at a price we can easily afford and it would actually help us in our current economic predicament
In 1956 Adlai Stevenson , running against Dwight Eisenhower , tried to make the political style of his opponent 's vice president , a man by the name of Richard Nixon , an issue
The nation , he warned , was in danger of becoming `` a land of slander and scare ; the land of sly innuendo , the poison pen , the anonymous phone call and hustling , pushing , shoving ; the land of smash and grab and anything to win
This is Nixonland .
The quote comes from `` Nixonland , '' a soon-to-be-published political history of the years from 1964 to 1972 written by Rick Perlstein , the author of `` Before the Storm .
As Mr. Perlstein shows , Stevenson warned in vain : during those years America did indeed become the land of slander and scare , of the politics of hatred
And it still is
In fact , these days even the Democratic Party seems to be turning into Nixonland
The bitterness of the fight for the Democratic nomination is , on the face of it , bizarre
Both candidates still standing are smart and appealing
Both have progressive agendas -LRB- although I believe that Hillary Clinton is more serious about achieving universal health care , and that Barack Obama has staked out positions that will undermine his own efforts -RRB-
Both have broad support among the party 's grass roots and are favorably viewed by Democratic voters
Supporters of each candidate should have no trouble rallying behind the other if he or she gets the nod
Why , then , is there so much venom out there
I wo n't try for fake evenhandedness here : most of the venom I see is coming from supporters of Mr. Obama , who want their hero or nobody
I 'm not the first to point out that the Obama campaign seems dangerously close to becoming a cult of personality
We 've already had that from the Bush administration remember Operation Flight Suit
We really do n't want to go there again
What 's particularly saddening is the way many Obama supporters seem happy with the application of `` Clinton rules '' the term a number of observers use for the way pundits and some news organizations treat any action or statement by the Clintons , no matter how innocuous , as proof of evil intent
The prime example of Clinton rules in the 1990s was the way the press covered Whitewater
A small , failed land deal became the basis of a multiyear , multimillion-dollar investigation , which never found any evidence of wrongdoing on the Clintons ' part , yet the `` scandal '' became a symbol of the Clinton administration 's alleged corruption
During the current campaign , Mrs. Clinton 's entirely reasonable remark that it took L.B.J. 's political courage and skills to bring Martin Luther King Jr. 's dream to fruition was cast as some kind of outrageous denigration of Dr. King
And the latest prominent example came when David Shuster of MSNBC , after pointing out that Chelsea Clinton was working for her mother 's campaign as adult children of presidential aspirants often do asked , `` does n't it seem like Chelsea 's sort of being pimped out in some weird sort of way ?
Mr. Shuster has been suspended , but as the Clinton campaign rightly points out , his remark was part of a broader pattern at the network
I call it Clinton rules , but it 's a pattern that goes well beyond the Clintons
For example , Al Gore was subjected to Clinton rules during the 2000 campaign : anything he said , and some things he did n't say -LRB- no , he never claimed to have invented the Internet -RRB- , was held up as proof of his alleged character flaws
For now , Clinton rules are working in Mr. Obama 's favor
But his supporters should not take comfort in that fact
For one thing , Mrs. Clinton may yet be the nominee and if Obama supporters care about anything beyond hero worship , they should want to see her win in November
For another , if history is any guide , if Mr. Obama wins the nomination , he will quickly find himself being subjected to Clinton rules
Democrats always do
But most of all , progressives should realize that Nixonland is not the country we want to be
Racism , misogyny and character assassination are all ways of distracting voters from the issues , and people who care about the issues have a shared interest in making the politics of hatred unacceptable
One of the most hopeful moments of this presidential campaign came last month , when a number of Jewish leaders signed a letter condemning the smear campaign claiming that Mr. Obama was a secret Muslim
It 's a good guess that some of those leaders would prefer that Mr. Obama not become president ; nonetheless , they understood that there are principles that matter more than short-term political advantage
I 'd like to see more moments like that , perhaps starting with strong assurances from both Democratic candidates that they respect their opponents and would support them in the general election
Abraham Lincoln , Inflationist There was a time when Republicans used to refer to themselves , proudly , as `` the party of Lincoln .
But you do n't hear that line much these days
The main answer , presumably , lies in the G.O.P. 's decision , long ago , to seek votes from Southerners angered by the end of legal segregation
With the old Confederacy now the heart of the Republican base , boasting about the party 's Civil War-era legacy is no longer advisable
But sooner or later , Republicans were bound to notice other reasons to disavow Lincoln
He was , after all , the first president to institute an income tax
And he was also the first president to issue a paper currency - the `` greenback '' - that was n't backed by gold or silver
`` There is nothing more insidious that a country can do to its people than to debase its currency , '' declared Representative Paul Ryan in one of two hearings Congress held on Wednesday on monetary policy
So much , then , for the Great Liberator
Which brings me to the story of what went on in those monetary hearings
One of the hearings was called by Representative Ron Paul , a harsh critic of the Federal Reserve , who now has an oversight role over the very institution he wants abolished in favor of a return to the gold standard
Mr. Paul 's subcommittee called three witnesses , one of whom was an odd choice : Thomas DiLorenzo , a professor at Loyola University and a senior fellow at the Ludwig von Mises Institute
What was odd about that choice
Well , Mr. DiLorenzo has n't actually written much about monetary policy , although he has described Fed policy - not just recently , but since the 1960s - as `` legalized counterfeiting operations .
His main claim to fame , instead , is as a critic of Lincoln - he 's the author of `` Lincoln Unmasked : What You 're Not Supposed to Know About Dishonest Abe '' - and as a modern-day secessionist
No , really : calls for secession run through many of Mr. DiLorenzo 's writings - for example , in his declaration that `` healthcare freedom '' wo n't be restored until `` some states begin seceding from the new American fascialistic state .
Raise the rebel flag
O.K. , it 's going to be a while before the G.O.P. as a whole embraces neo-secessionism , and Mr. Paul , although highly visible , is , in fact , a somewhat marginal figure even within his own party
But Mr. Ryan , who led the other hearing - the one at which Ben Bernanke , the Fed chairman , testified - is a rising Republican star
So it 's worth noting that Mr. Ryan 's hard-money rhetoric was nearly as bizarre as Mr. DiLorenzo 's
Start with that bit about debasing our currency
Where did that come from
The dollar 's value in terms of other major currencies is about the same now as it was three years ago
And as Mr. Bernanke pointed out , consumer prices rose only 1.2 percent in 2010 , an inflation rate that , for the record , is well below the rate under the sainted Ronald Reagan
The Fed 's preferred measure , which excludes volatile food and energy prices , was up only 0.7 percent , well below the target of around 2 percent
But Mr. Ryan is sure that the dollar is being debased and wo n't take no for an answer
In an attempt to create a gotcha moment , he waved a copy of a newspaper bearing the headline `` Inflation Worries Spread '' at the Fed chairman
But the gotcha actually went the other way
As Mr. Bernanke immediately pointed out , the article was about inflation in China and other emerging markets , not in the United States
And the Fed chairman declared , correctly , that `` inflation made here in the U.S. is very , very low .
Advantage Bernanke
But the facts do n't matter , because conservative hard-money mania , the demand that the Fed stop trying to rescue the economy , is n't really about inflation fears
Mr. Ryan said as much in Wednesday 's hearing , in which he declared that our currency `` should be guided by the rule of law , not the rule of men .
A few years ago , my response would have been , say what
After all , even Milton Friedman saw the conduct of monetary policy as a technical issue , not a matter of principle ; his complaint about the Fed 's role in the Great Depression was that it did n't print enough money , not that it printed too much
But then Friedman , who believed that it sometimes makes sense to let your currency depreciate , who urged Japan 's central bank to adopt a policy very similar to what the Fed is doing now , was a leftist by the standards of today 's G.O.P. Wednesday 's hearings are n't likely to have any immediate effect on monetary policy
But they offer a revealing - and appalling - look at the mind-set of one of our two major political parties
We 've always known that the modern G.O.P. wants to take America back to the way it was before the New Deal ; but now it 's clear that the party wants to build a bridge to the 19th century , and maybe even to the antebellum era
Backward , march
`` Do n't cut Medicare
The reform bills passed by the House and Senate cut Medicare by approximately $ 500 billion
This is wrong .
So declared Newt Gingrich , the former speaker of the House , in a recent op-ed article written with John Goodman , the president of the National Center for Policy Analysis
Now , Mr. Gingrich was just repeating the current party line
Furious denunciations of any effort to seek cost savings in Medicare death panels
have been central to Republican efforts to demonize health reform
What 's amazing , however , is that they 're getting away with it
Why is this amazing
It 's not just the fact that Republicans are now posing as staunch defenders of a program they have hated ever since the days when Ronald Reagan warned that Medicare would destroy America 's freedom
Nor is it even the fact that , as House speaker , Mr. Gingrich personally tried to ram through deep cuts in Medicare and , in 1995 , went so far as to shut down the federal government in an attempt to bully Bill Clinton into accepting those cuts
After all , you could explain this about-face by supposing that Republicans have had a change of heart , that they have finally realized just how much good Medicare does
And if you believe that , I 've got some mortgage-backed securities you might want to buy
No , what 's truly mind-boggling is this : Even as Republicans denounce modest proposals to rein in Medicare 's rising costs , they are , themselves , seeking to dismantle the whole program
And the process of dismantling would begin with spending cuts of about $ 650 billion over the next decade
Math is hard , but I do believe that 's more than the roughly $ 400 billion -LRB- not $ 500 billion -RRB- in Medicare savings projected for the Democratic health bills
What I 'm talking about here is the `` Roadmap for America 's Future , '' the budget plan recently released by Representative Paul Ryan , the ranking Republican member of the House Budget Committee
Other leading Republicans have been bobbing and weaving on the official status of this proposal , but it 's pretty clear that Mr. Ryan 's vision does , in fact , represent what the G.O.P. would try to do if it returns to power
The broad picture that emerges from the `` roadmap '' is of an economic agenda that has n't changed one iota in response to the economic failures of the Bush years
In particular , Mr. Ryan offers a plan for Social Security privatization that is basically identical to the Bush proposals of five years ago
But what 's really worth noting , given the way the G.O.P. has campaigned against health care reform , is what Mr. Ryan proposes doing with and to Medicare
In the Ryan proposal , nobody currently under the age of 55 would be covered by Medicare as it now exists
Instead , people would receive vouchers and be told to buy their own insurance
And even this new , privatized version of Medicare would erode over time because the value of these vouchers would almost surely lag ever further behind the actual cost of health insurance
By the time Americans now in their 20s or 30s reached the age of eligibility , there would n't be much of a Medicare program left
But what about those who already are covered by Medicare , or will enter the program over the next decade
You 're safe , says the roadmap ; you 'll still be eligible for traditional Medicare
Except , that is , for the fact that the plan `` strengthens the current program with changes such as income-relating drug benefit premiums to ensure long-term sustainability .
If this sounds like deliberately confusing gobbledygook , that 's because it is
Fortunately , the Congressional Budget Office , which has done an evaluation of the roadmap , offers a translation : `` Some higher-income enrollees would pay higher premiums , and some program payments would be reduced .
In short , there would be Medicare cuts
And it 's possible to back out the size of those cuts from the budget office analysis , which compares the Ryan proposal with a `` baseline '' representing current policy
As I 've already said , the total over the next decade comes to about $ 650 billion substantially bigger than the Medicare savings in the Democratic bills
The bottom line , then , is that the crusade against health reform has relied , crucially , on utter hypocrisy : Republicans who hate Medicare , tried to slash Medicare in the past , and still aim to dismantle the program over time , have been scoring political points by denouncing proposals for modest cost savings savings that are substantially smaller than the spending cuts buried in their own proposals
And if Democrats do n't get their act together and push the almost-completed reform across the goal line , this breathtaking act of staggering hypocrisy will succeed
By any normal political standards , this week 's Congressional agreement on an economic stimulus package was a great victory for President Obama
He got more or less what he asked for : almost $ 800 billion to rescue the economy , with most of the money allocated to spending rather than tax cuts
Break out the Champagne
Or maybe not
These are n't normal times , so normal political standards do n't apply : Mr. Obama 's victory feels more than a bit like defeat
The stimulus bill looks helpful but inadequate , especially when combined with a disappointing plan for rescuing the banks
And the politics of the stimulus fight have made nonsense of Mr. Obama 's postpartisan dreams
Let 's start with the politics
One might have expected Republicans to act at least slightly chastened in these early days of the Obama administration , given both their drubbing in the last two elections and the economic debacle of the past eight years
But it 's now clear that the party 's commitment to deep voodoo enforced , in part , by pressure groups that stand ready to run primary challengers against heretics is as strong as ever
In both the House and the Senate , the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration 's tax cuts is more Bush-style tax cuts
And the rhetorical response of conservatives to the stimulus plan which will , it 's worth bearing in mind , cost substantially less than either the Bush administration 's $ 2 trillion in tax cuts or the $ 1 trillion and counting spent in Iraq has bordered on the deranged
It 's `` generational theft , '' said Senator John McCain , just a few days after voting for tax cuts that would , over the next decade , have cost about four times as much
It 's `` destroying my daughters ' future
It is like sitting there watching my house ransacked by a gang of thugs , '' said Arnold Kling of the Cato Institute
And the ugliness of the political debate matters because it raises doubts about the Obama administration 's ability to come back for more if , as seems likely , the stimulus bill proves inadequate
For while Mr. Obama got more or less what he asked for , he almost certainly did n't ask for enough
We 're probably facing the worst slump since the Great Depression
The Congressional Budget Office , not usually given to hyperbole , predicts that over the next three years there will be a $ 2.9 trillion gap between what the economy could produce and what it will actually produce
And $ 800 billion , while it sounds like a lot of money , is n't nearly enough to bridge that chasm
Officially , the administration insists that the plan is adequate to the economy 's need
But few economists agree
And it 's widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support
We 've just seen how well that worked
Now , the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue , one that would unfreeze the credit markets and get money moving again
But the long-awaited announcement of the Obama administration 's plans on that front , which also came this week , landed with a dull thud
The plan sketched out by Tim Geithner , the Treasury secretary , was n't bad , exactly
What it was , instead , was vague
It left everyone trying to figure out where the administration was really going
Will those public-private partnerships end up being a covert way to bail out bankers at taxpayers ' expense
Or will the required `` stress test '' act as a back-door route to temporary bank nationalization -LRB- the solution favored by a growing number of economists , myself included -RRB-
Nobody knows
Over all , the effect was to kick the can down the road
And that 's not good enough
So far the Obama administration 's response to the economic crisis is all too reminiscent of Japan in the 1990s : a fiscal expansion large enough to avert the worst , but not enough to kick-start recovery ; support for the banking system , but a reluctance to force banks to face up to their losses
It 's early days yet , but we 're falling behind the curve
And I do n't know about you , but I 've got a sick feeling in the pit of my stomach a feeling that America just is n't rising to the greatest economic challenge in 70 years
The best may not lack all conviction , but they seem alarmingly willing to settle for half-measures
And the worst are , as ever , full of passionate intensity , oblivious to the grotesque failure of their doctrine in practice
There 's still time to turn this around
But Mr. Obama has to be stronger looking forward
Otherwise , the verdict on this crisis might be that no , we ca n't
Eat the Future On Friday , House Republicans unveiled their proposal for immediate cuts in federal spending
Uncharacteristically , they failed to accompany the release with a catchy slogan
So I 'd like to propose one : Eat the Future
Republican leaders like to claim that the midterms gave them a mandate for sharp cuts in government spending
Some of us believe that the elections were less about spending than they were about persistent high unemployment , but whatever
The key point to understand is that while many voters say that they want lower spending , press the issue a bit further and it turns out that they only want to cut spending on other people
That 's the lesson from a new survey by the Pew Research Center , in which Americans were asked whether they favored higher or lower spending in a variety of areas
It turns out that they want more , not less , spending on most things , including education and Medicare
They 're evenly divided about spending on aid to the unemployed and - surprise - defense
The only thing they clearly want to cut is foreign aid , which most Americans believe , wrongly , accounts for a large share of the federal budget
Pew also asked people how they would like to see states close their budget deficits
Do they favor cuts in either education or health care , the main expenses states face
Do they favor tax increases
The only deficit-reduction measure with significant support was cuts in public-employee pensions - and even there the public was evenly divided
The moral is clear
Republicans do n't have a mandate to cut spending ; they have a mandate to repeal the laws of arithmetic
How can voters be so ill informed
In their defense , bear in mind that they have jobs , children to raise , parents to take care of
They do n't have the time or the incentive to study the federal budget , let alone state budgets -LRB- which are by and large incomprehensible -RRB-
So they rely on what they hear from seemingly authoritative figures
And what they 've been hearing ever since Ronald Reagan is that their hard-earned dollars are going to waste , paying for vast armies of useless bureaucrats -LRB- payroll is only 5 percent of federal spending -RRB- and welfare queens driving Cadillacs
How can we expect voters to appreciate fiscal reality when politicians consistently misrepresent that reality
Which brings me back to the Republican dilemma
The new House majority promised to deliver $ 100 billion in spending cuts - and its members face the prospect of Tea Party primary challenges if they fail to deliver big cuts
Yet the public opposes cuts in programs it likes - and it likes almost everything
What 's a politician to do
The answer , once you think about it , is obvious : sacrifice the future
Focus the cuts on programs whose benefits are n't immediate ; basically , eat America 's seed corn
There will be a huge price to pay , eventually - but for now , you can keep the base happy
If you did n't understand that logic , you might be puzzled by many items in the House G.O.P. proposal
Why cut a billion dollars from a highly successful program that provides supplemental nutrition to pregnant mothers , infants , and young children
Why cut $ 648 million from nuclear nonproliferation activities
-LRB- One terrorist nuke , assembled from stray ex-Soviet fissile material , can ruin your whole day .
Why cut $ 578 million from the I.R.S. enforcement budget
-LRB- Letting tax cheats run wild does n't exactly serve the cause of deficit reduction .
Once you understand the imperatives Republicans face , however , it all makes sense
By slashing future-oriented programs , they can deliver the instant spending cuts Tea Partiers demand , without imposing too much immediate pain on voters
And as for the future costs - a population damaged by childhood malnutrition , an increased chance of terrorist attacks , a revenue system undermined by widespread tax evasion - well , tomorrow is another day
In a better world , politicians would talk to voters as if they were adults
They would explain that discretionary spending has little to do with the long-run imbalance between spending and revenues
They would then explain that solving that long-run problem requires two main things : reining in health-care costs and , realistically , increasing taxes to pay for the programs that Americans really want
But Republican leaders ca n't do that , of course : they refuse to admit that taxes ever need to rise , and they spent much of the last two years screaming `` death panels !
in response to even the most modest , sensible efforts to ensure that Medicare dollars are well spent
And so they had to produce something like Friday 's proposal , a plan that would save remarkably little money but would do a remarkably large amount of harm
A decade ago , during the last global financial crisis , the word on everyone 's lips was `` contagion .
Troubles that began in a far-away country of which most people knew nothing -LRB- Thailand -RRB- eventually spread to much bigger countries with no obvious connection to Southeast Asia , like Russia and Brazil
Today , we 're witnessing another kind of contagion , not so much across countries as across markets
Troubles that began a little over a year ago in an obscure corner of the financial system , BBB-minus subprime-mortgage-backed securities , have spread to corporate bonds , auto loans , credit cards and now the latest casualty student loans
Indeed , this week the state of Michigan suspended a major student-loan program because of the sudden collapse of another $ 300 billion market you 've never heard of , the market for auction-rate securities
Why has a crisis that began with loans to a limited group of home buyers ended up disrupting so much of the financial system
Because , ultimately , it 's more than a subprime crisis ; indeed , it 's more than a housing crisis
It 's a crisis of faith
I know that sounds dramatic
But , let me talk about what just happened to auction-rate securities
Like many of the financial innovations that are now being called into question , auction-rate securities are complicated deals that seemed to offer something for nothing
They seemed to offer the borrowers typically local governments or quasi-governmental agencies , like the Port Authority of New York and New Jersey and the Michigan Higher Education Student Loan Authority a way to borrow long term without paying the relatively high interest rates investors usually demand on long-term loans
At the same time , they seemed to offer investors an asset that was as good as cash readily available whenever needed but paid higher interest rates than bank deposits
The operative word in all of this , of course , is `` seemed .
Auction-rate securities seemed as good as cash because they involve regular , well , auctions , held as often as once a week , in which investors wanting out sell their positions to investors wanting in
In principle , it was always possible for auctions to fail for lack of enough willing buyers but that was n't ever supposed to happen
Meanwhile , these securities seemed like a good deal for borrowers despite the fact that they contain a penalty clause : if an auction fails , the interest rate the borrower pays jumps up
-LRB- The Port Authority , which had a failed auction last week , just saw the interest rate it pays leap from 4.3 percent to 20 percent .
You see , there were n't ever supposed to be failed auctions , so the penalties were n't supposed to be relevant
Now , what was n't ever supposed to happen has
In the last few weeks , a series of auctions have failed , leaving investors who thought they had ready access to their cash stuck , even as borrowers find themselves paying penalty rates
The collapse of the auction-rate security market does n't reflect newly discovered problems with the borrowers : the Port Authority is as financially sound today as it was a month ago
Instead , it 's contagion from the broader credit crisis
One channel of contagion involves monoline bond insurers , the specialized insurance companies that are supposed to guarantee debt
These companies insured buyers of local government debt against losses but they also guaranteed a lot of subprime-related investments , which makes everyone wonder whether they 'll actually have the money to compensate losers in other markets
More important , however , is the way the ever-widening financial crisis has shaken investors ' faith in the whole system
People no longer trust assurances that fancy financial instruments will function the way they 're supposed to after all , they know what happened to people who thought their subprime-backed securities were safe , AAA-rated investments
Why , then , should they believe that auction-rate securities are as good as cash
And loss of trust can be a self-fulfilling prophecy
Now that new investors wo n't buy auction-rate securities because they no longer believe that they 're as good as cash , those securities become a much worse investment
Needless to say , all of this is bad for the economy
I like to think of what 's happening as a sort of minor-key reprise of the banking crisis that swept America in 1930 and 1931
Frustrated investors who ca n't get their money out of auction-rate securities are n't as photogenic as angry mobs milling outside closed banks , but the principle is the same
And so are the effects : would-be borrowers ca n't get credit , and the economy suffers
One simple measure of the seriousness of the credit problem is this : although the Federal Reserve has sharply cut the interest rate it controls over the past few weeks , the borrowing costs facing many companies and households have actually gone up
And the financial contagion is still spreading
What market is next
But I 've been troubled by reporting that focuses almost exclusively on European debts and deficits , conveying the impression that it 's all about government profligacy and feeding into the narrative of our own deficit hawks , who want to slash spending even in the face of mass unemployment , and hold Greece up as an object lesson of what will happen if we do n't
For the truth is that lack of fiscal discipline is n't the whole , or even the main , source of Europe 's troubles not even in Greece , whose government was indeed irresponsible -LRB- and hid its irresponsibility with creative accounting -RRB-
No , the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites specifically , the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment
Consider the case of Spain , which on the eve of the crisis appeared to be a model fiscal citizen
Its debts were low 43 percent of G.D.P. in 2007 , compared with 66 percent in Germany
It was running budget surpluses
And it had exemplary bank regulation
But with its warm weather and beaches , Spain was also the Florida of Europe and like Florida , it experienced a huge housing boom
The financing for this boom came largely from outside the country : there were giant inflows of capital from the rest of Europe , Germany in particular
The result was rapid growth combined with significant inflation : between 2000 and 2008 , the prices of goods and services produced in Spain rose by 35 percent , compared with a rise of only 10 percent in Germany
Thanks to rising costs , Spanish exports became increasingly uncompetitive , but job growth stayed strong thanks to the housing boom
Then the bubble burst
Spanish unemployment soared , and the budget went into deep deficit
But the flood of red ink which was caused partly by the way the slump depressed revenues and partly by emergency spending to limit the slump 's human costs was a result , not a cause , of Spain 's problems
And there 's not much that Spain 's government can do to make things better
The nation 's core economic problem is that costs and prices have gotten out of line with those in the rest of Europe
If Spain still had its old currency , the peseta , it could remedy that problem quickly through devaluation by , say , reducing the value of a peseta by 20 percent against other European currencies
But Spain no longer has its own money , which means that it can regain competitiveness only through a slow , grinding process of deflation
Now , if Spain were an American state rather than a European country , things would n't be so bad
For one thing , costs and prices would n't have gotten so far out of line : Florida , which among other things was freely able to attract workers from other states and keep labor costs down , never experienced anything like Spain 's relative inflation
For another , Spain would be receiving a lot of automatic support in the crisis : Florida 's housing boom has gone bust , but Washington keeps sending the Social Security and Medicare checks
But Spain is n't an American state , and as a result it 's in deep trouble
Greece , of course , is in even deeper trouble , because the Greeks , unlike the Spaniards , actually were fiscally irresponsible
Greece , however , has a small economy , whose troubles matter mainly because they 're spilling over to much bigger economies , like Spain 's
So the inflexibility of the euro , not deficit spending , lies at the heart of the crisis
None of this should come as a big surprise
Long before the euro came into being , economists warned that Europe was n't ready for a single currency
But these warnings were ignored , and the crisis came
Now what
A breakup of the euro is very nearly unthinkable , as a sheer matter of practicality
As Berkeley 's Barry Eichengreen puts it , an attempt to reintroduce a national currency would trigger `` the mother of all financial crises .
So the only way out is forward : to make the euro work , Europe needs to move much further toward political union , so that European nations start to function more like American states
But that 's not going to happen anytime soon
What we 'll probably see over the next few years is a painful process of muddling through : bailouts accompanied by demands for savage austerity , all against a background of very high unemployment , perpetuated by the grinding deflation I already mentioned
It 's an ugly picture
But it 's important to understand the nature of Europe 's fatal flaw
Yes , some governments were irresponsible ; but the fundamental problem was hubris , the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it was n't ready
By now everyone knows the sad tale of Bernard Madoff 's duped investors
They looked at their statements and thought they were rich
But then , one day , they discovered to their horror that their supposed wealth was a figment of someone else 's imagination
Unfortunately , that 's a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century
Last week the Federal Reserve released the results of the latest Survey of Consumer Finances , a triennial report on the assets and liabilities of American households
The bottom line is that there has been basically no wealth creation at all since the turn of the millennium : the net worth of the average American household , adjusted for inflation , is lower now than it was in 2001
At one level this should come as no surprise
For most of the last decade America was a nation of borrowers and spenders , not savers
The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s , to just 0.6 percent from 2005 to 2007 , and household debt grew much faster than personal income
Why should we have expected our net worth to go up
Yet until very recently Americans believed they were getting richer , because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing
And if the belief of many Americans that they could count on capital gains forever sounds na ve , it 's worth remembering just how many influential voices notably in right-leaning publications like The Wall Street Journal , Forbes and National Review promoted that belief , and ridiculed those who worried about low savings and high levels of debt
Then reality struck , and it turned out that the worriers had been right all along
The surge in asset values had been an illusion but the surge in debt had been all too real
So now we 're in trouble deeper trouble , I think , than most people realize even now
And I 'm not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now
For this is a broad-based mess
Everyone talks about the problems of the banks , which are indeed in even worse shape than the rest of the system
But the banks are n't the only players with too much debt and too few assets ; the same description applies to the private sector as a whole
And as the great American economist Irving Fisher pointed out in the 1930s , the things people and companies do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time
Attempts to sell assets and pay off debt deepen the plunge in asset prices , further reducing net worth
Attempts to save more translate into a collapse of consumer demand , deepening the economic slump
Are policy makers ready to do what it takes to break this vicious circle
In principle , yes
Government officials understand the issue : we need to `` contain what is a very damaging and potentially deflationary spiral , '' says Lawrence Summers , a top Obama economic adviser
In practice , however , the policies currently on offer do n't look adequate to the challenge
The fiscal stimulus plan , while it will certainly help , probably wo n't do more than mitigate the economic side effects of debt deflation
And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured
There 's hope that the bank rescue will eventually turn into something stronger
It has been interesting to watch the idea of temporary bank nationalization move from the fringe to mainstream acceptance , with even Republicans like Senator Lindsey Graham conceding that it may be necessary
But even if we eventually do what 's needed on the bank front , that will solve only part of the problem
If you want to see what it really takes to boot the economy out of a debt trap , look at the large public works program , otherwise known as World War II , that ended the Great Depression
The war did n't just lead to full employment
It also led to rapidly rising incomes and substantial inflation , all with virtually no borrowing by the private sector
By 1945 the government 's debt had soared , but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940
And this low level of private debt helped set the stage for the great postwar boom
Since nothing like that is on the table , or seems likely to get on the table any time soon , it will take years for families and firms to work off the debt they ran up so blithely
The odds are that the legacy of our time of illusion our decade at Bernie 's will be a long , painful slump
`` Poverty in early childhood poisons the brain .
That was the opening of an article in Saturday 's Financial Times , summarizing research presented last week at the American Association for the Advancement of Science
As the article explained , neuroscientists have found that `` many children growing up in very poor families with low social status experience unhealthy levels of stress hormones , which impair their neural development .
The effect is to impair language development and memory and hence the ability to escape poverty for the rest of the child 's life
So now we have another , even more compelling reason to be ashamed about America 's record of failing to fight poverty
L. B. J. declared his `` War on Poverty '' 44 years ago
Contrary to cynical legend , there actually was a large reduction in poverty over the next few years , especially among children , who saw their poverty rate fall from 23 percent in 1963 to 14 percent in 1969
But progress stalled thereafter : American politics shifted to the right , attention shifted from the suffering of the poor to the alleged abuses of welfare queens driving Cadillacs , and the fight against poverty was largely abandoned
In 2006 , 17.4 percent of children in America lived below the poverty line , substantially more than in 1969
And even this measure probably understates the true depth of many children 's misery
Living in or near poverty has always been a form of exile , of being cut off from the larger society
But the distance between the poor and the rest of us is much greater than it was 40 years ago , because most American incomes have risen in real terms while the official poverty line has not
To be poor in America today , even more than in the past , is to be an outcast in your own country
And that , the neuroscientists tell us , is what poisons a child 's brain
America 's failure to make progress in reducing poverty , especially among children , should provoke a lot of soul-searching
Unfortunately , what it often seems to provoke instead is great creativity in making excuses
Some of these excuses take the form of assertions that America 's poor really are n't all that poor a claim that always has me wondering whether those making it watched any TV during Hurricane Katrina , or for that matter have ever looked around them while visiting a major American city
Mainly , however , excuses for poverty involve the assertion that the United States is a land of opportunity , a place where people can start out poor , work hard and become rich
But the fact of the matter is that Horatio Alger stories are rare , and stories of people trapped by their parents ' poverty are all too common
According to one recent estimate , American children born to parents in the bottom fourth of the income distribution have almost a 50 percent chance of staying there and almost a two-thirds chance of remaining stuck if they 're black
That 's not surprising
Growing up in poverty puts you at a disadvantage at every step
I 'd bracket those new studies on brain development in early childhood with a study from the National Center for Education Statistics , which tracked a group of students who were in eighth grade in 1988
The study found , roughly speaking , that in modern America parental status trumps ability : students who did very well on a standardized test but came from low-status families were slightly less likely to get through college than students who tested poorly but had well-off parents
None of this is inevitable
Poverty rates are much lower in most European countries than in the United States , mainly because of government programs that help the poor and unlucky
And governments that set their minds to it can reduce poverty
In Britain , the Labor government that came into office in 1997 made reducing poverty a priority and despite some setbacks , its program of income subsidies and other aid has achieved a great deal
Child poverty , in particular , has been cut in half by the measure that corresponds most closely to the U.S. definition
At the moment it 's hard to imagine anything comparable happening in this country
To their credit and to the credit of John Edwards , who goaded them into it both Hillary Clinton and Barack Obama are proposing new initiatives against poverty
But their proposals are modest in scope and far from central to their campaigns
I 'm not blaming them for that ; if a progressive wins this election , it will be by promising to ease the anxiety of the middle class rather than aiding the poor
And for a variety of reasons , health care , not poverty , should be the first priority of a Democratic administration
But ultimately , let 's hope that the nation turns back to the task it abandoned that of ending the poverty that still poisons so many American lives
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Willie Sutton Wept There are three things you need to know about the current budget debate
First , it 's essentially fraudulent
Second , most people posing as deficit hawks are faking it
Third , while President Obama has n't fully avoided the fraudulence , he 's less bad than his opponents - and he deserves much more credit for fiscal responsibility than he 's getting
About the fraudulence : Last month , Howard Gleckman of the Tax Policy Center described the president as the `` anti-Willie Sutton , '' after the holdup artist who reputedly said he robbed banks because that 's where the money is
Indeed , Mr. Obama has lately been going where the money is n't , making a big deal out of a freeze on nonsecurity discretionary spending , which accounts for only 12 percent of the budget
But that 's what everyone does
House Republicans talk big about spending cuts - but focus solely on that same small budget sliver
And by proposing sharp spending cuts right away , Republicans are n't just going where the money is n't , they 're also going when the money is n't
Slashing spending while the economy is still deeply depressed is a recipe for slower economic growth , which means lower tax receipts - so any deficit reduction from G.O.P. cuts would be at least partly offset by lower revenue
The whole budget debate , then , is a sham
House Republicans , in particular , are literally stealing food from the mouths of babes - nutritional aid to pregnant women and very young children is one of the items on their cutting block - so they can pose , falsely , as deficit hawks
What would a serious approach to our fiscal problems involve
I can summarize it in seven words : health care , health care , health care , revenue
Notice that I said `` health care , '' not `` entitlements .
People in Washington often talk as if there were a program called Socialsecuritymedicareandmedicaid , then focus on things like raising the retirement age
But that 's more anti-Willie Suttonism
Long-run projections suggest that spending on the major entitlement programs will rise sharply over the decades ahead , but the great bulk of that rise will come from the health insurance programs , not Social Security
So anyone who is really serious about the budget should be focusing mainly on health care
And by focusing , I do n't mean writing down a number and expecting someone else to make that number happen - a dodge known in the trade as a `` magic asterisk .
I mean getting behind specific actions to rein in costs
By that standard , the Simpson-Bowles deficit commission , whose work is now being treated as if it were the gold standard of fiscal seriousness , was in fact deeply unserious
Its report `` was one big magic asterisk , '' Bob Greenstein of the Center on Budget and Policy Priorities told The Washington Post 's Ezra Klein
So is the much-hyped proposal by Paul Ryan , the G.O.P. 's supposed deep thinker du jour , to replace Medicare with vouchers whose value would systematically lag behind health care costs
What 's supposed to happen when seniors find that they ca n't afford insurance
What would real action on health look like
Well , it might include things like giving an independent commission the power to ensure that Medicare only pays for procedures with real medical value ; rewarding health care providers for delivering quality care rather than simply paying a fixed sum for every procedure ; limiting the tax deductibility of private insurance plans ; and so on
And what do these things have in common
They 're all in last year 's health reform bill
That 's why I say that Mr. Obama gets too little credit
He has done more to rein in long-run deficits than any previous president
And if his opponents were serious about those deficits , they 'd be backing his actions and calling for more ; instead , they 've been screaming about death panels
Now , even if we manage to rein in health costs , we 'll still have a long-run deficit problem - a fundamental gap between the government 's spending and the amount it collects in taxes
So what should be done
This brings me to the seventh word of my summary of the real fiscal issues : if you 're serious about the deficit , you should be willing to consider closing at least part of this gap with higher taxes
True , higher taxes are n't popular , but neither are cuts in government programs
So we should add to the roster of fundamentally unserious people anyone who talks about the deficit - as most of our prominent deficit scolds do - as if it were purely a spending issue
The bottom line , then , is that while the budget is all over the news , we 're not having a real debate ; it 's all sound , fury , and posturing , telling us a lot about the cynicism of politicians but signifying nothing in terms of actual deficit reduction
And we should n't indulge those politicians by pretending otherwise
Health insurance premiums are surging and conservatives fear that the spectacle will reinvigorate the push for reform
On the Fox Business Network , a host chided a vice president of WellPoint , which has told California customers to expect huge rate increases : `` You handed the politicians red meat at a time when health care is being discussed
You gave it to them !
Sky-high rate increases make a powerful case for action
And they show , in particular , that we need comprehensive , guaranteed coverage which is exactly what Democrats are trying to accomplish
Here 's the story : About 800,000 people in California who buy insurance on the individual market as opposed to getting it through their employers are covered by Anthem Blue Cross , a WellPoint subsidiary
These are the people who were recently told to expect dramatic rate increases , in some cases as high as 39 percent
Why the huge increase
It 's not profiteering , says WellPoint , which claims instead -LRB- without using the term -RRB- that it 's facing a classic insurance death spiral
Bear in mind that private health insurance only works if insurers can sell policies to both sick and healthy customers
If too many healthy people decide that they 'd rather take their chances and remain uninsured , the risk pool deteriorates , forcing insurers to raise premiums
This , in turn , leads more healthy people to drop coverage , worsening the risk pool even further , and so on
Now , what WellPoint claims is that it has been forced to raise premiums because of `` challenging economic times '' : cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans
Those retaining coverage tend to be people with high current medical expenses
And the result , says the company , is a drastically worsening risk pool : in effect , a death spiral
So the rate increases , WellPoint insists , are n't its fault : `` Other individual market insurers are facing the same dynamics and are being forced to take similar actions .
Indeed , a report released Thursday by the department of Health and Human Services shows that there have been steep actual or proposed increases in rates by a number of insurers
But here 's the thing : suppose that we posit , provisionally , that the insurers are n't the main villains in this story
Even so , California 's death spiral makes nonsense of all the main arguments against comprehensive health reform
For example , some claim that health costs would fall dramatically if only insurance companies were allowed to sell policies across state lines
But California is already a huge market , with much more insurance competition than in other states ; unfortunately , insurers compete mainly by trying to excel in the art of denying coverage to those who need it most
And competition has n't averted a death spiral
So why would creating a national market make things better
More broadly , conservatives would have you believe that health insurance suffers from too much government interference
In fact , the real point of the push to allow interstate sales is that it would set off a race to the bottom , effectively eliminating state regulation
But California 's individual insurance market is already notable for its lack of regulation , certainly as compared with states like New York yet the market is collapsing anyway
Finally , there have been calls for minimalist health reform that would ban discrimination on the basis of pre-existing conditions and stop there
It 's a popular idea , but as every health economist knows , it 's also nonsense
For a ban on medical discrimination would lead to higher premiums for the healthy , and would , therefore , cause more and bigger death spirals
So California 's woes show that conservative prescriptions for health reform just wo n't work
What would work
By all means , let 's ban discrimination on the basis of medical history but we also have to keep healthy people in the risk pool , which means requiring that people purchase insurance
This , in turn , requires substantial aid to lower-income Americans so that they can afford coverage
And if you put all of that together , you end up with something very much like the health reform bills that have already passed both the House and the Senate
What about claims that these bills would force Americans into the clutches of greedy insurance companies
Well , the main answer is stronger regulation ; but it would also be a very good idea , politically as well as substantively , for the Senate to use reconciliation to put the public option back into its bill
But the main point is this : California 's death spiral is a reminder that our health care system is unraveling , and that inaction is n't an option
Congress and the president need to make reform happen now
But Mr. Edwards , far more than is usual in modern politics , ran a campaign based on ideas
And even as his personal quest for the White House faltered , his ideas triumphed : both candidates left standing are , to a large extent , running on the platform Mr. Edwards built
To understand the extent of the Edwards effect , you have to think about what might have been
At the beginning of 2007 , it seemed likely that the Democratic nominee would run a cautious campaign , without strong , distinctive policy ideas
That , after all , is what John Kerry did in 2004
If 2008 is different , it will be largely thanks to Mr. Edwards
He made a habit of introducing bold policy proposals and they were met with such enthusiasm among Democrats that his rivals were more or less forced to follow suit
It 's hard , in particular , to overstate the importance of the Edwards health care plan , introduced in February
Before the Edwards plan was unveiled , advocates of universal health care had difficulty getting traction , in part because they were divided over how to get there
Some advocated a single-payer system a k a Medicare for all but this was dismissed as politically infeasible
Some advocated reform based on private insurers , but single-payer advocates , aware of the vast inefficiency of the private insurance system , recoiled at the prospect
With no consensus about how to pursue health reform , and vivid memories of the failure of 1993-1994 , Democratic politicians avoided the subject , treating universal care as a vague dream for the distant future
But the Edwards plan squared the circle , giving people the choice of staying with private insurers , while also giving everyone the option of buying into government-offered , Medicare-type plans a form of public-private competition that Mr. Edwards made clear might lead to a single-payer system over time
And he also broke the taboo against calling for tax increases to pay for reform
Suddenly , universal health care became a possible dream for the next administration
In the months that followed , the rival campaigns moved to assure the party 's base that it was a dream they shared , by emulating the Edwards plan
And there 's little question that if the next president really does achieve major health reform , it will transform the political landscape
Similar if less dramatic examples of leadership followed on other key issues
For example , Mr. Edwards led the way last March by proposing a serious plan for responding to climate change , and at this point both Barack Obama and Hillary Clinton are offering far stronger measures to limit emissions of greenhouse gases than anyone would have expected to see on the table not long ago
Unfortunately for Mr. Edwards , the willingness of his rivals to emulate his policy proposals made it hard for him to differentiate himself as a candidate ; meanwhile , those rivals had far larger financial resources and received vastly more media attention
Even The Times 's own public editor chided the paper for giving Mr. Edwards so little coverage
And so Mr. Edwards won the arguments but not the political war
Where will Edwards supporters go now
The truth is that nobody knows
Yes , Mr. Obama is also running as a `` change '' candidate
But he is n't offering the same kind of change : Mr. Edwards ran an unabashedly populist campaign , while Mr. Obama portrays himself as a candidate who can transcend partisanship and given the economic elitism of the modern Republican Party , populism is unavoidably partisan
It 's true that Mr. Obama has tried to work some populist themes into his campaign , but he apparently is n't all that convincing : the working-class voters Mr. Edwards attracted have tended to favor Mrs. Clinton over Mr. Obama
Furthermore , to the extent that this remains a campaign of ideas , it remains true that on the key issue of health care , the Clinton plan is more or less identical to the Edwards plan
The Obama plan , which does n't actually achieve universal coverage , is considerably weaker
One thing is clear , however : whichever candidate does get the nomination , his or her chance of victory will rest largely on the ideas Mr. Edwards brought to the campaign
Personal appeal wo n't do the job : history shows that Republicans are very good at demonizing their opponents as individuals
Mrs. Clinton has already received the full treatment , while Mr. Obama has n't yet
But if he gets the nod , watch how quickly conservative pundits who have praised him discover that he has deep character flaws
If Democrats manage to get the focus on their substantive differences with the Republicans , however , polls on the issues suggest that they 'll have a big advantage
And they 'll have Mr. Edwards to thank
In times of crisis , good news is no news
Iceland 's meltdown made headlines ; the remarkable stability of Canada 's banks , not so much
Yet as the world 's attention shifts from financial rescue to financial reform , the quiet success stories deserve at least as much attention as the spectacular failures
We need to learn from those countries that evidently did it right
And leading that list is our neighbor to the north
Right now , Canada is a very important role model
Yes , I know , Canada is supposed to be dull
The New Republic famously pronounced `` Worthwhile Canadian Initiative '' -LRB- from a Times Op-Ed column in the '80s -RRB- the world 's most boring headline
But I 've always considered Canada fascinating , precisely because it 's similar to the United States in many but not all ways
The point is that when Canadian and U.S. experience diverge , it 's a very good bet that policy differences , rather than differences in culture or economic structure , are responsible for that divergence
And anyway , when it comes to banking , boring is good
First , some background
Over the past decade the United States and Canada faced the same global environment
Both were confronted with the same flood of cheap goods and cheap money from Asia
Economists in both countries cheerfully declared that the era of severe recessions was over
But when things fell apart , the consequences were very different here and there
In the United States , mortgage defaults soared , some major financial institutions collapsed , and others survived only thanks to huge government bailouts
In Canada , none of that happened
What did the Canadians do differently
It was n't interest rate policy
Many commentators have blamed the Federal Reserve for the financial crisis , claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long
But Canadian interest rates have tracked U.S. rates quite closely , so it seems that low rates are n't enough by themselves to produce a financial crisis
Canada 's experience also seems to refute the view , forcefully pushed by Paul Volcker , the formidable former Fed chairman , that the roots of our crisis lay in the scale and scope of our financial institutions in the existence of banks that were `` too big to fail .
For in Canada essentially all the banks are too big to fail : just five banking groups dominate the financial scene
On the other hand , Canada 's experience does seem to support the views of people like Elizabeth Warren , the head of the Congressional panel overseeing the bank bailout , who place much of the blame for the crisis on failure to protect consumers from deceptive lending
Canada has an independent Financial Consumer Agency , and it has sharply restricted subprime-type lending
Above all , Canada 's experience seems to support those who say that the way to keep banking safe is to keep it boring that is , to limit the extent to which banks can take on risk
The United States used to have a boring banking system , but Reagan-era deregulation made things dangerously interesting
Canada , by contrast , has maintained a happy tedium
More specifically , Canada has been much stricter about limiting banks ' leverage , the extent to which they can rely on borrowed funds
It has also limited the process of securitization , in which banks package and resell claims on their loans outstanding a process that was supposed to help banks reduce their risk by spreading it , but has turned out in practice to be a way for banks to make ever-bigger wagers with other people 's money
There 's no question that in recent years these restrictions meant fewer opportunities for bankers to come up with clever ideas than would have been available if Canada had emulated America 's deregulatory zeal
But that , it turns out , was all to the good
So what are the chances that the United States will learn from Canada 's success
Actually , the financial reform bill that the House of Representatives passed in December would significantly Canadianize the U.S. system
It would create an independent Consumer Financial Protection Agency , it would establish limits on leverage , and it would limit securitization by requiring that lenders hold on to some of their loans
But prospects for a comparable bill getting the 60 votes now needed to push anything through the Senate are doubtful
Republicans are clearly dead set against any significant financial reform not a single Republican voted for the House bill and some Democrats are ambivalent , too
So there 's a good chance that we 'll do nothing , or nothing much , to prevent future banking crises
But it wo n't be because we do n't know what to do : we 've got a clear example of how to keep banking safe sitting right next door
Earlier this week , the Federal Reserve released the minutes of the most recent meeting of its open market committee the group that sets interest rates
Most press reports focused either on the Fed 's downgrade of the near-term outlook or on its adoption of a long-run 2 percent inflation target
But my eye was caught by the following chilling passage -LRB- yes , things are so bad that the summarized musings of central bankers can keep you up at night -RRB- : `` All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011 , even absent further economic shocks ; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation .
So people at the Fed are troubled by the same question I 've been obsessing on lately : What 's supposed to end this slump
No doubt this , too , shall pass but how , and when
To appreciate the problem , you need to know that this is n't your father 's recession
It 's your grandfather 's , or maybe even -LRB- as I 'll explain -RRB- your great-great-grandfather 's
Your father 's recession was something like the severe downturn of 1981-1982
That recession was , in effect , a deliberate creation of the Federal Reserve , which raised interest rates to as much as 17 percent in an effort to control runaway inflation
Once the Fed decided that we had suffered enough , it relented , and the economy quickly bounced back
Your grandfather 's recession , on the other hand , was something like the Great Depression , which happened in spite of the Fed 's efforts , not because of them
When a stock market bubble and a credit boom collapsed , bringing down much of the banking system with them , the Fed tried to revive the economy with low interest rates but even rates barely above zero were n't low enough to end a prolonged era of high unemployment
Now we 're in the midst of a crisis that bears an eerie , troubling resemblance to the onset of the Depression ; interest rates are already near zero , and still the economy plunges
How and when will it all end
To be sure , the Obama administration is taking action to help the economy , but it 's trying to mitigate the slump , not end it
The stimulus bill , on the administration 's own estimates , will limit the rise in unemployment but fall far short of restoring full employment
The housing plan announced this week looks good in the sense that it will help many homeowners , but it wo n't spur a new housing boom
What , then , will actually end the slump
Well , the Great Depression did eventually come to an end , but that was thanks to an enormous war , something we 'd rather not emulate
The slump that followed Japan 's `` bubble economy '' also eventually ended , but only after a lost decade
And when Japan finally did start to experience some solid growth , it was thanks to an export boom , which was in turn made possible by vigorous growth in the rest of the world not an experience anyone can repeat when the whole world is in a slump
So will our slump go on forever
In fact , the seeds of eventual recovery are already being planted
Consider housing starts , which have fallen to their lowest level in 50 years
That 's bad news for the near term
It means that spending on construction will fall even more
But it also means that the supply of houses is lagging behind population growth , which will eventually prompt a housing revival
Or consider the plunge in auto sales
Again , that 's bad news for the near term
But at current sales rates , as the finance blog Calculated Risk points out , it would take about 27 years to replace the existing stock of vehicles
Most cars will be junked long before that , either because they 've worn out or because they 've become obsolete , so we 're building up a pent-up demand for cars
The same story can be told for durable goods and assets throughout the economy : given time , the current slump will end itself , the way slumps did in the 19th century
As I said , this may be your great-great-grandfather 's recession
But recovery may be a long time coming
The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873
That recession did eventually end without any government intervention , but it lasted more than five years , and another prolonged recession followed just three years later
You can see , then , why some Fed officials are so pessimistic
Let 's be clear : the Obama administration 's policy initiatives will help in this difficult period especially if the administration bites the bullet and takes over weak banks
But still I wonder : Who 'll stop the pain
Wisconsin Power Play It was n't the smartest thing for Mr. Ryan to say , since he probably did n't mean to compare Mr. Walker , a fellow Republican , to Hosni Mubarak
Or maybe he did - after all , quite a few prominent conservatives , including Glenn Beck , Rush Limbaugh and Rick Santorum , denounced the uprising in Egypt and insist that President Obama should have helped the Mubarak regime suppress it
In any case , however , Mr. Ryan was more right than he knew
For what 's happening in Wisconsin is n't about the state budget , despite Mr. Walker 's pretense that he 's just trying to be fiscally responsible
It is , instead , about power
What Mr. Walker and his backers are trying to do is to make Wisconsin - and eventually , America - less of a functioning democracy and more of a third-world-style oligarchy
And that 's why anyone who believes that we need some counterweight to the political power of big money should be on the demonstrators ' side
Some background : Wisconsin is indeed facing a budget crunch , although its difficulties are less severe than those facing many other states
Revenue has fallen in the face of a weak economy , while stimulus funds , which helped close the gap in 2009 and 2010 , have faded away
In this situation , it makes sense to call for shared sacrifice , including monetary concessions from state workers
And union leaders have signaled that they are , in fact , willing to make such concessions
But Mr. Walker is n't interested in making a deal
Partly that 's because he does n't want to share the sacrifice : even as he proclaims that Wisconsin faces a terrible fiscal crisis , he has been pushing through tax cuts that make the deficit worse
Mainly , however , he has made it clear that rather than bargaining with workers , he wants to end workers ' ability to bargain
The bill that has inspired the demonstrations would strip away collective bargaining rights for many of the state 's workers , in effect busting public-employee unions
Tellingly , some workers - namely , those who tend to be Republican-leaning - are exempted from the ban ; it 's as if Mr. Walker were flaunting the political nature of his actions
Why bust the unions
As I said , it has nothing to do with helping Wisconsin deal with its current fiscal crisis
Nor is it likely to help the state 's budget prospects even in the long run : contrary to what you may have heard , public-sector workers in Wisconsin and elsewhere are paid somewhat less than private-sector workers with comparable qualifications , so there 's not much room for further pay squeezes
So it 's not about the budget ; it 's about the power
In principle , every American citizen has an equal say in our political process
In practice , of course , some of us are more equal than others
Billionaires can field armies of lobbyists ; they can finance think tanks that put the desired spin on policy issues ; they can funnel cash to politicians with sympathetic views -LRB- as the Koch brothers did in the case of Mr. Walker -RRB-
On paper , we 're a one-person-one-vote nation ; in reality , we 're more than a bit of an oligarchy , in which a handful of wealthy people dominate
Given this reality , it 's important to have institutions that can act as counterweights to the power of big money
And unions are among the most important of these institutions
You do n't have to love unions , you do n't have to believe that their policy positions are always right , to recognize that they 're among the few influential players in our political system representing the interests of middle - and working-class Americans , as opposed to the wealthy
Indeed , if America has become more oligarchic and less democratic over the last 30 years - which it has - that 's to an important extent due to the decline of private-sector unions
And now Mr. Walker and his backers are trying to get rid of public-sector unions , too
There 's a bitter irony here
The fiscal crisis in Wisconsin , as in other states , was largely caused by the increasing power of America 's oligarchy
After all , it was superwealthy players , not the general public , who pushed for financial deregulation and thereby set the stage for the economic crisis of 2008-9 , a crisis whose aftermath is the main reason for the current budget crunch
And now the political right is trying to exploit that very crisis , using it to remove one of the few remaining checks on oligarchic influence
So will the attack on unions succeed
I do n't know
But anyone who cares about retaining government of the people by the people should hope that it does n't
Will the next president be the second coming of Jimmy Carter
Given Thursday 's economic headlines , full of dire warnings about the return of 1970s-style stagflation , you might think so
Realistically , though , the parallels between the problems facing the U.S. economy now and those of the late-1970s are n't that strong
That 's the good news
The bad news is that the economy probably will look similar to , but worse than , the economy that undid the first President Bush
And it 's all too easy to see how the next president could suffer a political fate resembling that of both the elder Mr. Bush and Mr. Carter
Let 's talk first about the Carter-era economy
Jimmy Carter 's overall economic record was much better than most people realize the average economic growth rate under his administration was 3.4 percent per year , slightly higher than the growth rate under Ronald Reagan and far better than growth under either Bush
Reagan famously asked Americans whether they were better off than they had been four years ago ; the answer , actually , was yes most families had higher real income in 1980 than they did in 1976
But the good economic news came in the Carter administration 's early years , while its final year was marked by rising unemployment and soaring inflation , largely caused by a surge in oil prices
And once again we have a weakening economy coupled with rising inflation , again thanks in large part to a surge in oil prices
That said , I do n't believe we 're really facing anything comparable to 1970s stagflation
For one thing , we 're less dependent on oil : America has more than twice the real G.D.P. it had in 1979 , but consumes only slightly more oil
For another , there 's no sign of the wage-price spiral that once drove inflation into double digits in fact , wage growth has been declining even as inflation rises
What 's much more likely is that we 'll have an economy like that of the early 1990s , only worse
The first President Bush presided over the 1990-1991 recession
But his real problem came during the alleged recovery , which was hobbled by financial problems at many banks , which had been badly damaged by the collapse of the late-1980s real estate bubble , and by sluggish consumer spending , held down by high levels of household debt
As a result , the unemployment rate just kept rising , not reaching its peak of 7.8 percent until June 1992
If all this sounds familiar , it should
Many economists have pointed out the parallels between the current situation and the early 1990s : another real estate bubble , subprime playing more or less the same role formerly played by bad loans by savings and loan institutions , financial trouble all around
The difference is that the problems look a lot worse this time : a much bigger bubble , more financial distress , deeper consumer indebtedness and sky-high oil prices added to the mix
So if history is any guide , we should be looking at an extended period of economic weakness , probably extending well into 2010 , and quite possibly even longer
Can the next president do anything to avoid that outcome
In terms of straight economics , the answer is a clear yes
To this day , it 's not clear what Mr. Carter could have done differently : stagflation is a problem with no good solutions
But weak spending is a treatable condition
A serious fiscal stimulus plan one that emphasized public investment and aid to Americans in economic distress rather than across-the-board tax rebates , which many people wo n't spend could do a lot to ease the country 's economic pain
Politically , however , it 's hard to see this happening
If the next president is a Republican , he will be captive to the doctrine that tax cuts are the answer to all problems , and therefore wo n't seek an effective response to the economy 's troubles
And even if the next president is a Democrat , any serious stimulus plan would face intense , ideologically motivated opposition in Congress
Will the next president be prepared to fight for an effective plan
Or will we end up with a compromise like the one Congressional Democrats agreed to this year , legislation that assuages conservative objections at the cost of undermining the plan 's effectiveness
Until recently , I thought the biggest political struggle facing the next president was likely to be over health care reform
But right now it looks as if the first thing on the next administration 's plate will have to be dealing with a weak economy
And if effective action is n't forthcoming , the next president will suffer the fate of Jimmy Carter , who began his administration with words of uplift `` Let us create together a new national spirit of unity and trust '' and ended up delivering America into the hands of the hard right
O.K. , the beast is starving
Now what
That 's the question confronting Republicans
But they 're refusing to answer , or even to engage in any serious discussion about what to do
For readers who do n't know what I 'm talking about : ever since Reagan , the G.O.P. has been run by people who want a much smaller government
In the famous words of the activist Grover Norquist , conservatives want to get the government `` down to the size where we can drown it in the bathtub .
But there has always been a political problem with this agenda
Voters may say that they oppose big government , but the programs that actually dominate federal spending Medicare , Medicaid and Social Security are very popular
So how can the public be persuaded to accept large spending cuts
The conservative answer , which evolved in the late 1970s , would be dubbed `` starving the beast '' during the Reagan years
The idea propounded by many members of the conservative intelligentsia , from Alan Greenspan to Irving Kristol was basically that sympathetic politicians should engage in a game of bait and switch
Rather than proposing unpopular spending cuts , Republicans would push through popular tax cuts , with the deliberate intention of worsening the government 's fiscal position
Spending cuts could then be sold as a necessity rather than a choice , the only way to eliminate an unsustainable budget deficit
And the deficit came
True , more than half of this year 's budget deficit is the result of the Great Recession , which has both depressed revenues and required a temporary surge in spending to contain the damage
But even when the crisis is over , the budget will remain deeply in the red , largely as a result of Bush-era tax cuts -LRB- and Bush-era unfunded wars -RRB-
And the combination of an aging population and rising medical costs will , unless something is done , lead to explosive debt growth after 2020
So the beast is starving , as planned
It should be time , then , for conservatives to explain which parts of the beast they want to cut
And President Obama has , in effect , invited them to do just that , by calling for a bipartisan deficit commission
Many progressives were deeply worried by this proposal , fearing that it would turn into a kind of Trojan horse in particular , that the commission would end up reviving the long-standing Republican goal of gutting Social Security
But they need n't have worried : Senate Republicans overwhelmingly voted against legislation that would have created a commission with some actual power , and it is unlikely that anything meaningful will come from the much weaker commission Mr. Obama established by executive order
Why are Republicans reluctant to sit down and talk
Because they would then be forced to put up or shut up
Since they 're adamantly opposed to reducing the deficit with tax increases , they would have to explain what spending they want to cut
And guess what
After three decades of preparing the ground for this moment , they 're still not willing to do that
In fact , conservatives have backed away from spending cuts they themselves proposed in the past
In the 1990s , for example , Republicans in Congress tried to force through sharp cuts in Medicare
But now they have made opposition to any effort to spend Medicare funds more wisely the core of their campaign against health care reform -LRB- death panels ! -RRB-
And presidential hopefuls say things like this , from Gov. Tim Pawlenty of Minnesota : `` I do n't think anybody 's gonna go back now and say , Let 's abolish , or reduce , Medicare and Medicaid .
What about Social Security
Five years ago the Bush administration proposed limiting future payments to upper - and middle-income workers , in effect means-testing retirement benefits
But in December , The Wall Street Journal 's editorial page denounced any such means-testing , because `` middle - and upper-middle-class -LRB- i.e. , G.O.P. -RRB- voters would get less than they were promised in return for a lifetime of payroll taxes .
#NAME?
Since when do conservatives openly admit that the G.O.P. is the party of the affluent ?
At this point , then , Republicans insist that the deficit must be eliminated , but they 're not willing either to raise taxes or to support cuts in any major government programs
And they 're not willing to participate in serious bipartisan discussions , either , because that might force them to explain their plan and there is n't any plan , except to regain power
But there is a kind of logic to the current Republican position : in effect , the party is doubling down on starve-the-beast
Depriving the government of revenue , it turns out , was n't enough to push politicians into dismantling the welfare state
So now the de facto strategy is to oppose any responsible action until we are in the midst of a fiscal catastrophe
You read it here first
O.K. , not exactly
What Alan Greenspan , the former Federal Reserve chairman and a staunch defender of free markets actually said was , `` It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring .
I agree
The case for nationalization rests on three observations
First , some major banks are dangerously close to the edge in fact , they would have failed already if investors did n't expect the government to rescue them if necessary
Second , banks must be rescued
The collapse of Lehman Brothers almost destroyed the world financial system , and we ca n't risk letting much bigger institutions like Citigroup or Bank of America implode
Third , while banks must be rescued , the U.S. government ca n't afford , fiscally or politically , to bestow huge gifts on bank shareholders
Let 's be concrete here
There 's a reasonable chance not a certainty that Citi and BofA , together , will lose hundreds of billions over the next few years
And their capital , the excess of their assets over their liabilities , is n't remotely large enough to cover those potential losses
Arguably , the only reason they have n't already failed is that the government is acting as a backstop , implicitly guaranteeing their obligations
But they 're zombie banks , unable to supply the credit the economy needs
To end their zombiehood the banks need more capital
But they ca n't raise more capital from private investors
So the government has to supply the necessary funds
But here 's the thing : the funds needed to bring these banks fully back to life would greatly exceed what they 're currently worth
Citi and BofA have a combined market value of less than $ 30 billion , and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout
And if it 's basically putting up all the money , the government should get ownership in return
Still , is n't nationalization un-American
No , it 's as American as apple pie
Lately the Federal Deposit Insurance Corporation has been seizing banks it deems insolvent at the rate of about two a week
When the F.D.I.C. seizes a bank , it takes over the bank 's bad assets , pays off some of its debt , and resells the cleaned-up institution to private investors
And that 's exactly what advocates of temporary nationalization want to see happen , not just to the small banks the F.D.I.C. has been seizing , but to major banks that are similarly insolvent
The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization , but turn out to involve huge handouts to bank stockholders
For example , the administration initially floated the idea of offering banks guarantees against losses on troubled assets
This would have been a great deal for bank stockholders , not so much for the rest of us : heads they win , tails taxpayers lose
Now the administration is talking about a `` public-private partnership '' to buy troubled assets from the banks , with the government lending money to private investors for that purpose
This would offer investors a one-way bet : if the assets rise in price , investors win ; if they fall substantially , investors walk away and leave the government holding the bag
Again , heads they win , tails we lose
Why not just go ahead and nationalize
Remember , the longer we live with zombie banks , the harder it will be to end the economic crisis
How would nationalization take place
All the administration has to do is take its own planned `` stress test '' for major banks seriously , and not hide the results when a bank fails the test , making a takeover necessary
Yes , the whole thing would have a Claude Rains feel to it , as a government that has been propping up banks for months declares itself shocked , shocked at the miserable state of their balance sheets
But that 's O.K. And once again , long-term government ownership is n't the goal : like the small banks seized by the F.D.I.C. every week , major banks would be returned to private control as soon as possible
The finance blog Calculated Risk suggests that instead of calling the process nationalization , we should call it `` preprivatization .
The Obama administration , says Robert Gibbs , the White House spokesman , believes `` that a privately held banking system is the correct way to go .
So do we all
But what we have now is n't private enterprise , it 's lemon socialism : banks get the upside but taxpayers bear the risks
And it 's perpetuating zombie banks , blocking economic recovery
What we want is a system in which banks own the downs as well as the ups
And the road to that system runs through nationalization
Shock Doctrine , U.S.A. Here 's a thought : maybe Madison , Wis. , is n't Cairo after all
Maybe it 's Baghdad - specifically , Baghdad in 2003 , when the Bush administration put Iraq under the rule of officials chosen for loyalty and political reliability rather than experience and competence
As many readers may recall , the results were spectacular - in a bad way
Instead of focusing on the urgent problems of a shattered economy and society , which would soon descend into a murderous civil war , those Bush appointees were obsessed with imposing a conservative ideological vision
Indeed , with looters still prowling the streets of Baghdad , L. Paul Bremer , the American viceroy , told a Washington Post reporter that one of his top priorities was to `` corporatize and privatize state-owned enterprises '' - Mr. Bremer 's words , not the reporter 's - and to `` wean people from the idea the state supports everything .
The story of the privatization-obsessed Coalition Provisional Authority was the centerpiece of Naomi Klein 's best-selling book `` The Shock Doctrine , '' which argued that it was part of a broader pattern
From Chile in the 1970s onward , she suggested , right-wing ideologues have exploited crises to push through an agenda that has nothing to do with resolving those crises , and everything to do with imposing their vision of a harsher , more unequal , less democratic society
Which brings us to Wisconsin 2011 , where the shock doctrine is on full display
In recent weeks , Madison has been the scene of large demonstrations against the governor 's budget bill , which would deny collective-bargaining rights to public-sector workers
Gov. Scott Walker claims that he needs to pass his bill to deal with the state 's fiscal problems
But his attack on unions has nothing to do with the budget
In fact , those unions have already indicated their willingness to make substantial financial concessions - an offer the governor has rejected
What 's happening in Wisconsin is , instead , a power grab - an attempt to exploit the fiscal crisis to destroy the last major counterweight to the political power of corporations and the wealthy
And the power grab goes beyond union-busting
The bill in question is 144 pages long , and there are some extraordinary things hidden deep inside
For example , the bill includes language that would allow officials appointed by the governor to make sweeping cuts in health coverage for low-income families without having to go through the normal legislative process
And then there 's this : `` Notwithstanding ss
13.48 -LRB- 14 -RRB- -LRB- am -RRB- and 16.705 -LRB- 1 -RRB- , the department may sell any state-owned heating , cooling , and power plant or may contract with a private entity for the operation of any such plant , with or without solicitation of bids , for any amount that the department determines to be in the best interest of the state
Notwithstanding ss
196.49 and 196.80 , no approval or certification of the public service commission is necessary for a public utility to purchase , or contract for the operation of , such a plant , and any such purchase is considered to be in the public interest and to comply with the criteria for certification of a project under s. 196.49 -LRB- 3 -RRB- -LRB- b -RRB- .
What 's that about
The state of Wisconsin owns a number of plants supplying heating , cooling , and electricity to state-run facilities -LRB- like the University of Wisconsin -RRB-
The language in the budget bill would , in effect , let the governor privatize any or all of these facilities at whim
Not only that , he could sell them , without taking bids , to anyone he chooses
And note that any such sale would , by definition , be `` considered to be in the public interest .
If this sounds to you like a perfect setup for cronyism and profiteering - remember those missing billions in Iraq
- you 're not alone
Indeed , there are enough suspicious minds out there that Koch Industries , owned by the billionaire brothers who are playing such a large role in Mr. Walker 's anti-union push , felt compelled to issue a denial that it 's interested in purchasing any of those power plants
Are you reassured
The good news from Wisconsin is that the upsurge of public outrage - aided by the maneuvering of Democrats in the State Senate , who absented themselves to deny Republicans a quorum - has slowed the bum 's rush
If Mr. Walker 's plan was to push his bill through before anyone had a chance to realize his true goals , that plan has been foiled
And events in Wisconsin may have given pause to other Republican governors , who seem to be backing off similar moves
But do n't expect either Mr. Walker or the rest of his party to change those goals
Union-busting and privatization remain G.O.P. priorities , and the party will continue its efforts to smuggle those priorities through in the name of balanced budgets
If we 're lucky , Thursday 's summit will turn out to have been the last act in the great health reform debate , the prologue to passage of an imperfect but nonetheless history-making bill
If so , the debate will have ended as it began : with Democrats offering moderate plans that draw heavily on past Republican ideas , and Republicans responding with slander and misdirection
Nobody really expected anything different
But what was nonetheless revealing about the meeting was the fact that Republicans who had weeks to prepare for this particular event , and have been campaigning against reform for a year did n't bother making a case that could withstand even minimal fact-checking
It was obvious how things would go as soon as the first Republican speaker , Senator Lamar Alexander , delivered his remarks
He was presumably chosen because he 's folksy and likable and could make his party 's position sound reasonable
But right off the bat he delivered a whopper , asserting that under the Democratic plan , `` for millions of Americans , premiums will go up .
I guess you could say that he was n't technically lying , since the Congressional Budget Office analysis of the Senate Democrats ' plan does say that average payments for insurance would go up
But it also makes it clear that this would happen only because people would buy more and better coverage
The `` price of a given amount of insurance coverage '' would fall , not rise and the actual cost to many Americans would fall sharply thanks to federal aid
His fib on premiums was quickly followed by a fib on process
Democrats , having already passed a health bill with 60 votes in the Senate , now plan to use a simple majority vote to modify some of the numbers , a process known as reconciliation
Mr. Alexander declared that reconciliation has `` never been used for something like this .
Well , I do n't know what `` like this '' means , but reconciliation has , in fact , been used for previous health reforms and was used to push through both of the Bush tax cuts at a budget cost of $ 1.8 trillion , twice the bill for health reform
What really struck me about the meeting , however , was the inability of Republicans to explain how they propose dealing with the issue that , rightly , is at the emotional center of much health care debate : the plight of Americans who suffer from pre-existing medical conditions
In other advanced countries , everyone gets essential care whatever their medical history
But in America , a bout of cancer , an inherited genetic disorder , or even , in some states , having been a victim of domestic violence can make you uninsurable , and thus make adequate health care unaffordable
One of the great virtues of the Democratic plan is that it would finally put an end to this unacceptable case of American exceptionalism
But what 's the Republican answer
Mr. Alexander was strangely inarticulate on the matter , saying only that `` House Republicans have some ideas about how my friend in Tullahoma can continue to afford insurance for his wife who has had breast cancer .
He offered no clue about what those ideas might be
In reality , House Republicans do n't have anything to offer to Americans with troubled medical histories
On the contrary , their big idea allowing unrestricted competition across state lines would lead to a race to the bottom
The states with the weakest regulations for example , those that allow insurance companies to deny coverage to victims of domestic violence would set the standards for the nation as a whole
The result would be to afflict the afflicted , to make the lives of Americans with pre-existing conditions even harder
Do n't take my word for it
Look at the Congressional Budget Office analysis of the House G.O.P. plan
That analysis is discreetly worded , with the budget office declaring somewhat obscurely that while the number of uninsured Americans would n't change much , `` the pool of people without health insurance would end up being less healthy , on average , than under current law .
But here 's the translation : While some people would gain insurance , the people losing insurance would be those who need it most
Under the Republican plan , the American health care system would become even more brutal than it is now
So what did we learn from the summit
What I took away was the arrogance that the success of things like the death-panel smear has obviously engendered in Republican politicians
At this point they obviously believe that they can blandly make utterly misleading assertions , saying things that can be easily refuted , and pay no price
And they may well be right
But Democrats can have the last laugh
All they have to do and they have the power to do it is finish the job , and enact health reform
Elections have consequences
President Obama 's new budget represents a huge break , not just with the policies of the past eight years , but with policy trends over the past 30 years
If he can get anything like the plan he announced on Thursday through Congress , he will set America on a fundamentally new course
The budget will , among other things , come as a huge relief to Democrats who were starting to feel a bit of postpartisan depression
The stimulus bill that Congress passed may have been too weak and too focused on tax cuts
The administration 's refusal to get tough on the banks may be deeply disappointing
But fears that Mr. Obama would sacrifice progressive priorities in his budget plans , and satisfy himself with fiddling around the edges of the tax system , have now been banished
For this budget allocates $ 634 billion over the next decade for health reform
That 's not enough to pay for universal coverage , but it 's an impressive start
And Mr. Obama plans to pay for health reform , not just with higher taxes on the affluent , but by putting a halt to the creeping privatization of Medicare , eliminating overpayments to insurance companies
On another front , it 's also heartening to see that the budget projects $ 645 billion in revenues from the sale of emission allowances
After years of denial and delay by its predecessor , the Obama administration is signaling that it 's ready to take on climate change
And these new priorities are laid out in a document whose clarity and plausibility seem almost incredible to those of us who grew accustomed to reading Bush-era budgets , which insulted our intelligence on every page
This is budgeting we can believe in
Many will ask whether Mr. Obama can actually pull off the deficit reduction he promises
Can he actually reduce the red ink from $ 1.75 trillion this year to less than a third as much in 2013
Yes , he can
Right now the deficit is huge thanks to temporary factors -LRB- at least we hope they 're temporary -RRB- : a severe economic slump is depressing revenues and large sums have to be allocated both to fiscal stimulus and to financial rescues
But if and when the crisis passes , the budget picture should improve dramatically
Bear in mind that from 2005 to 2007 , that is , in the three years before the crisis , the federal deficit averaged only $ 243 billion a year
Now , during those years , revenues were inflated , to some degree , by the housing bubble
But it 's also true that we were spending more than $ 100 billion a year in Iraq
So if Mr. Obama gets us out of Iraq -LRB- without bogging us down in an equally expensive Afghan quagmire -RRB- and manages to engineer a solid economic recovery two big ifs , to be sure getting the deficit down to around $ 500 billion by 2013 should n't be at all difficult
But wo n't the deficit be swollen by interest on the debt run-up over the next few years
Not as much as you might think
Interest rates on long-term government debt are less than 4 percent , so even a trillion dollars of additional debt adds less than $ 40 billion a year to future deficits
And those interest costs are fully reflected in the budget documents
So we have good priorities and plausible projections
What 's not to like about this budget
Basically , the long run outlook remains worrying
According to the Obama administration 's budget projections , the ratio of federal debt to G.D.P. , a widely used measure of the government 's financial position , will soar over the next few years , then more or less stabilize
But this stability will be achieved at a debt-to-G.D.P. ratio of around 60 percent
That would n't be an extremely high debt level by international standards , but it would be the deepest in debt America has been since the years immediately following World War II
And it would leave us with considerably reduced room for maneuver if another crisis comes along
Furthermore , the Obama budget only tells us about the next 10 years
That 's an improvement on Bush-era budgets , which looked only 5 years ahead
But America 's really big fiscal problems lurk over that budget horizon : sooner or later we 're going to have to come to grips with the forces driving up long-run spending above all , the ever-rising cost of health care
And even if fundamental health care reform brings costs under control , I at least find it hard to see how the federal government can meet its long-term obligations without some tax increases on the middle class
Whatever politicians may say now , there 's probably a value-added tax in our future
But I do n't blame Mr. Obama for leaving some big questions unanswered in this budget
There 's only so much long-run thinking the political system can handle in the midst of a severe crisis ; he has probably taken on all he can , for now
And this budget looks very , very good
Texas , Budget Cuts and Children Will 2011 be the year of fiscal austerity
At the federal level , it 's still not clear : Republicans are demanding draconian spending cuts , but we do n't yet know how far they 're willing to go in a showdown with President Obama
At the state and local level , however , there 's no doubt about it : big spending cuts are coming
Now , politicians - and especially , in my experience , conservative politicians - always claim to be deeply concerned about the nation 's children
Back during the 2000 campaign , then-candidate George W. Bush , touting the `` Texas miracle '' of dramatically lower dropout rates , declared that he wanted to be the `` education president .
Today , advocates of big spending cuts often claim that their greatest concern is the burden of debt our children will face
In practice , however , when advocates of lower spending get a chance to put their ideas into practice , the burden always seems to fall disproportionately on those very children they claim to hold so dear
Consider , as a case in point , what 's happening in Texas , which more and more seems to be where America 's political future happens first
Texas likes to portray itself as a model of small government , and indeed it is
Taxes are low , at least if you 're in the upper part of the income distribution -LRB- taxes on the bottom 40 percent of the population are actually above the national average -RRB-
Government spending is also low
And to be fair , low taxes may be one reason for the state 's rapid population growth , although low housing prices are surely much more important
But here 's the thing : While low spending may sound good in the abstract , what it amounts to in practice is low spending on children , who account directly or indirectly for a large part of government outlays at the state and local level
And in low-tax , low-spending Texas , the kids are not all right
The high school graduation rate , at just 61.3 percent , puts Texas 43rd out of 50 in state rankings
Nationally , the state ranks fifth in child poverty ; it leads in the percentage of children without health insurance
And only 78 percent of Texas children are in excellent or very good health , significantly below the national average
But wait - how can graduation rates be so low when Texas had that education miracle back when former President Bush was governor
Well , a couple of years into his presidency the truth about that miracle came out : Texas school administrators achieved low reported dropout rates the old-fashioned way - they , ahem , got the numbers wrong
It 's not a pretty picture ; compassion aside , you have to wonder - and many business people in Texas do - how the state can prosper in the long run with a future work force blighted by childhood poverty , poor health and lack of education
But things are about to get much worse
A few months ago another Texas miracle went the way of that education miracle of the 1990s
For months , Gov. Rick Perry had boasted that his `` tough conservative decisions '' had kept the budget in surplus while allowing the state to weather the recession unscathed
But after Mr. Perry 's re-election , reality intruded - funny how that happens - and the state is now scrambling to close a huge budget gap
-LRB- By the way , given the current efforts to blame public-sector unions for state fiscal problems , it 's worth noting that the mess in Texas was achieved with an overwhelmingly nonunion work force .
So how will that gap be closed
Given the already dire condition of Texas children , you might have expected the state 's leaders to focus the pain elsewhere
In particular , you might have expected high-income Texans , who pay much less in state and local taxes than the national average , to be asked to bear at least some of the burden
But you 'd be wrong
Tax increases have been ruled out of consideration ; the gap will be closed solely through spending cuts
Medicaid , a program that is crucial to many of the state 's children , will take the biggest hit , with the Legislature proposing a funding cut of no less than 29 percent , including a reduction in the state 's already low payments to providers - raising fears that doctors will start refusing to see Medicaid patients
And education will also face steep cuts , with school administrators talking about as many as 100,000 layoffs
The really striking thing about all this is n't the cruelty - at this point you expect that - but the shortsightedness
What 's supposed to happen when today 's neglected children become tomorrow 's work force
Anyway , the next time some self-proclaimed deficit hawk tells you how much he worries about the debt we 're leaving our children , remember what 's happening in Texas , a state whose slogan right now might as well be `` Lose the future .
Ross Douthat is off today
Question : what happens if you lose vast amounts of other people 's money
Answer : you get a big gift from the federal government but the president says some very harsh things about you before forking over the cash
Am I being unfair
I hope so
But right now that 's what seems to be happening
Just to be clear , I 'm not talking about the Obama administration 's plan to support jobs and output with a large , temporary rise in federal spending , which is very much the right thing to do
I 'm talking , instead , about the administration 's plans for a banking system rescue plans that are shaping up as a classic exercise in `` lemon socialism '' : taxpayers bear the cost if things go wrong , but stockholders and executives get the benefits if things go right
When I read recent remarks on financial policy by top Obama administration officials , I feel as if I 've entered a time warp as if it 's still 2005 , Alan Greenspan is still the Maestro , and bankers are still heroes of capitalism
`` We have a financial system that is run by private shareholders , managed by private institutions , and we 'd like to do our best to preserve that system , '' says Timothy Geithner , the Treasury secretary as he prepares to put taxpayers on the hook for that system 's immense losses
Meanwhile , a Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers , President Obama 's top economic adviser , `` think governments make poor bank managers '' as opposed , presumably , to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years
And this prejudice in favor of private control , even when the government is putting up all the money , seems to be warping the administration 's response to the financial crisis
Now , something must be done to shore up the financial system
The chaos after Lehman Brothers failed showed that letting major financial institutions collapse can be very bad for the economy 's health
And a number of major institutions are dangerously close to the edge
So banks need more capital
In normal times , banks raise capital by selling stock to private investors , who receive a share in the bank 's ownership in return
You might think , then , that if banks currently ca n't or wo n't raise enough capital from private investors , the government should do what a private investor would : provide capital in return for partial ownership
But bank stocks are worth so little these days Citigroup and Bank of America have a combined market value of only $ 52 billion that the ownership would n't be partial : pumping in enough taxpayer money to make the banks sound would , in effect , turn them into publicly owned enterprises
My response to this prospect is : so
If taxpayers are footing the bill for rescuing the banks , why should n't they get ownership , at least until private buyers can be found
But the Obama administration appears to be tying itself in knots to avoid this outcome
If news reports are right , the bank rescue plan will contain two main elements : government purchases of some troubled bank assets and guarantees against losses on other assets
The guarantees would represent a big gift to bank stockholders ; the purchases might not , if the price was fair but prices would , The Financial Times reports , probably be based on `` valuation models '' rather than market prices , suggesting that the government would be making a big gift here , too
And in return for what is likely to be a huge subsidy to stockholders , taxpayers will get , well , nothing
Will there at least be limits on executive compensation , to prevent more of the rip-offs that have enraged the public
President Obama denounced Wall Street bonuses in his latest weekly address but according to The Washington Post , `` the administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid '' because `` harsh limits could discourage some firms from asking for aid .
This suggests that Mr. Obama 's tough talk is just for show
Meanwhile , Wall Street 's culture of excess seems to have been barely dented by the crisis
`` Say I 'm a banker and I created $ 30 million
I should get a part of that , '' one banker told The New York Times
And if you 're a banker and you destroyed $ 30 billion
Uncle Sam to the rescue
There 's more at stake here than fairness , although that matters too
Saving the economy is going to be very expensive : that $ 800 billion stimulus plan is probably just a down payment , and rescuing the financial system , even if it 's done right , is going to cost hundreds of billions more
We ca n't afford to squander money giving huge windfalls to banks and their executives , merely to preserve the illusion of private ownership
The principal policy division between Hillary Clinton and Barack Obama involves health care
It 's a division that can seem technical and obscure and I 've read many assertions that only the most wonkish care about the fine print of their proposals
But as I 've tried to explain in previous columns , there really is a big difference between the candidates ' approaches
And new research , just released , confirms what I 've been saying : the difference between the plans could well be the difference between achieving universal health coverage a key progressive goal and falling far short
Specifically , new estimates say that a plan resembling Mrs. Clinton 's would cover almost twice as many of those now uninsured as a plan resembling Mr. Obama 's at only slightly higher cost
Let 's talk about how the plans compare
Both plans require that private insurers offer policies to everyone , regardless of medical history
Both also allow people to buy into government-offered insurance instead
And both plans seek to make insurance affordable to lower-income Americans
The Clinton plan is , however , more explicit about affordability , promising to limit insurance costs as a percentage of family income
And it also seems to include more funds for subsidies
But the big difference is mandates : the Clinton plan requires that everyone have insurance ; the Obama plan does n't
Mr. Obama claims that people will buy insurance if it becomes affordable
Unfortunately , the evidence says otherwise
After all , we already have programs that make health insurance free or very cheap to many low-income Americans , without requiring that they sign up
And many of those eligible fail , for whatever reason , to enroll
An Obama-type plan would also face the problem of healthy people who decide to take their chances or do n't sign up until they develop medical problems , thereby raising premiums for everyone else
Mr. Obama , contradicting his earlier assertions that affordability is the only bar to coverage , is now talking about penalizing those who delay signing up but it 's not clear how this would work
So the Obama plan would leave more people uninsured than the Clinton plan
How big is the difference
To answer this question you need to make a detailed analysis of health care decisions
That 's what Jonathan Gruber of M.I.T. , one of America 's leading health care economists , does in a new paper
Mr. Gruber finds that a plan without mandates , broadly resembling the Obama plan , would cover 23 million of those currently uninsured , at a taxpayer cost of $ 102 billion per year
An otherwise identical plan with mandates would cover 45 million of the uninsured essentially everyone at a taxpayer cost of $ 124 billion
Over all , the Obama-type plan would cost $ 4,400 per newly insured person , the Clinton-type plan only $ 2,700
That does n't look like a trivial difference to me
One plan achieves more or less universal coverage ; the other , although it costs more than 80 percent as much , covers only about half of those currently uninsured
As with any economic analysis , Mr. Gruber 's results are only as good as his model
But they 're consistent with the results of other analyses , such as a 2003 study , commissioned by the Robert Wood Johnson Foundation , that compared health reform plans and found that mandates made a big difference both to success in covering the uninsured and to cost-effectiveness
And that 's why many health care experts like Mr. Gruber strongly support mandates
Now , some might argue that none of this matters , because the legislation presidents actually manage to get enacted often bears little resemblance to their campaign proposals
And there is , indeed , no guarantee that Mrs. Clinton would , if elected , be able to pass anything like her current health care plan
But while it 's easy to see how the Clinton plan could end up being eviscerated , it 's hard to see how the hole in the Obama plan can be repaired
Because Mr. Obama 's campaigning on the health care issue has sabotaged his own prospects
You see , the Obama campaign has demonized the idea of mandates most recently in a scare-tactics mailer sent to voters that bears a striking resemblance to the `` Harry and Louise '' ads run by the insurance lobby in 1993 , ads that helped undermine our last chance at getting universal health care
If Mr. Obama gets to the White House and tries to achieve universal coverage , he 'll find that it ca n't be done without mandates but if he tries to institute mandates , the enemies of reform will use his own words against him
If you combine the economic analysis with these political realities , here 's what I think it says : If Mrs. Clinton gets the Democratic nomination , there is some chance nobody knows how big that we 'll get universal health care in the next administration
If Mr. Obama gets the nomination , it just wo n't happen
These days it 's hard to pick up a newspaper or turn on a news program without encountering stern warnings about the federal budget deficit
The deficit threatens economic recovery , we 're told ; it puts American economic stability at risk ; it will undermine our influence in the world
These claims generally are n't stated as opinions , as views held by some analysts but disputed by others
Instead , they 're reported as if they were facts , plain and simple
Yet they are n't facts
Many economists take a much calmer view of budget deficits than anything you 'll see on TV
Nor do investors seem unduly concerned : U.S. government bonds continue to find ready buyers , even at historically low interest rates
The long-run budget outlook is problematic , but short-term deficits are n't and even the long-term outlook is much less frightening than the public is being led to believe
So why the sudden ubiquity of deficit scare stories
It is n't being driven by any actual news
It has been obvious for at least a year that the U.S. government would face an extended period of large deficits , and projections of those deficits have n't changed much since last summer
Yet the drumbeat of dire fiscal warnings has grown vastly louder
To me and I 'm not alone in this the sudden outbreak of deficit hysteria brings back memories of the groupthink that took hold during the run-up to the Iraq war
Now , as then , dubious allegations , not backed by hard evidence , are being reported as if they have been established beyond a shadow of a doubt
Now , as then , much of the political and media establishments have bought into the notion that we must take drastic action quickly , even though there has n't been any new information to justify this sudden urgency
Now , as then , those who challenge the prevailing narrative , no matter how strong their case and no matter how solid their background , are being marginalized
And fear-mongering on the deficit may end up doing as much harm as the fear-mongering on weapons of mass destruction
Let 's talk for a moment about budget reality
Contrary to what you often hear , the large deficit the federal government is running right now is n't the result of runaway spending growth
Instead , well more than half of the deficit was caused by the ongoing economic crisis , which has led to a plunge in tax receipts , required federal bailouts of financial institutions , and been met appropriately with temporary measures to stimulate growth and support employment
The point is that running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do
If anything , deficits should be bigger than they are because the government should be doing more than it is to create jobs
True , there is a longer-term budget problem
Even a full economic recovery would n't balance the budget , and it probably would n't even reduce the deficit to a permanently sustainable level
So once the economic crisis is past , the U.S. government will have to increase its revenue and control its costs
And in the long run there 's no way to make the budget math work unless something is done about health care costs
But there 's no reason to panic about budget prospects for the next few years , or even for the next decade
Consider , for example , what the latest budget proposal from the Obama administration says about interest payments on federal debt ; according to the projections , a decade from now they 'll have risen to 3.5 percent of G.D.P. How scary is that
It 's about the same as interest costs under the first President Bush
Why , then , all the hysteria
The answer is politics
The main difference between last summer , when we were mostly -LRB- and appropriately -RRB- taking deficits in stride , and the current sense of panic is that deficit fear-mongering has become a key part of Republican political strategy , doing double duty : it damages President Obama 's image even as it cripples his policy agenda
And if the hypocrisy is breathtaking politicians who voted for budget-busting tax cuts posing as apostles of fiscal rectitude , politicians demonizing attempts to rein in Medicare costs one day -LRB- death panels !
, then denouncing excessive government spending the next well , what else is new
The trouble , however , is that it 's apparently hard for many people to tell the difference between cynical posturing and serious economic argument
And that is having tragic consequences
For the fact is that thanks to deficit hysteria , Washington now has its priorities all wrong : all the talk is about how to shave a few billion dollars off government spending , while there 's hardly any willingness to tackle mass unemployment
Policy is headed in the wrong direction and millions of Americans will pay the price
A not-so-funny thing happened on the way to economic recovery
Over the last two weeks , what should have been a deadly serious debate about how to save an economy in desperate straits turned , instead , into hackneyed political theater , with Republicans spouting all the old clich s about wasteful government spending and the wonders of tax cuts
It 's as if the dismal economic failure of the last eight years never happened yet Democrats have , incredibly , been on the defensive
Even if a major stimulus bill does pass the Senate , there 's a real risk that important parts of the original plan , especially aid to state and local governments , will have been emasculated
Somehow , Washington has lost any sense of what 's at stake of the reality that we may well be falling into an economic abyss , and that if we do , it will be very hard to get out again
It 's hard to exaggerate how much economic trouble we 're in
The crisis began with housing , but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States , but around the world
Consumers , their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market , have cut back their spending and sharply increased their saving a good thing in the long run , but a huge blow to the economy right now
Developers of commercial real estate , watching rents fall and financing costs soar , are slashing their investment plans
Businesses are canceling plans to expand capacity , since they are n't selling enough to use the capacity they have
And exports , which were one of the U.S. economy 's few areas of strength over the past couple of years , are now plunging as the financial crisis hits our trading partners
Meanwhile , our main line of defense against recessions the Federal Reserve 's usual ability to support the economy by cutting interest rates has already been overrun
The Fed has cut the rates it controls basically to zero , yet the economy is still in free fall
It 's no wonder , then , that most economic forecasts warn that in the absence of government action we 're headed for a deep , prolonged slump
Some private analysts predict double-digit unemployment
The Congressional Budget Office is slightly more sanguine , but its director , nonetheless , recently warned that `` absent a change in fiscal policy ... the shortfall in the nation 's output relative to potential levels will be the largest in duration and depth since the Depression of the 1930s .
Worst of all is the possibility that the economy will , as it did in the '30s , end up stuck in a prolonged deflationary trap
We 're already closer to outright deflation than at any point since the Great Depression
In particular , the private sector is experiencing widespread wage cuts for the first time since the 1930s , and there will be much more of that if the economy continues to weaken
As the great American economist Irving Fisher pointed out almost 80 years ago , deflation , once started , tends to feed on itself
As dollar incomes fall in the face of a depressed economy , the burden of debt becomes harder to bear , while the expectation of further price declines discourages investment spending
These effects of deflation depress the economy further , which leads to more deflation , and so on
And deflationary traps can go on for a long time
Japan experienced a `` lost decade '' of deflation and stagnation in the 1990s and the only thing that let Japan escape from its trap was a global boom that boosted the nation 's exports
Who will rescue America from a similar trap now that the whole world is slumping at the same time
Would the Obama economic plan , if enacted , ensure that America wo n't have its own lost decade
Not necessarily : a number of economists , myself included , think the plan falls short and should be substantially bigger
But the Obama plan would certainly improve our odds
And that 's why the efforts of Republicans to make the plan smaller and less effective to turn it into little more than another round of Bush-style tax cuts are so destructive
So what should Mr. Obama do
Count me among those who think that the president made a big mistake in his initial approach , that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh
What matters now , however , is what he does next
It 's time for Mr. Obama to go on the offensive
Above all , he must not shy away from pointing out that those who stand in the way of his plan , in the name of a discredited economic philosophy , are putting the nation 's future at risk
The American economy is on the edge of catastrophe , and much of the Republican Party is trying to push it over that edge
Droughts , Floods and Food We 're in the midst of a global food crisis - the second in three years
World food prices hit a record in January , driven by huge increases in the prices of wheat , corn , sugar and oils
These soaring prices have had only a modest effect on U.S. inflation , which is still low by historical standards , but they 're having a brutal impact on the world 's poor , who spend much if not most of their income on basic foodstuffs
The consequences of this food crisis go far beyond economics
After all , the big question about uprisings against corrupt and oppressive regimes in the Middle East is n't so much why they 're happening as why they 're happening now
And there 's little question that sky-high food prices have been an important trigger for popular rage
So what 's behind the price spike
American right-wingers -LRB- and the Chinese -RRB- blame easy-money policies at the Federal Reserve , with at least one commentator declaring that there is `` blood on Bernanke 's hands .
Meanwhile , President Nicolas Sarkozy of France blames speculators , accusing them of `` extortion and pillaging .
But the evidence tells a different , much more ominous story
While several factors have contributed to soaring food prices , what really stands out is the extent to which severe weather events have disrupted agricultural production
And these severe weather events are exactly the kind of thing we 'd expect to see as rising concentrations of greenhouse gases change our climate - which means that the current food price surge may be just the beginning
Now , to some extent soaring food prices are part of a general commodity boom : the prices of many raw materials , running the gamut from aluminum to zinc , have been rising rapidly since early 2009 , mainly thanks to rapid industrial growth in emerging markets
But the link between industrial growth and demand is a lot clearer for , say , copper than it is for food
Except in very poor countries , rising incomes do n't have much effect on how much people eat
It 's true that growth in emerging nations like China leads to rising meat consumption , and hence rising demand for animal feed
It 's also true that agricultural raw materials , especially cotton , compete for land and other resources with food crops - as does the subsidized production of ethanol , which consumes a lot of corn
So both economic growth and bad energy policy have played some role in the food price surge
Still , food prices lagged behind the prices of other commodities until last summer
Then the weather struck
Consider the case of wheat , whose price has almost doubled since the summer
The immediate cause of the wheat price spike is obvious : world production is down sharply
The bulk of that production decline , according to U.S. Department of Agriculture data , reflects a sharp plunge in the former Soviet Union
And we know what that 's about : a record heat wave and drought , which pushed Moscow temperatures above 100 degrees for the first time ever
The Russian heat wave was only one of many recent extreme weather events , from dry weather in Brazil to biblical-proportion flooding in Australia , that have damaged world food production
The question then becomes , what 's behind all this extreme weather
To some extent we 're seeing the results of a natural phenomenon , La Ni a - a periodic event in which water in the equatorial Pacific becomes cooler than normal
And La Ni a events have historically been associated with global food crises , including the crisis of 2007-8
But that 's not the whole story
Do n't let the snow fool you : globally , 2010 was tied with 2005 for warmest year on record , even though we were at a solar minimum and La Ni a was a cooling factor in the second half of the year
Temperature records were set not just in Russia but in no fewer than 19 countries , covering a fifth of the world 's land area
And both droughts and floods are natural consequences of a warming world : droughts because it 's hotter , floods because warm oceans release more water vapor
As always , you ca n't attribute any one weather event to greenhouse gases
But the pattern we 're seeing , with extreme highs and extreme weather in general becoming much more common , is just what you 'd expect from climate change
The usual suspects will , of course , go wild over suggestions that global warming has something to do with the food crisis ; those who insist that Ben Bernanke has blood on his hands tend to be more or less the same people who insist that the scientific consensus on climate reflects a vast leftist conspiracy
But the evidence does , in fact , suggest that what we 're getting now is a first taste of the disruption , economic and political , that we 'll face in a warming world
And given our failure to act on greenhouse gases , there will be much more , and much worse , to come
The economic news has been fairly dire this week
The credit crunch is getting worse , and a widely watched indicator of trends in the service sector which is most of the economy has fallen off a cliff
It 's still not a certainty that we 're headed into recession , but the odds are growing greater
And if past experience is any guide , the troubles will persist for a long time say , into the middle of 2010
The problems now facing the U.S. economy look a lot like the problems that caused the last two recessions but this time in combination
On one side , the bursting of the housing bubble is playing the role that the bursting of the dot-com bubble played in 2001
On the other , the subprime crisis is creating a credit crunch reminiscent of the crunch after the savings-and-loan crisis of the late 1980s , which led to recession in 1990
Now , you may have heard that those recessions were short
And it 's true that the last two recessions both officially ended after only eight months
But the official end dates for those recessions are deeply misleading , at least as far as most peoples ' experience is concerned
There 's a reason that the Bush administration , in its -LRB- increasingly strained -RRB- efforts to tout economic performance on its watch , always talks about jobs added since August 2003
It was only then two and a half years after the recession began that the U.S. economy began to experience anything that felt like a recovery
And the same thing happened a decade earlier : the recession that began in 1990 officially ended in March 1991 , but the jobless recovery that followed kept Americans feeling miserable about the economy right up through the 1992 election
Since the current problems of the U.S. economy look like a combination of 1990 and 2001 , the shape of this episode of economic distress will probably be similar to that of the earlier episodes : even if the official recession is short , the bad times will linger well into the next administration
How severe will the distress be
The double-bubble nature of the underlying problem a housing bubble and a credit bubble combined suggests that it may well be worse than either 1990 or 2001
And some highly respected economists are issuing dire warnings
There has been a lot of buzz about a new paper by Carmen Reinhart and Kenneth Rogoff that compares the United States in recent years to other advanced countries that have experienced financial crises
They find that the U.S. profile resembles that of the `` big five crises , '' a list that includes , for example , Sweden 's 1991 crisis , which caused the unemployment rate to soar from 2 percent to 9 percent over a two-year period
Maybe we 'll be lucky , and that wo n't happen
But what can be done to limit the damage
Since September , the Federal Reserve has slashed its target interest rate five times , and everyone expects it to cut further
But interest rates were cut dramatically during the last two slumps , too yet the slumps went on for years anyway
Meanwhile , Congress and the Bush administration have reached agreement on a much-hyped stimulus package
But the package , while probably better than nothing , is unlikely to make a noticeable dent in the problem in part because the insistence of the administration and Senate Republicans on blocking precisely the measures , such as expanded unemployment insurance and food stamps , that are most likely to be effective
Still , by January the White House will have a new occupant
If the slump is still going on , which is likely , this will offer a chance to consider other , more effective measures
In particular , now would be a good time to think about the possibility of going beyond tax cuts and rebate checks , and stimulating the economy with some much-needed public investment say , in repairing the country 's crumbling infrastructure
The usual rap against public spending as a form of economic stimulus is that it takes too long to get going that by the time the money starts flowing , the recession is already over
But if this turns out to be a prolonged slump , which seems likely , that wo n't be a problem
But we wo n't get any innovative action to help the economy unless the next president has a couple of key attributes
First , he or she has to be free of the ideological blinders that make the current administration and its allies fiercely oppose the idea that the government can do anything positive aside from cutting taxes
Second , he or she has to be knowledgeable about and interested in economic policy
Presidents do n't have to be their own chief economists , but they do need to know enough to take the right advice
Will we have that kind of president
Stay tuned
We 've always known that America 's reign as the world 's greatest nation would eventually end
But most of us imagined that our downfall , when it came , would be something grand and tragic
What we 're getting instead is less a tragedy than a deadly farce
Instead of fraying under the strain of imperial overstretch , we 're paralyzed by procedure
Instead of re-enacting the decline and fall of Rome , we 're re-enacting the dissolution of 18th-century Poland
A brief history lesson : In the 17th and 18th centuries , the Polish legislature , the Sejm , operated on the unanimity principle : any member could nullify legislation by shouting `` I do not allow !
This made the nation largely ungovernable , and neighboring regimes began hacking off pieces of its territory
By 1795 Poland had disappeared , not to re-emerge for more than a century
Today , the U.S. Senate seems determined to make the Sejm look good by comparison
Last week , after nine months , the Senate finally approved Martha Johnson to head the General Services Administration , which runs government buildings and purchases supplies
It 's an essentially nonpolitical position , and nobody questioned Ms. Johnson 's qualifications : she was approved by a vote of 94 to 2
But Senator Christopher Bond , Republican of Missouri , had put a `` hold '' on her appointment to pressure the government into approving a building project in Kansas City
This dubious achievement may have inspired Senator Richard Shelby , Republican of Alabama
In any case , Mr. Shelby has now placed a hold on all outstanding Obama administration nominations about 70 high-level government positions until his state gets a tanker contract and a counterterrorism center
What gives individual senators this kind of power
Much of the Senate 's business relies on unanimous consent : it 's difficult to get anything done unless everyone agrees on procedure
And a tradition has grown up under which senators , in return for not gumming up everything , get the right to block nominees they do n't like
In the past , holds were used sparingly
That 's because , as a Congressional Research Service report on the practice says , the Senate used to be ruled by `` traditions of comity , courtesy , reciprocity , and accommodation .
But that was then
Rules that used to be workable have become crippling now that one of the nation 's major political parties has descended into nihilism , seeing no harm in fact , political dividends in making the nation ungovernable
How bad is it
It 's so bad that I miss Newt Gingrich
Readers may recall that in 1995 Mr. Gingrich , then speaker of the House , cut off the federal government 's funding and forced a temporary government shutdown
It was ugly and extreme , but at least Mr. Gingrich had specific demands : he wanted Bill Clinton to agree to sharp cuts in Medicare
Today , by contrast , the Republican leaders refuse to offer any specific proposals
They inveigh against the deficit and last month their senators voted in lockstep against any increase in the federal debt limit , a move that would have precipitated another government shutdown if Democrats had n't had 60 votes
But they also denounce anything that might actually reduce the deficit , including , ironically , any effort to spend Medicare funds more wisely
And with the national G.O.P. having abdicated any responsibility for making things work , it 's only natural that individual senators should feel free to take the nation hostage until they get their pet projects funded
The truth is that given the state of American politics , the way the Senate works is no longer consistent with a functioning government
Senators themselves should recognize this fact and push through changes in those rules , including eliminating or at least limiting the filibuster
This is something they could and should do , by majority vote , on the first day of the next Senate session
Do n't hold your breath
As it is , Democrats do n't even seem able to score political points by highlighting their opponents ' obstructionism
It should be a simple message -LRB- and it should have been the central message in Massachusetts -RRB- : a vote for a Republican , no matter what you think of him as a person , is a vote for paralysis
But by now , we know how the Obama administration deals with those who would destroy it : it goes straight for the capillaries
Sure enough , Robert Gibbs , the White House press secretary , accused Mr. Shelby of `` silliness .
Yep , that will really resonate with voters
After the dissolution of Poland , a Polish officer serving under Napoleon penned a song that eventually after the country 's post-World War I resurrection became the country 's national anthem
It begins , `` Poland is not yet lost .
Well , America is not yet lost
But the Senate is working on it
What do you call someone who eliminates hundreds of thousands of American jobs , deprives millions of adequate health care and nutrition , undermines schools , but offers a $ 15,000 bonus to affluent people who flip their houses
A proud centrist
For that is what the senators who ended up calling the tune on the stimulus bill just accomplished
Even if the original Obama plan around $ 800 billion in stimulus , with a substantial fraction of that total given over to ineffective tax cuts had been enacted , it would n't have been enough to fill the looming hole in the U.S. economy , which the Congressional Budget Office estimates will amount to $ 2.9 trillion over the next three years
Yet the centrists did their best to make the plan weaker and worse
One of the best features of the original plan was aid to cash-strapped state governments , which would have provided a quick boost to the economy while preserving essential services
But the centrists insisted on a $ 40 billion cut in that spending
The original plan also included badly needed spending on school construction ; $ 16 billion of that spending was cut
It included aid to the unemployed , especially help in maintaining health care cut
Food stamps cut
All in all , more than $ 80 billion was cut from the plan , with the great bulk of those cuts falling on precisely the measures that would do the most to reduce the depth and pain of this slump
On the other hand , the centrists were apparently just fine with one of the worst provisions in the Senate bill , a tax credit for home buyers
Dean Baker of the Center for Economic Policy Research calls this the `` flip your house to your brother '' provision : it will cost a lot of money while doing nothing to help the economy
All in all , the centrists ' insistence on comforting the comfortable while afflicting the afflicted will , if reflected in the final bill , lead to substantially lower employment and substantially more suffering
But how did this happen
I blame President Obama 's belief that he can transcend the partisan divide a belief that warped his economic strategy
After all , many people expected Mr. Obama to come out with a really strong stimulus plan , reflecting both the economy 's dire straits and his own electoral mandate
Instead , however , he offered a plan that was clearly both too small and too heavily reliant on tax cuts
Because he wanted the plan to have broad bipartisan support , and believed that it would
Not long ago administration strategists were talking about getting 80 or more votes in the Senate
Mr. Obama 's postpartisan yearnings may also explain why he did n't do something crucially important : speak forcefully about how government spending can help support the economy
Instead , he let conservatives define the debate , waiting until late last week before finally saying what needed to be said that increasing spending is the whole point of the plan
And Mr. Obama got nothing in return for his bipartisan outreach
Not one Republican voted for the House version of the stimulus plan , which was , by the way , better focused than the original administration proposal
In the Senate , Republicans inveighed against `` pork '' although the wasteful spending they claimed to have identified -LRB- much of it was fully justified -RRB- was a trivial share of the bill 's total
And they decried the bill 's cost even as 36 out of 41 Republican senators voted to replace the Obama plan with $ 3 trillion , that 's right , $ 3 trillion in tax cuts over 10 years
So Mr. Obama was reduced to bargaining for the votes of those centrists
And the centrists , predictably , extracted a pound of flesh not , as far as anyone can tell , based on any coherent economic argument , but simply to demonstrate their centrist mojo
They probably would have demanded that $ 100 billion or so be cut from anything Mr. Obama proposed ; by coming in with such a low initial bid , the president guaranteed that the final deal would be much too small
Such are the perils of negotiating with yourself
Now , House and Senate negotiators have to reconcile their versions of the stimulus , and it 's possible that the final bill will undo the centrists ' worst
And Mr. Obama may be able to come back for a second round
But this was his best chance to get decisive action , and it fell short
So has Mr. Obama learned from this experience
Early indications are n't good
For rather than acknowledge the failure of his political strategy and the damage to his economic strategy , the president tried to put a postpartisan happy face on the whole thing
`` Democrats and Republicans came together in the Senate and responded appropriately to the urgency this moment demands , '' he declared on Saturday , and `` the scale and scope of this plan is right .
No , they did n't , and no , it is n't
Climate of Hate When you heard the terrible news from Arizona , were you completely surprised
Or were you , at some level , expecting something like this atrocity to happen
Put me in the latter category
I 've had a sick feeling in the pit of my stomach ever since the final stages of the 2008 campaign
I remembered the upsurge in political hatred after Bill Clinton 's election in 1992 - an upsurge that culminated in the Oklahoma City bombing
And you could see , just by watching the crowds at McCain-Palin rallies , that it was ready to happen again
The Department of Homeland Security reached the same conclusion : in April 2009 an internal report warned that right-wing extremism was on the rise , with a growing potential for violence
Conservatives denounced that report
But there has , in fact , been a rising tide of threats and vandalism aimed at elected officials , including both Judge John Roll , who was killed Saturday , and Representative Gabrielle Giffords
One of these days , someone was bound to take it to the next level
And now someone has
It 's true that the shooter in Arizona appears to have been mentally troubled
But that does n't mean that his act can or should be treated as an isolated event , having nothing to do with the national climate
Last spring Politico.com reported on a surge in threats against members of Congress , which were already up by 300 percent
A number of the people making those threats had a history of mental illness - but something about the current state of America has been causing far more disturbed people than before to act out their illness by threatening , or actually engaging in , political violence
And there 's not much question what has changed
As Clarence Dupnik , the sheriff responsible for dealing with the Arizona shootings , put it , it 's `` the vitriolic rhetoric that we hear day in and day out from people in the radio business and some people in the TV business .
The vast majority of those who listen to that toxic rhetoric stop short of actual violence , but some , inevitably , cross that line
It 's important to be clear here about the nature of our sickness
It 's not a general lack of `` civility , '' the favorite term of pundits who want to wish away fundamental policy disagreements
Politeness may be a virtue , but there 's a big difference between bad manners and calls , explicit or implicit , for violence ; insults are n't the same as incitement
The point is that there 's room in a democracy for people who ridicule and denounce those who disagree with them ; there is n't any place for eliminationist rhetoric , for suggestions that those on the other side of a debate must be removed from that debate by whatever means necessary
And it 's the saturation of our political discourse - and especially our airwaves - with eliminationist rhetoric that lies behind the rising tide of violence
Where 's that toxic rhetoric coming from
Let 's not make a false pretense of balance : it 's coming , overwhelmingly , from the right
It 's hard to imagine a Democratic member of Congress urging constituents to be `` armed and dangerous '' without being ostracized ; but Representative Michele Bachmann , who did just that , is a rising star in the G.O.P. And there 's a huge contrast in the media
Listen to Rachel Maddow or Keith Olbermann , and you 'll hear a lot of caustic remarks and mockery aimed at Republicans
But you wo n't hear jokes about shooting government officials or beheading a journalist at The Washington Post
Listen to Glenn Beck or Bill O'Reilly , and you will
Of course , the likes of Mr. Beck and Mr. O'Reilly are responding to popular demand
Citizens of other democracies may marvel at the American psyche , at the way efforts by mildly liberal presidents to expand health coverage are met with cries of tyranny and talk of armed resistance
Still , that 's what happens whenever a Democrat occupies the White House , and there 's a market for anyone willing to stoke that anger
But even if hate is what many want to hear , that does n't excuse those who pander to that desire
They should be shunned by all decent people
Unfortunately , that has n't been happening : the purveyors of hate have been treated with respect , even deference , by the G.O.P. establishment
As David Frum , the former Bush speechwriter , has put it , `` Republicans originally thought that Fox worked for us and now we 're discovering we work for Fox .
So will the Arizona massacre make our discourse less toxic
It 's really up to G.O.P. leaders
Will they accept the reality of what 's happening to America , and take a stand against eliminationist rhetoric
Or will they try to dismiss the massacre as the mere act of a deranged individual , and go on as before
If Arizona promotes some real soul-searching , it could prove a turning point
If it does n't , Saturday 's atrocity will be just the beginning
Today I 'd like to talk about a much-derided contender making a surprising comeback , a comeback that calls into question much of the conventional wisdom of American politics
No , I 'm not talking about a politician
I 'm talking about an economy specifically , the European economy , which many Americans assume is tired and spent but has lately been showing surprising vitality
Why should Americans care about Europe 's economy
Well , for one thing , it 's big
The G.D.P. of the European Union is roughly comparable to that of the United States ; the euro is almost as important a global currency as the dollar ; and the governance of the world financial system is , for practical purposes , equally shared by the European Central Bank and the Federal Reserve
But there 's another thing : it 's important to get the facts about Europe 's economy right because the alleged woes of that economy play an important role in American political discourse , usually as an excuse for the insecurities and injustices of our own society
For example , does Hillary Clinton have a plan to cover the millions of Americans who lack health insurance
`` She takes her inspiration from European bureaucracies , '' sneers Mitt Romney
Or are top U.S. executives grossly overpaid
According to a Times report , Michael Jensen , a professor emeritus at Harvard 's Graduate School of Business whose theories helped pave the way for gigantic paychecks , considers executive excess `` an acceptable price to pay for an American economy that he believes has outstripped Japan and Europe in growth and prosperity .
In fact , however , tales of a moribund Europe are greatly exaggerated
It 's true that Europe has had a lot of economic troubles over the past generation
In the mid-1970s the Continent entered a prolonged era of sluggish job creation , which contrasted with vigorous employment growth in the United States
And in the 1990s , Europe lagged behind America in the adoption of new technology
For example , in 1997 fewer than 15 percent of French homes contained personal computers and fewer than 1 percent were connected to the Internet
But that was then
Since 2000 , employment has actually grown a bit faster in Europe than in the United States and since Europe has a lower rate of population growth , this has translated into a substantial rise in the percentage of working-age Europeans with jobs , even as America 's employment-population ratio has declined
In particular , in the prime working years , from 25 to 54 , the big gap between European and U.S. employment rates that existed a decade ago has been largely eliminated
If you think Europe is a place where lots of able-bodied adults just sit at home collecting welfare checks , think again
Meanwhile , Europe 's Internet lag is a thing of the past
The dial-up Internet of the 1990s was dominated by the United States
But as dial-up has given way to broadband , Europe has more than kept up
The number of broadband connections per 100 people in the 15 countries that were members of the European Union before it was enlarged in 2004 , is slightly higher than in the U.S. and Europe 's connections are both substantially faster and substantially cheaper than ours
I do n't want to exaggerate the good news
Europe continues to have many economic problems
But who does n't
The fact is that Europe 's economy looks a lot better now both in absolute terms and compared with our economy than it did a decade ago
What 's behind Europe 's comeback
It 's a complicated story , probably involving a combination of deregulation -LRB- which has expanded job opportunities -RRB- and smart regulation
One of the keys to Europe 's broadband success is that unlike U.S. regulators , many European governments have promoted competition , preventing phone and cable companies from monopolizing broadband access
What European countries definitely have n't done is dismantle their strong social safety nets
Universal health care is a given
So are a variety of programs that support families in trouble , helping protect Europeans from the extreme poverty all too common in this country
All of this costs money even though European countries spend far less on health care than we do and European taxes are very high by U.S. standards
In short , Europe continues to be a big-government sort of place
And that 's why it 's important to get the real story of the European economy out there
According to the anti-government ideology that dominates much U.S. political discussion , low taxes and a weak social safety net are essential to prosperity
Try to make the lives of Americans even slightly more secure , we 're told , and the economy will shrivel up the same way it supposedly has in Europe
But the next time a politician tries to scare you with the European bogeyman , bear this in mind : Europe 's economy is actually doing O.K. these days , despite a level of taxing and spending beyond the wildest ambitions of American progressives
As health care reform nears the finish line , there is much wailing and rending of garments among conservatives
And I 'm not just talking about the tea partiers
Even calmer conservatives have been issuing dire warnings that Obamacare will turn America into a European-style social democracy
And everyone knows that Europe has lost all its economic dynamism
Strange to say , however , what everyone knows is n't true
Europe has its economic troubles ; who does n't
But the story you hear all the time of a stagnant economy in which high taxes and generous social benefits have undermined incentives , stalling growth and innovation bears little resemblance to the surprisingly positive facts
The real lesson from Europe is actually the opposite of what conservatives claim : Europe is an economic success , and that success shows that social democracy works
Actually , Europe 's economic success should be obvious even without statistics
For those Americans who have visited Paris : did it look poor and backward
What about Frankfurt or London
You should always bear in mind that when the question is which to believe official economic statistics or your own lying eyes the eyes have it
In any case , the statistics confirm what the eyes see
It 's true that the U.S. economy has grown faster than that of Europe for the past generation
Since 1980 when our politics took a sharp turn to the right , while Europe 's did n't America 's real G.D.P. has grown , on average , 3 percent per year
Meanwhile , the E.U. 15 the bloc of 15 countries that were members of the European Union before it was enlarged to include a number of former Communist nations has grown only 2.2 percent a year
America rules
Or maybe not
All this really says is that we 've had faster population growth
Since 1980 , per capita real G.D.P. which is what matters for living standards has risen at about the same rate in America and in the E.U. 15 : 1.95 percent a year here ; 1.83 percent there
What about technology
In the late 1990s you could argue that the revolution in information technology was passing Europe by
But Europe has since caught up in many ways
Broadband , in particular , is just about as widespread in Europe as it is in the United States , and it 's much faster and cheaper
And what about jobs
Here America arguably does better : European unemployment rates are usually substantially higher than the rate here , and the employed fraction of the population lower
But if your vision is of millions of prime-working-age adults sitting idle , living on the dole , think again
In 2008 , 80 percent of adults aged 25 to 54 in the E.U. 15 were employed -LRB- and 83 percent in France -RRB-
That 's about the same as in the United States
Europeans are less likely than we are to work when young or old , but is that entirely a bad thing
And Europeans are quite productive , too : they work fewer hours , but output per hour in France and Germany is close to U.S. levels
The point is n't that Europe is utopia
Like the United States , it 's having trouble grappling with the current financial crisis
Like the United States , Europe 's big nations face serious long-run fiscal issues and like some individual U.S. states , some European countries are teetering on the edge of fiscal crisis
-LRB- Sacramento is now the Athens of America in a bad way .
But taking the longer view , the European economy works ; it grows ; it 's as dynamic , all in all , as our own
So why do we get such a different picture from many pundits
Because according to the prevailing economic dogma in this country and I 'm talking here about many Democrats as well as essentially all Republicans European-style social democracy should be an utter disaster
And people tend to see what they want to see
After all , while reports of Europe 's economic demise are greatly exaggerated , reports of its high taxes and generous benefits are n't
Taxes in major European nations range from 36 to 44 percent of G.D.P. , compared with 28 in the United States
Universal health care is , well , universal
Social expenditure is vastly higher than it is here
So if there were anything to the economic assumptions that dominate U.S. public discussion above all , the belief that even modestly higher taxes on the rich and benefits for the less well off would drastically undermine incentives to work , invest and innovate Europe would be the stagnant , decaying economy of legend
But it is n't
Europe is often held up as a cautionary tale , a demonstration that if you try to make the economy less brutal , to take better care of your fellow citizens when they 're down on their luck , you end up killing economic progress
But what European experience actually demonstrates is the opposite : social justice and progress can go hand in hand
Last week President-elect Barack Obama was asked to respond to critics who say that his stimulus plan wo n't do enough to help the economy
Mr. Obama answered that he wants to hear ideas about `` how to spend money efficiently and effectively to jump-start the economy .
O.K. , I 'll bite although as I 'll explain shortly , the `` jump-start '' metaphor is part of the problem
First , Mr. Obama should scrap his proposal for $ 150 billion in business tax cuts , which would do little to help the economy
Ideally he 'd scrap the proposed $ 150 billion payroll tax cut as well , though I 'm aware that it was a campaign promise
Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress enhanced unemployment benefits , expanded Medicaid and more
And why not get an early start on the insurance subsidies probably running at $ 100 billion or more per year that will be essential if we 're going to achieve universal health care
Mainly , though , Mr. Obama needs to make his plan bigger
To see why , consider a new report from his own economic team
On Saturday , Christina Romer , the future head of the Council of Economic Advisers , and Jared Bernstein , who will be the vice president 's chief economist , released estimates of what the Obama economic plan would accomplish
Their report is reasonable and intellectually honest , which is a welcome change from the fuzzy math of the last eight years
But the report also makes it clear that the plan falls well short of what the economy needs
According to Ms. Romer and Mr. Bernstein , the Obama plan would have its maximum impact in the fourth quarter of 2010
Without the plan , they project , the unemployment rate in that quarter would be a disastrous 8.8 percent
Yet even with the plan , unemployment would be 7 percent roughly as high as it is now
After 2010 , the report says , the effects of the economic plan would rapidly fade away
The job of promoting full recovery would , however , remain undone : the unemployment rate would still be a painful 6.3 percent in the last quarter of 2011
Now , economic forecasting is an inexact science , to say the least , and things could turn out better than the report predicts
But they could also turn out worse
The report itself acknowledges that `` some private forecasters anticipate unemployment rates as high as 11 percent in the absence of action .
And I 'm with Lawrence Summers , another member of the Obama economic team , who recently declared , `` In this crisis , doing too little poses a greater threat than doing too much .
Unfortunately , that principle is n't reflected in the current plan
So how can Mr. Obama do more
By including a lot more public investment in his plan which will be possible if he takes a longer view
The Romer-Bernstein report acknowledges that `` a dollar of infrastructure spending is more effective in creating jobs than a dollar of tax cuts .
It argues , however , that `` there is a limit on how much government investment can be carried out efficiently in a short time frame .
But why does the time frame have to be short
As far as I can tell , Mr. Obama 's planners have focused on investment projects that will deliver their main jobs boost over the next two years
But since unemployment is likely to remain high well beyond that two-year window , the plan should also include longer-term investment projects
And bear in mind that even a project that delivers its main punch in , say , 2011 can provide significant economic support in earlier years
If Mr. Obama drops the `` jump-start '' metaphor , if he accepts the reality that we need a multi-year program rather than a short burst of activity , he can create a lot more jobs through government investment , even in the near term
Still , should n't Mr. Obama wait for proof that a bigger , longer-term plan is needed
Right now the investment portion of the Obama plan is limited by a shortage of `` shovel ready '' projects , projects ready to go on short notice
A lot more investment can be under way by late 2010 or 2011 if Mr. Obama gives the go-ahead now but if he waits too long before deciding , that window of opportunity will be gone
One more thing : even with the Obama plan , the Romer-Bernstein report predicts an average unemployment rate of 7.3 percent over the next three years
That 's a scary number , big enough to pose a real risk that the U.S. economy will get stuck in a Japan-type deflationary trap
So my advice to the Obama team is to scrap the business tax cuts , and , more important , to deal with the threat of doing too little by doing more
And the way to do more is to stop talking about jump-starts and look more broadly at the possibilities for government investment
Suddenly , the economic consensus seems to be that the implosion of the housing market will indeed push the U.S. economy into a recession , and that it 's quite possible that we 're already in one
As a result , over the next few weeks we 'll be hearing a lot about plans for economic stimulus
Since this is an election year , the debate over how to stimulate the economy is inevitably tied up with politics
And here 's a modest suggestion for political reporters
Instead of trying to divine the candidates ' characters by scrutinizing their tone of voice and facial expressions , why not pay attention to what they say about economic policy
In fact , recent statements by the candidates and their surrogates about the economy are quite revealing
Take , for example , John McCain 's admission that economics is n't his thing
`` The issue of economics is not something I 've understood as well as I should , '' he says
`` I 've got Greenspan 's book .
His self-deprecating humor is attractive , as always
But should n't we worry about a candidate who 's so out of touch that he regards Mr. Bubble , the man who refused to regulate subprime lending and assured us that there was at most some `` froth '' in the housing market , as a source of sage advice
Meanwhile , Rudy Giuliani wants us to go for broke , literally : his answer to the economy 's short-run problems is a huge permanent tax cut , which he claims would pay for itself
It would n't
About Mike Huckabee well , what can you say about a candidate who talks populist while proposing to raise taxes on the middle class and cut them for the rich
And then there 's the curious case of Mitt Romney
I 'm told that he actually does know a fair bit about economics , and he has some big-name Republican economists supporting his campaign
Fears of recession might have offered him a chance to distinguish himself from the G.O.P. field , by offering an economic proposal that actually responded to the gathering economic storm
I mean , even the Bush administration seems to be coming around to the view that lobbying for long-term tax cuts is n't enough , that the economy needs some immediate help
`` Time is of the essence , '' declared Henry Paulson , the Treasury secretary , last week
But Mr. Romney , who really needs to take chances at this point , apparently ca n't break the habit of telling Republicans only what he thinks they want to hear
He 's still offering nothing but standard-issue G.O.P. pablum about low taxes and a pro-business environment
On the Democratic side , John Edwards , although never the front-runner , has been driving his party 's policy agenda
He 's done it again on economic stimulus : last month , before the economic consensus turned as negative as it now has , he proposed a stimulus package including aid to unemployed workers , aid to cash-strapped state and local governments , public investment in alternative energy , and other measures
Last week Hillary Clinton offered a broadly similar but somewhat larger proposal
-LRB- It also includes aid to families having trouble paying heating bills , which seems like a clever way to put cash in the hands of people likely to spend it .
The Edwards and Clinton proposals both contain provisions for bigger stimulus if the economy worsens
And you have to say that Mrs. Clinton seems comfortable with and knowledgeable about economic policy
I 'm sure the Hillary-haters will find some reason that 's a bad thing , but there 's something to be said for presidents who know what they 're talking about
The Obama campaign 's initial response to the latest wave of bad economic news was , I 'm sorry to say , disreputable : Mr. Obama 's top economic adviser claimed that the long-term tax-cut plan the candidate announced months ago is just what we need to keep the slump from `` morphing into a drastic decline in consumer spending .
Hmm : claiming that the candidate is all-seeing , and that a tax cut originally proposed for other reasons is also a recession-fighting measure does n't that sound familiar
Anyway , on Sunday Mr. Obama came out with a real stimulus plan
As was the case with his health care plan , which fell short of universal coverage , his stimulus proposal is similar to those of the other Democratic candidates , but tilted to the right
For example , the Obama plan appears to contain none of the alternative energy initiatives that are in both the Edwards and Clinton proposals , and emphasizes across-the-board tax cuts over both aid to the hardest-hit families and help for state and local governments
I know that Mr. Obama 's supporters hate to hear this , but he really is less progressive than his rivals on matters of domestic policy
In short , the stimulus debate offers a pretty good portrait of the men and woman who would be president
And I have n't said a word about their hairstyles
A Tale of Two Moralities On Wednesday , President Obama called on Americans to `` expand our moral imaginations , to listen to each other more carefully , to sharpen our instincts for empathy , and remind ourselves of all the ways our hopes and dreams are bound together .
Those were beautiful words ; they spoke to our desire for reconciliation
But the truth is that we are a deeply divided nation and are likely to remain one for a long time
By all means , let 's listen to each other more carefully ; but what we 'll discover , I fear , is how far apart we are
For the great divide in our politics is n't really about pragmatic issues , about which policies work best ; it 's about differences in those very moral imaginations Mr. Obama urges us to expand , about divergent beliefs over what constitutes justice
And the real challenge we face is not how to resolve our differences - something that wo n't happen any time soon - but how to keep the expression of those differences within bounds
What are the differences I 'm talking about
One side of American politics considers the modern welfare state - a private-enterprise economy , but one in which society 's winners are taxed to pay for a social safety net - morally superior to the capitalism red in tooth and claw we had before the New Deal
It 's only right , this side believes , for the affluent to help the less fortunate
The other side believes that people have a right to keep what they earn , and that taxing them to support others , no matter how needy , amounts to theft
That 's what lies behind the modern right 's fondness for violent rhetoric : many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty
There 's no middle ground between these views
One side saw health reform , with its subsidized extension of coverage to the uninsured , as fulfilling a moral imperative : wealthy nations , it believed , have an obligation to provide all their citizens with essential care
The other side saw the same reform as a moral outrage , an assault on the right of Americans to spend their money as they choose
This deep divide in American political morality - for that 's what it amounts to - is a relatively recent development
Commentators who pine for the days of civility and bipartisanship are , whether they realize it or not , pining for the days when the Republican Party accepted the legitimacy of the welfare state , and was even willing to contemplate expanding it
As many analysts have noted , the Obama health reform - whose passage was met with vandalism and death threats against members of Congress - was modeled on Republican plans from the 1990s
But that was then
Today 's G.O.P. sees much of what the modern federal government does as illegitimate ; today 's Democratic Party does not
When people talk about partisan differences , they often seem to be implying that these differences are petty , matters that could be resolved with a bit of good will
But what we 're talking about here is a fundamental disagreement about the proper role of government
Regular readers know which side of that divide I 'm on
In future columns I will no doubt spend a lot of time pointing out the hypocrisy and logical fallacies of the `` I earned it and I have the right to keep it '' crowd
And I 'll also have a lot to say about how far we really are from being a society of equal opportunity , in which success depends solely on one 's own efforts
But the question for now is what we can agree on given this deep national divide
In a way , politics as a whole now resembles the longstanding politics of abortion - a subject that puts fundamental values at odds , in which each side believes that the other side is morally in the wrong
Almost 38 years have passed since Roe v. Wade , and this dispute is no closer to resolution
Yet we have , for the most part , managed to agree on certain ground rules in the abortion controversy : it 's acceptable to express your opinion and to criticize the other side , but it 's not acceptable either to engage in violence or to encourage others to do so
What we need now is an extension of those ground rules to the wider national debate
Right now , each side in that debate passionately believes that the other side is wrong
And it 's all right for them to say that
What 's not acceptable is the kind of violence and eliminationist rhetoric encouraging violence that has become all too common these past two years
It 's not enough to appeal to the better angels of our nature
We need to have leaders of both parties - or Mr. Obama alone if necessary - declare that both violence and any language hinting at the acceptability of violence are out of bounds
We all want reconciliation , but the road to that goal begins with an agreement that our differences will be settled by the rule of law
The official Financial Crisis Inquiry Commission the group that aims to hold a modern version of the Pecora hearings of the 1930s , whose investigations set the stage for New Deal bank regulation began taking testimony on Wednesday
In its first panel , the commission grilled four major financial-industry honchos
What did we learn
Well , if you were hoping for a Perry Mason moment a scene in which the witness blurts out : `` Yes
I admit it
I did it
And I 'm glad !
the hearing was disappointing
What you got , instead , was witnesses blurting out : `` Yes
I admit it
I 'm clueless !
O.K. , not in so many words
But the bankers ' testimony showed a stunning failure , even now , to grasp the nature and extent of the current crisis
And that 's important : It tells us that as Congress and the administration try to reform the financial system , they should ignore advice coming from the supposed wise men of Wall Street , who have no wisdom to offer
Consider what has happened so far : The U.S. economy is still grappling with the consequences of the worst financial crisis since the Great Depression ; trillions of dollars of potential income have been lost ; the lives of millions have been damaged , in some cases irreparably , by mass unemployment ; millions more have seen their savings wiped out ; hundreds of thousands , perhaps millions , will lose essential health care because of the combination of job losses and draconian cutbacks by cash-strapped state governments
And this disaster was entirely self-inflicted
This is n't like the stagflation of the 1970s , which had a lot to do with soaring oil prices , which were , in turn , the result of political instability in the Middle East
This time we 're in trouble entirely thanks to the dysfunctional nature of our own financial system
Everyone understands this everyone , it seems , except the financiers themselves
There were two moments in Wednesday 's hearing that stood out
One was when Jamie Dimon of JPMorgan Chase declared that a financial crisis is something that `` happens every five to seven years
We should n't be surprised .
In short , stuff happens , and that 's just part of life
But the truth is that the United States managed to avoid major financial crises for half a century after the Pecora hearings were held and Congress enacted major banking reforms
It was only after we forgot those lessons , and dismantled effective regulation , that our financial system went back to being dangerously unstable
As an aside , it was also startling to hear Mr. Dimon admit that his bank never even considered the possibility of a large decline in home prices , despite widespread warnings that we were in the midst of a monstrous housing bubble
Still , Mr. Dimon 's cluelessness paled beside that of Goldman Sachs 's Lloyd Blankfein , who compared the financial crisis to a hurricane nobody could have predicted
Phil Angelides , the commission 's chairman , was not amused : The financial crisis , he declared , was n't an act of God ; it resulted from `` acts of men and women .
Was Mr. Blankfein just inarticulate
He used the same metaphor in his prepared testimony in which he urged Congress not to push too hard for financial reform : `` We should resist a response ... that is solely designed around protecting us from the 100-year storm .
So this giant financial crisis was just a rare accident , a freak of nature , and we should n't overreact
But there was nothing accidental about the crisis
From the late 1970s on , the American financial system , freed by deregulation and a political climate in which greed was presumed to be good , spun ever further out of control
There were ever-greater rewards bonuses beyond the dreams of avarice for bankers who could generate big short-term profits
And the way to raise those profits was to pile up ever more debt , both by pushing loans on the public and by taking on ever-higher leverage within the financial industry
Sooner or later , this runaway system was bound to crash
And if we do n't make fundamental changes , it will happen all over again
Do the bankers really not understand what happened , or are they just talking their self-interest
No matter
As I said , the important thing looking forward is to stop listening to financiers about financial reform
Wall Street executives will tell you that the financial-reform bill the House passed last month would cripple the economy with overregulation -LRB- it 's actually quite mild -RRB-
They 'll insist that the tax on bank debt just proposed by the Obama administration is a crude concession to foolish populism
They 'll warn that action to tax or otherwise rein in financial-industry compensation is destructive and unjustified
But what do they know
The answer , as far as I can tell , is : not much
Last Sunday President-elect Barack Obama was asked whether he would seek an investigation of possible crimes by the Bush administration
`` I do n't believe that anybody is above the law , '' he responded , but `` we need to look forward as opposed to looking backwards .
I 'm sorry , but if we do n't have an inquest into what happened during the Bush years and nearly everyone has taken Mr. Obama 's remarks to mean that we wo n't this means that those who hold power are indeed above the law because they do n't face any consequences if they abuse their power
Let 's be clear what we 're talking about here
It 's not just torture and illegal wiretapping , whose perpetrators claim , however implausibly , that they were patriots acting to defend the nation 's security
The fact is that the Bush administration 's abuses extended from environmental policy to voting rights
And most of the abuses involved using the power of government to reward political friends and punish political enemies
At the Justice Department , for example , political appointees illegally reserved nonpolitical positions for `` right-thinking Americans '' their term , not mine and there 's strong evidence that officials used their positions both to undermine the protection of minority voting rights and to persecute Democratic politicians
The hiring process at Justice echoed the hiring process during the occupation of Iraq an occupation whose success was supposedly essential to national security in which applicants were judged by their politics , their personal loyalty to President Bush and , according to some reports , by their views on Roe v. Wade , rather than by their ability to do the job
Speaking of Iraq , let 's also not forget that country 's failed reconstruction : the Bush administration handed billions of dollars in no-bid contracts to politically connected companies , companies that then failed to deliver
And why should they have bothered to do their jobs
Any government official who tried to enforce accountability on , say , Halliburton quickly found his or her career derailed
There 's much , much more
By my count , at least six important government agencies experienced major scandals over the past eight years in most cases , scandals that were never properly investigated
And then there was the biggest scandal of all : Does anyone seriously doubt that the Bush administration deliberately misled the nation into invading Iraq
Why , then , should n't we have an official inquiry into abuses during the Bush years
One answer you hear is that pursuing the truth would be divisive , that it would exacerbate partisanship
But if partisanship is so terrible , should n't there be some penalty for the Bush administration 's politicization of every aspect of government
Alternatively , we 're told that we do n't have to dwell on past abuses , because we wo n't repeat them
But no important figure in the Bush administration , or among that administration 's political allies , has expressed remorse for breaking the law
What makes anyone think that they or their political heirs wo n't do it all over again , given the chance
In fact , we 've already seen this movie
During the Reagan years , the Iran-contra conspirators violated the Constitution in the name of national security
But the first President Bush pardoned the major malefactors , and when the White House finally changed hands the political and media establishment gave Bill Clinton the same advice it 's giving Mr. Obama : let sleeping scandals lie
Sure enough , the second Bush administration picked up right where the Iran-contra conspirators left off which is n't too surprising when you bear in mind that Mr. Bush actually hired some of those conspirators
Now , it 's true that a serious investigation of Bush-era abuses would make Washington an uncomfortable place , both for those who abused power and those who acted as their enablers or apologists
And these people have a lot of friends
But the price of protecting their comfort would be high : If we whitewash the abuses of the past eight years , we 'll guarantee that they will happen again
Meanwhile , about Mr. Obama : while it 's probably in his short-term political interests to forgive and forget , next week he 's going to swear to `` preserve , protect , and defend the Constitution of the United States .
That 's not a conditional oath to be honored only when it 's convenient
And to protect and defend the Constitution , a president must do more than obey the Constitution himself ; he must hold those who violate the Constitution accountable
So Mr. Obama should reconsider his apparent decision to let the previous administration get away with crime
Consequences aside , that 's not a decision he has the right to make
The War on Logic My wife and I were thinking of going out for an inexpensive dinner tonight
But John Boehner , the speaker of the House , says that no matter how cheap the meal may seem , it will cost thousands of dollars once you take our monthly mortgage payments into account
Wait a minute , you may say
How can our mortgage payments be a cost of going out to eat , when we 'll have to make the same payments even if we stay home
But Mr. Boehner is adamant : our mortgage is part of the cost of our meal , and to say otherwise is just a budget gimmick
O.K. , the speaker has n't actually weighed in on our plans for the evening
But he and his G.O.P. colleagues have lately been making exactly the nonsensical argument I 've just described - not about tonight 's dinner , but about health care reform
And the nonsense was n't a slip of the tongue ; it 's the official party position , laid out in charts and figures
We are , I believe , witnessing something new in American politics
Last year , looking at claims that we can cut taxes , avoid cuts to any popular program and still balance the budget , I observed that Republicans seemed to have lost interest in the war on terror and shifted focus to the war on arithmetic
But now the G.O.P. has moved on to an even bigger project : the war on logic
So , about that nonsense : this week the House is expected to pass H.R. 2 , the Repealing the Job-Killing Health Care Law Act - its actual name
But Republicans have a small problem : they claim to care about budget deficits , yet the Congressional Budget Office says that repealing last year 's health reform would increase the deficit
So what , other than dismissing the nonpartisan budget office 's verdict as `` their opinion '' - as Mr. Boehner has - can the G.O.P. do
The answer is contained in an analysis - or maybe that should be `` analysis '' - released by the speaker 's office , which purports to show that health care reform actually increases the deficit
That 's where the war on logic comes in
First of all , says the analysis , the true cost of reform includes the cost of the `` doc fix .
What 's that
Well , in 1997 Congress enacted a formula to determine Medicare payments to physicians
The formula was , however , flawed ; it would lead to payments so low that doctors would stop accepting Medicare patients
Instead of changing the formula , however , Congress has consistently enacted one-year fixes
And Republicans claim that the estimated cost of future fixes , $ 208 billion over the next 10 years , should be considered a cost of health care reform
But the same spending would still be necessary if we were to undo reform
So the G.O.P. argument here is exactly like claiming that my mortgage payments , which I 'll have to make no matter what we do tonight , are a cost of going out for dinner
There 's more like that : the G.O.P. also claims that $ 115 billion of other health care spending should be charged to health reform , even though the budget office has tried to explain that most of this spending would have taken place even without reform
To be sure , the Republican analysis does n't rely entirely on spurious attributions of cost - it also relies on using three-card monte tricks to make money disappear
Health reform , says the budget office , will increase Social Security revenues and reduce Medicare costs
But the G.O.P. analysis says that these sums do n't count , because some people have said that these savings would also extend the life of these programs ' trust funds , so counting these savings as deficit reduction would be `` double-counting , '' because - well , actually it does n't make any sense , but it sounds impressive
So , is the Republican leadership unable to see through childish logical fallacies
The key to understanding the G.O.P. analysis of health reform is that the party 's leaders are not , in fact , opposed to reform because they believe it will increase the deficit
Nor are they opposed because they seriously believe that it will be `` job-killing '' -LRB- which it wo n't be -RRB-
They 're against reform because it would cover the uninsured - and that 's something they just do n't want to do
And it 's not about the money
As I tried to explain in my last column , the modern G.O.P. has been taken over by an ideology in which the suffering of the unfortunate is n't a proper concern of government , and alleviating that suffering at taxpayer expense is immoral , never mind how little it costs
Given that their minds were made up from the beginning , top Republicans were n't interested in and did n't need any real policy analysis - in fact , they 're basically contemptuous of such analysis , something that shines through in their health care report
All they ever needed or wanted were some numbers and charts to wave at the press , fooling some people into believing that we 're having some kind of rational discussion
We are n't
The story has played itself out time and time again over the past 30 years
Global investors , disappointed with the returns they 're getting , search for alternatives
They think they 've found what they 're looking for in some country or other , and money rushes in
But eventually it becomes clear that the investment opportunity was n't all it seemed to be , and the money rushes out again , with nasty consequences for the former financial favorite
That 's the story of multiple financial crises in Latin America and Asia
And it 's also the story of the U.S. combined housing and credit bubble
These days , we 're playing the role usually assigned to third-world economies
For reasons I 'll explain later , it 's unlikely that America will experience a recession as severe as that in , say , Argentina
But the origins of our problem are pretty much the same
And understanding those origins also helps us understand where U.S. economic policy went wrong
The global origins of our current mess were actually laid out by none other than Ben Bernanke , in an influential speech he gave early in 2005 , before he was named chairman of the Federal Reserve
Mr. Bernanke asked a good question : `` Why is the United States , with the world 's largest economy , borrowing heavily on international capital markets rather than lending , as would seem more natural ?
His answer was that the main explanation lay not here in America , but abroad
In particular , third world economies , which had been investor favorites for much of the 1990s , were shaken by a series of financial crises beginning in 1997
As a result , they abruptly switched from being destinations for capital to sources of capital , as their governments began accumulating huge precautionary hoards of overseas assets
The result , said Mr. Bernanke , was a `` global saving glut '' : lots of money , all dressed up with nowhere to go
In the end , most of that money went to the United States
Because , said Mr. Bernanke , of the `` depth and sophistication of the country 's financial markets .
All of this was right , except for one thing : U.S. financial markets , it turns out , were characterized less by sophistication than by sophistry , which my dictionary defines as `` a deliberately invalid argument displaying ingenuity in reasoning in the hope of deceiving someone .
E.g. , `` Repackaging dubious loans into collateralized debt obligations creates a lot of perfectly safe , AAA assets that will never go bad .
In other words , the United States was not , in fact , uniquely well-suited to make use of the world 's surplus funds
It was , instead , a place where large sums could be and were invested very badly
Directly or indirectly , capital flowing into America from global investors ended up financing a housing-and-credit bubble that has now burst , with painful consequences
As I said , these consequences probably wo n't be as bad as the devastating recessions that racked third-world victims of the same syndrome
The saving grace of America 's situation is that our foreign debts are in our own currency
This means that we wo n't have the kind of financial death spiral Argentina experienced , in which a falling peso caused the country 's debts , which were in dollars , to balloon in value relative to domestic assets
But even without those currency effects , the next year or two could be quite unpleasant
What should have been done differently
Some critics say that the Fed helped inflate the housing bubble with low interest rates
But those rates were low for a good reason : although the last recession officially ended in November 2001 , it was another two years before the U.S. economy began delivering convincing job growth , and the Fed was rightly concerned about the possibility of Japanese-style prolonged economic stagnation
The real sin , both of the Fed and of the Bush administration , was the failure to exercise adult supervision over markets running wild
It was n't just Alan Greenspan 's unwillingness to admit that there was anything more than a bit of `` froth '' in housing markets , or his refusal to do anything about subprime abuses
The fact is that as America 's financial system has grown ever more complex , it has also outgrown the framework of banking regulations that used to protect us yet instead of an attempt to update that framework , all we got were paeans to the wonders of free markets
Right now , Mr. Bernanke is in crisis-management mode , trying to deal with the mess his predecessor left behind
I do n't have any problems with his testimony yesterday , although I suspect that it 's already too late to prevent a recession
But let 's hope that when the dust settles a bit , Mr. Bernanke takes the lead in talking about what needs to be done to fix a financial system gone very , very wrong
Lately many people have been second-guessing the Obama administration 's political strategy
The conventional wisdom seems to be that President Obama tried to do too much in particular , that he should have put health care on one side and focused on the economy
I disagree
The Obama administration 's troubles are the result not of excessive ambition , but of policy and political misjudgments
The stimulus was too small ; policy toward the banks was n't tough enough ; and Mr. Obama did n't do what Ronald Reagan , who also faced a poor economy early in his administration , did namely , shelter himself from criticism with a narrative that placed the blame on previous administrations
About the stimulus : it has surely helped
Without it , unemployment would be much higher than it is
But the administration 's program clearly was n't big enough to produce job gains in 2009
Why was the stimulus underpowered
A number of economists -LRB- myself included -RRB- called for a stimulus substantially bigger than the one the administration ended up proposing
According to The New Yorker 's Ryan Lizza , however , in December 2008 Mr. Obama 's top economic and political advisers concluded that a bigger stimulus was neither economically necessary nor politically feasible
Their political judgment may or may not have been correct ; their economic judgment obviously was n't
Whatever led to this misjudgment , however , it was n't failure to focus on the issue : in late 2008 and early 2009 the Obama team was focused on little else
The administration was n't distracted ; it was just wrong
The same can be said about policy toward the banks
Some economists defend the administration 's decision not to take a harder line on banks , arguing that the banks are earning their way back to financial health
But the light-touch approach to the financial industry further entrenched the power of the very institutions that caused the crisis , even as it failed to revive lending : bailed-out banks have been reducing , not increasing , their loan balances
And it has had disastrous political consequences : the administration has placed itself on the wrong side of popular rage over bailouts and bonuses
Finally , about that narrative : It 's instructive to compare Mr. Obama 's rhetorical stance on the economy with that of Ronald Reagan
It 's often forgotten now , but unemployment actually soared after Reagan 's 1981 tax cut
Reagan , however , had a ready answer for critics : everything going wrong was the result of the failed policies of the past
In effect , Reagan spent his first few years in office continuing to run against Jimmy Carter
Mr. Obama could have done the same with , I 'd argue , considerably more justice
He could have pointed out , repeatedly , that the continuing troubles of America 's economy are the result of a financial crisis that developed under the Bush administration , and was at least in part the result of the Bush administration 's refusal to regulate the banks
But he did n't
Maybe he still dreams of bridging the partisan divide ; maybe he fears the ire of pundits who consider blaming your predecessor for current problems uncouth if you 're a Democrat
-LRB- It 's O.K. if you 're a Republican .
Whatever the reason , Mr. Obama has allowed the public to forget , with remarkable speed , that the economy 's troubles did n't start on his watch
So where do complaints of an excessively broad agenda fit into all this
Could the administration have made a midcourse correction on economic policy if it had n't been fighting battles on health care
Probably not
One key argument of those pushing for a bigger stimulus plan was that there would be no second chance : if unemployment remained high , they warned , people would conclude that stimulus does n't work rather than that we needed a bigger dose
And so it has proved
It 's important to remember , also , how important health care reform is to the Democratic base
Some activists have been left disillusioned by the compromises made to get legislation through the Senate but they would have been even more disillusioned if Democrats had simply punted on the issue
And politics should be about more than winning elections
Even if health care reform loses Democrats ' votes -LRB- which is questionable -RRB- , it 's the right thing to do
So what comes next
At this point Mr. Obama probably ca n't do much about job creation
He can , however , push hard on financial reform , and seek to put himself back on the right side of public anger by portraying Republicans as the enemies of reform which they are
And meanwhile , Democrats have to do whatever it takes to enact a health care bill
Passing such a bill wo n't be their political salvation but not passing a bill would surely be their political doom
Old-fashioned voodoo economics the belief in tax-cut magic has been banished from civilized discourse
The supply-side cult has shrunk to the point that it contains only cranks , charlatans , and Republicans
But recent news reports suggest that many influential people , including Federal Reserve officials , bank regulators , and , possibly , members of the incoming Obama administration , have become devotees of a new kind of voodoo : the belief that by performing elaborate financial rituals we can keep dead banks walking
To explain the issue , let me describe the position of a hypothetical bank that I 'll call Gothamgroup , or Gotham for short
On paper , Gotham has $ 2 trillion in assets and $ 1.9 trillion in liabilities , so that it has a net worth of $ 100 billion
But a substantial fraction of its assets say , $ 400 billion worth are mortgage-backed securities and other toxic waste
If the bank tried to sell these assets , it would get no more than $ 200 billion
So Gotham is a zombie bank : it 's still operating , but the reality is that it has already gone bust
Its stock is n't totally worthless it still has a market capitalization of $ 20 billion but that value is entirely based on the hope that shareholders will be rescued by a government bailout
Why would the government bail Gotham out
Because it plays a central role in the financial system
When Lehman was allowed to fail , financial markets froze , and for a few weeks the world economy teetered on the edge of collapse
Since we do n't want a repeat performance , Gotham has to be kept functioning
But how can that be done
Well , the government could simply give Gotham a couple of hundred billion dollars , enough to make it solvent again
But this would , of course , be a huge gift to Gotham 's current shareholders and it would also encourage excessive risk-taking in the future
Still , the possibility of such a gift is what 's now supporting Gotham 's stock price
A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s : it seized the defunct banks , cleaning out the shareholders
Then it transferred their bad assets to a special institution , the Resolution Trust Corporation ; paid off enough of the banks ' debts to make them solvent ; and sold the fixed-up banks to new owners
The current buzz suggests , however , that policy makers are n't willing to take either of these approaches
Instead , they 're reportedly gravitating toward a compromise approach : moving toxic waste from private banks ' balance sheets to a publicly owned `` bad bank '' or `` aggregator bank '' that would resemble the Resolution Trust Corporation , but without seizing the banks first
Sheila Bair , the chairwoman of the Federal Deposit Insurance Corporation , recently tried to describe how this would work : `` The aggregator bank would buy the assets at fair value .
But what does `` fair value '' mean
In my example , Gothamgroup is insolvent because the alleged $ 400 billion of toxic waste on its books is actually worth only $ 200 billion
The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer
Now , maybe private buyers are n't willing to pay what toxic waste is really worth : `` We do n't have really any rational pricing right now for some of these asset categories , '' Ms. Bair says
But should the government be in the business of declaring that it knows better than the market what assets are worth
And is it really likely that paying `` fair value , '' whatever that means , would be enough to make Gotham solvent again
What I suspect is that policy makers possibly without realizing it are gearing up to attempt a bait-and-switch : a policy that looks like the cleanup of the savings and loans , but in practice amounts to making huge gifts to bank shareholders at taxpayer expense , disguised as `` fair value '' purchases of toxic assets
Why go through these contortions
The answer seems to be that Washington remains deathly afraid of the N-word nationalization
The truth is that Gothamgroup and its sister institutions are already wards of the state , utterly dependent on taxpayer support ; but nobody wants to recognize that fact and implement the obvious solution : an explicit , though temporary , government takeover
Hence the popularity of the new voodoo , which claims , as I said , that elaborate financial rituals can reanimate dead banks
Unfortunately , the price of this retreat into superstition may be high
I hope I 'm wrong , but I suspect that taxpayers are about to get another raw deal and that we 're about to get another financial rescue plan that fails to do the job
It 's the season when pundits traditionally make predictions about the year ahead
Mine concerns international economics : I predict that 2010 will be the year of China
And not in a good way
Actually , the biggest problems with China involve climate change
But today I want to focus on currency policy
China has become a major financial and trade power
But it does n't act like other big economies
Instead , it follows a mercantilist policy , keeping its trade surplus artificially high
And in today 's depressed world , that policy is , to put it bluntly , predatory
Here 's how it works : Unlike the dollar , the euro or the yen , whose values fluctuate freely , China 's currency is pegged by official policy at about 6.8 yuan to the dollar
At this exchange rate , Chinese manufacturing has a large cost advantage over its rivals , leading to huge trade surpluses
Under normal circumstances , the inflow of dollars from those surpluses would push up the value of China 's currency , unless it was offset by private investors heading the other way
And private investors are trying to get into China , not out of it
But China 's government restricts capital inflows , even as it buys up dollars and parks them abroad , adding to a $ 2 trillion-plus hoard of foreign exchange reserves
This policy is good for China 's export-oriented state-industrial complex , not so good for Chinese consumers
But what about the rest of us
In the past , China 's accumulation of foreign reserves , many of which were invested in American bonds , was arguably doing us a favor by keeping interest rates low although what we did with those low interest rates was mainly to inflate a housing bubble
But right now the world is awash in cheap money , looking for someplace to go
Short-term interest rates are close to zero ; long-term interest rates are higher , but only because investors expect the zero-rate policy to end some day
China 's bond purchases make little or no difference
Meanwhile , that trade surplus drains much-needed demand away from a depressed world economy
My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs
The Chinese refuse to acknowledge the problem
Recently Wen Jiabao , the prime minister , dismissed foreign complaints : `` On one hand , you are asking for the yuan to appreciate , and on the other hand , you are taking all kinds of protectionist measures .
Indeed : other countries are taking -LRB- modest -RRB- protectionist measures precisely because China refuses to let its currency rise
And more such measures are entirely appropriate
Or are they
I usually hear two reasons for not confronting China over its policies
Neither holds water
First , there 's the claim that we ca n't confront the Chinese because they would wreak havoc with the U.S. economy by dumping their hoard of dollars
This is all wrong , and not just because in so doing the Chinese would inflict large losses on themselves
The larger point is that the same forces that make Chinese mercantilism so damaging right now also mean that China has little or no financial leverage
Again , right now the world is awash in cheap money
So if China were to start selling dollars , there 's no reason to think it would significantly raise U.S. interest rates
It would probably weaken the dollar against other currencies but that would be good , not bad , for U.S. competitiveness and employment
So if the Chinese do dump dollars , we should send them a thank-you note
Second , there 's the claim that protectionism is always a bad thing , in any circumstances
If that 's what you believe , however , you learned Econ 101 from the wrong people because when unemployment is high and the government ca n't restore full employment , the usual rules do n't apply
Let me quote from a classic paper by the late Paul Samuelson , who more or less created modern economics : `` With employment less than full ... all the debunked mercantilistic arguments '' that is , claims that nations who subsidize their exports effectively steal jobs from other countries `` turn out to be valid .
He then went on to argue that persistently misaligned exchange rates create `` genuine problems for free-trade apologetics .
The best answer to these problems is getting exchange rates back to where they ought to be
But that 's exactly what China is refusing to let happen
The bottom line is that Chinese mercantilism is a growing problem , and the victims of that mercantilism have little to lose from a trade confrontation
So I 'd urge China 's government to reconsider its stubbornness
Otherwise , the very mild protectionism it 's currently complaining about will be the start of something much bigger
Historical narratives matter
That 's why conservatives are still writing books denouncing F.D.R. and the New Deal ; they understand that the way Americans perceive bygone eras , even eras from the seemingly distant past , affects politics today
And it 's also why the furor over Barack Obama 's praise for Ronald Reagan is not , as some think , overblown
The fact is that how we talk about the Reagan era still matters immensely for American politics
Bill Clinton knew that in 1991 , when he began his presidential campaign
`` The Reagan-Bush years , '' he declared , `` have exalted private gain over public obligation , special interests over the common good , wealth and fame over work and family
The 1980s ushered in a Gilded Age of greed and selfishness , of irresponsibility and excess , and of neglect .
Contrast that with Mr. Obama 's recent statement , in an interview with a Nevada newspaper , that Reagan offered a `` sense of dynamism and entrepreneurship that had been missing .
Maybe Mr. Obama was , as his supporters insist , simply praising Reagan 's political skills
-LRB- I think he was trying to curry favor with a conservative editorial board , which did in fact endorse him .
But where in his remarks was the clear declaration that Reaganomics failed
For it did fail
The Reagan economy was a one-hit wonder
Yes , there was a boom in the mid-1980s , as the economy recovered from a severe recession
But while the rich got much richer , there was little sustained economic improvement for most Americans
By the late 1980s , middle-class incomes were barely higher than they had been a decade before and the poverty rate had actually risen
When the inevitable recession arrived , people felt betrayed a sense of betrayal that Mr. Clinton was able to ride into the White House
Given that reality , what was Mr. Obama talking about
Some good things did eventually happen to the U.S. economy but not on Reagan 's watch
For example , I 'm not sure what `` dynamism '' means , but if it means productivity growth , there was n't any resurgence in the Reagan years
Eventually productivity did take off but even the Bush administration 's own Council of Economic Advisers dates the beginning of that takeoff to 1995
Similarly , if a sense of entrepreneurship means having confidence in the talents of American business leaders , that did n't happen in the 1980s , when all the business books seemed to have samurai warriors on their covers
Like productivity , American business prestige did n't stage a comeback until the mid-1990s , when the U.S. began to reassert its technological and economic leadership
I understand why conservatives want to rewrite history and pretend that these good things happened while a Republican was in office or claim , implausibly , that the 1981 Reagan tax cut somehow deserves credit for positive economic developments that did n't happen until 14 or more years had passed
-LRB- Does Richard Nixon get credit for `` Morning in America '' ?
But why would a self-proclaimed progressive say anything that lends credibility to this rewriting of history particularly right now , when Reaganomics has just failed all over again
Like Ronald Reagan , President Bush began his term in office with big tax cuts for the rich and promises that the benefits would trickle down to the middle class
Like Reagan , he also began his term with an economic slump , then claimed that the recovery from that slump proved the success of his policies
And like Reaganomics but more quickly Bushonomics has ended in grief
The public mood today is as grim as it was in 1992
Wages are lagging behind inflation
Employment growth in the Bush years has been pathetic compared with job creation in the Clinton era
Even if we do n't have a formal recession and the odds now are that we will the optimism of the 1990s has evaporated
This is , in short , a time when progressives ought to be driving home the idea that the right 's ideas do n't work , and never have
It 's not just a matter of what happens in the next election
Mr. Clinton won his elections , but as Mr. Obama correctly pointed out he did n't change America 's trajectory the way Reagan did
Well , I 'd say that the great failure of the Clinton administration more important even than its failure to achieve health care reform , though the two failures were closely related was the fact that it did n't change the narrative , a fact demonstrated by the way Republicans are still claiming to be the next Ronald Reagan
Now progressives have been granted a second chance to argue that Reaganism is fundamentally wrong : once again , the vast majority of Americans think that the country is on the wrong track
But they wo n't be able to make that argument if their political leaders , whatever they meant to convey , seem to be saying that Reagan had it right
China Goes to Nixon With Hu Jintao , China 's president , currently visiting the United States , stories about growing Chinese economic might are everywhere
And those stories are entirely true : although China is still a poor country , it 's growing fast , and given its sheer size it 's well on the way to matching America as an economic superpower
What 's also true , however , is that China has stumbled into a monetary muddle that 's getting worse with each passing month
Furthermore , the Chinese government 's response to the problem - with policy seemingly paralyzed by deference to special interests , lack of intellectual clarity and a resort to blame games - belies any notion that China 's leaders can be counted on to act decisively and effectively
In fact , the Chinese come off looking like , well , us
How bad will it get
Warnings from some analysts that China could trigger a global crisis seem overblown
But the fact that people are saying such things is an indication of how out of control the situation looks right now
The root cause of China 's muddle is its weak-currency policy , which is feeding an artificially large trade surplus
As I 've emphasized in the past , this policy hurts the rest of the world , increasing unemployment in many other countries , America included
But a policy can be bad for us without being good for China
In fact , Chinese currency policy is a lose-lose proposition , simultaneously depressing employment here and producing an overheated , inflation-prone economy in China itself
One way to think about what 's happening is that inflation is the market 's way of undoing currency manipulation
China has been using a weak currency to keep its wages and prices low in dollar terms ; market forces have responded by pushing those wages and prices up , eroding that artificial competitive advantage
Some estimates I 've heard suggest that at current rates of inflation , Chinese undervaluation could be gone in two or three years - not soon enough , but sooner than many expected
China 's leaders are , however , trying to prevent this outcome , not just to protect exporters ' interest , but because inflation is even more unpopular in China than it is elsewhere
One big reason is that China already in effect exploits its citizens through financial repression -LRB- other kinds , too , but that 's not relevant here -RRB-
Interest rates on bank deposits are limited to just 2.75 percent , which is below the official inflation rate - and it 's widely believed that China 's true inflation rate is substantially higher than its government admits
Rapidly rising prices , even if matched by wage increases , will make this exploitation much worse
It 's no wonder that the Chinese public is angry about inflation , and that China 's leaders want to stop it
But for whatever reason - the power of export interests , refusal to do anything that looks like giving in to U.S. demands or sheer inability to think clearly - they 're not willing to deal with the root cause and let their currency rise
Instead , they are trying to control inflation by raising interest rates and restricting credit
This is destructive from a global point of view : with much of the world economy still depressed , the last thing we need is major players pursuing tight-money policies
More to the point from China 's perspective , however , is that it 's not working
Credit limits are proving hard to enforce and are being further undermined by inflows of hot money from abroad
With efforts to cool the economy falling short , China has been trying to limit inflation with price controls - a policy that rarely works
In particular , it 's a policy that failed dismally the last time it was tried here , during the Nixon administration
-LRB- And , yes , this means that right now China is going to Nixon .
So what 's left
Well , China has turned to the blame game , accusing the Federal Reserve -LRB- wrongly -RRB- of creating the problem by printing too much money
But while blaming the Fed may make Chinese leaders feel better , it wo n't change U.S. monetary policy , nor will it do anything to tame China 's inflation monster
Could all of this really turn into a full-fledged crisis
If I did n't know my economic history , I 'd find the idea implausible
After all , the solution to China 's monetary muddle is both simple and obvious : just let the currency rise , already
But I do know my economic history , which means that I know how often governments refuse , sometimes for many years , to do the obviously right thing - and especially when currency values are concerned
Usually they try to keep their currencies artificially strong rather than artificially weak ; but it can be a big mess either way
So our newest economic superpower may indeed be on its way to some kind of economic crisis , with collateral damage to the world as a whole
Did we need this
A message to House Democrats : This is your moment of truth
You can do the right thing and pass the Senate health care bill
Or you can look for an easy way out , make excuses and fail the test of history
Tuesday 's Republican victory in the Massachusetts special election means that Democrats ca n't send a modified health care bill back to the Senate
That 's a shame because the bill that would have emerged from House-Senate negotiations would have been better than the bill the Senate has already passed
But the Senate bill is much , much better than nothing
And all that has to happen to make it law is for the House to pass the same bill , and send it to President Obama 's desk
Right now , Nancy Pelosi , the speaker of the House , says that she does n't have the votes to pass the Senate bill
But there is no good alternative
Some are urging Democrats to scale back their proposals in the hope of gaining Republican support
But anyone who thinks that would work must have spent the past year living on another planet
The fact is that the Senate bill is a centrist document , which moderate Republicans should find entirely acceptable
In fact , it 's very similar to the plan Mitt Romney introduced in Massachusetts just a few years ago
Yet it has faced lock-step opposition from the G.O.P. , which is determined to prevent Democrats from achieving any successes
Why would this change now that Republicans think they 're on a roll
Alternatively , some call for breaking the health care plan into pieces so that the Senate can vote the popular pieces into law
But anyone who thinks that would work has n't paid attention to the actual policy issues
Think of health care reform as being like a three-legged stool
You would , rightly , ridicule anyone who proposed saving money by leaving off one or two of the legs
Well , those who propose doing only the popular pieces of health care reform deserve the same kind of ridicule
Reform wo n't work unless all the essential pieces are in place
Suppose , for example , that Congress took the advice of those who want to ban insurance discrimination on the basis of medical history , and stopped there
What would happen next
The answer , as any health care economist will tell you , is that if Congress did n't simultaneously require that healthy people buy insurance , there would be a `` death spiral '' : healthier Americans would choose not to buy insurance , leading to high premiums for those who remain , driving out more people , and so on
And if Congress tried to avoid the death spiral by requiring that healthy Americans buy insurance , it would have to offer financial aid to lower-income families to make that insurance affordable aid at least as generous as that in the Senate bill
There just is n't any way to do reform on a smaller scale
So reaching out to Republicans wo n't work , and neither will trying to pass only the crowd-pleasing pieces of reform
What about the suggestion that Democrats use reconciliation the Senate procedure for finalizing budget legislation , which bypasses the filibuster to enact health reform
That 's a real option , which may become necessary -LRB- and could be used to improve the Senate bill after the fact -RRB-
But reconciliation , which is basically limited to matters of taxing and spending , probably ca n't be used to enact many important aspects of reform
In fact , it 's not even clear if it could be used to ban discrimination based on medical history
Finally , some Democrats want to just give up on the whole thing
That would be an act of utter political folly
It would n't protect Democrats from charges that they voted for `` socialist '' health care remember , both houses of Congress have already passed reform
All it would do is solidify the public perception of Democrats as hapless and ineffectual
And anyway , politics is supposed to be about achieving something more than your own re-election
America desperately needs health care reform ; it would be a betrayal of trust if Democrats fold simply because they hope -LRB- wrongly -RRB- that this would slightly reduce their losses in the midterm elections
Now , part of Democrats ' problem since Tuesday 's special election has been that they have been waiting in vain for leadership from the White House , where Mr. Obama has conspicuously failed to rise to the occasion
But members of Congress , who were sent to Washington to serve the public , do n't have the right to hide behind the president 's passivity
Bear in mind that the horrors of health insurance outrageous premiums , coverage denied to those who need it most and dropped when you actually get sick will get only worse if reform fails , and insurance companies know that they 're off the hook
And voters will blame politicians who , when they had a chance to do something , made excuses instead
Ladies and gentlemen , the nation is waiting
Stop whining , and do what needs to be done
Like anyone who pays attention to business and financial news , I am in a state of high economic anxiety
Like everyone of good will , I hoped that President Obama 's Inaugural Address would offer some reassurance , that it would suggest that the new administration has this thing covered
But it was not to be
I ended Tuesday less confident about the direction of economic policy than I was in the morning
Just to be clear , there was n't anything glaringly wrong with the address although for those still hoping that Mr. Obama will lead the way to universal health care , it was disappointing that he spoke only of health care 's excessive cost , never once mentioning the plight of the uninsured and underinsured
Also , one wishes that the speechwriters had come up with something more inspiring than a call for an `` era of responsibility '' which , not to put too fine a point on it , was the same thing former President George W. Bush called for eight years ago
But my real problem with the speech , on matters economic , was its conventionality
In response to an unprecedented economic crisis or , more accurately , a crisis whose only real precedent is the Great Depression Mr. Obama did what people in Washington do when they want to sound serious : he spoke , more or less in the abstract , of the need to make hard choices and stand up to special interests
That 's not enough
In fact , it 's not even right
Thus , in his speech Mr. Obama attributed the economic crisis in part to `` our collective failure to make hard choices and prepare the nation for a new age '' but I have no idea what he meant
This is , first and foremost , a crisis brought on by a runaway financial industry
And if we failed to rein in that industry , it was n't because Americans `` collectively '' refused to make hard choices ; the American public had no idea what was going on , and the people who did know what was going on mostly thought deregulation was a great idea
Or consider this statement from Mr. Obama : `` Our workers are no less productive than when this crisis began
Our minds are no less inventive , our goods and services no less needed than they were last week or last month or last year
Our capacity remains undiminished
But our time of standing pat , of protecting narrow interests and putting off unpleasant decisions that time has surely passed .
The first part of this passage was almost surely intended as a paraphrase of words that John Maynard Keynes wrote as the world was plunging into the Great Depression and it was a great relief , after decades of knee-jerk denunciations of government , to hear a new president giving a shout-out to Keynes
`` The resources of nature and men 's devices , '' Keynes wrote , `` are just as fertile and productive as they were
The rate of our progress towards solving the material problems of life is not less rapid
We are as capable as before of affording for everyone a high standard of life
... But today we have involved ourselves in a colossal muddle , having blundered in the control of a delicate machine , the working of which we do not understand .
But something was lost in translation
Mr. Obama and Keynes both assert that we 're failing to make use of our economic capacity
But Keynes 's insight that we 're in a `` muddle '' that needs to be fixed somehow was replaced with standard we 're - all-at-fault , let 's - get-tough-on-ourselves boilerplate
Remember , Herbert Hoover did n't have a problem making unpleasant decisions : he had the courage and toughness to slash spending and raise taxes in the face of the Great Depression
Unfortunately , that just made things worse
Still , a speech is just a speech
The members of Mr. Obama 's economic team certainly understand the extraordinary nature of the mess we 're in
So the tone of Tuesday 's address may signify nothing about the Obama administration 's future policy
On the other hand , Mr. Obama is , as his predecessor put it , the decider
And he 's going to have to make some big decisions very soon
In particular , he 's going to have to decide how bold to be in his moves to sustain the financial system , where the outlook has deteriorated so drastically that a surprising number of economists , not all of them especially liberal , now argue that resolving the crisis will require the temporary nationalization of some major banks
So is Mr. Obama ready for that
Or were the platitudes in his Inaugural Address a sign that he 'll wait for the conventional wisdom to catch up with events
If so , his administration will find itself dangerously behind the curve
And that 's not a place that we want the new team to be
The economic crisis grows worse , and harder to resolve , with each passing week
If we do n't get drastic action soon , we may find ourselves stuck in the muddle for a very long time
The Competition Myth Meet the new buzzword , same as the old buzzword
In advance of the State of the Union , President Obama has telegraphed his main theme : competitiveness
The President 's Economic Recovery Advisory Board has been renamed the President 's Council on Jobs and Competitiveness
And in his Saturday radio address , the president declared that `` We can out-compete any other nation on Earth .
This may be smart politics
Arguably , Mr. Obama has enlisted an old clich on behalf of a good cause , as a way to sell a much-needed increase in public investment to a public thoroughly indoctrinated in the view that government spending is a bad thing
But let 's not kid ourselves : talking about `` competitiveness '' as a goal is fundamentally misleading
At best , it 's a misdiagnosis of our problems
At worst , it could lead to policies based on the false idea that what 's good for corporations is good for America
About that misdiagnosis : What sense does it make to view our current woes as stemming from lack of competitiveness
It 's true that we 'd have more jobs if we exported more and imported less
But the same is true of Europe and Japan , which also have depressed economies
And we ca n't all export more while importing less , unless we can find another planet to sell to
Yes , we could demand that China shrink its trade surplus - but if confronting China is what Mr. Obama is proposing , he should say that plainly
Furthermore , while America is running a trade deficit , this deficit is smaller than it was before the Great Recession began
It would help if we could make it smaller still
But ultimately , we 're in a mess because we had a financial crisis , not because American companies have lost their ability to compete with foreign rivals
But is n't it at least somewhat useful to think of our nation as if it were America Inc. , competing in the global marketplace
Consider : A corporate leader who increases profits by slashing his work force is thought to be successful
Well , that 's more or less what has happened in America recently : employment is way down , but profits are hitting new records
Who , exactly , considers this economic success
Still , you might say that talk of competitiveness helps Mr. Obama quiet claims that he 's anti-business
That 's fine , as long as he realizes that the interests of nominally `` American '' corporations and the interests of the nation , which were never the same , are now less aligned than ever before
Take the case of General Electric , whose chief executive , Jeffrey Immelt , has just been appointed to head that renamed advisory board
I have nothing against either G.E. or Mr. Immelt
But with fewer than half its workers based in the United States and less than half its revenues coming from U.S. operations , G.E. 's fortunes have very little to do with U.S. prosperity
By the way , some have praised Mr. Immelt 's appointment on the grounds that at least he represents a company that actually makes things , rather than being yet another financial wheeler-dealer
Sorry to burst this bubble , but these days G.E. derives more revenue from its financial operations than it does from manufacturing - indeed , GE Capital , which received a government guarantee for its debt , was a major beneficiary of the Wall Street bailout
So what does the administration 's embrace of the rhetoric of competitiveness mean for economic policy
The favorable interpretation , as I said , is that it 's just packaging for an economic strategy centered on public investment , investment that 's actually about creating jobs now while promoting longer-term growth
The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they 've been too tough on business , and that what America needs now is corporate tax cuts and across-the-board deregulation
My guess is that we 're mainly talking about packaging here
And if the president does propose a serious increase in spending on infrastructure and education , I 'll be pleased
But even if he proposes good policies , the fact that Mr. Obama feels the need to wrap these policies in bad metaphors is a sad commentary on the state of our discourse
The financial crisis of 2008 was a teachable moment , an object lesson in what can go wrong if you trust a market economy to regulate itself
Nor should we forget that highly regulated economies , like Germany , did a much better job than we did at sustaining employment after the crisis hit
For whatever reason , however , the teachable moment came and went with nothing learned
Mr. Obama himself may do all right : his approval rating is up , the economy is showing signs of life , and his chances of re-election look pretty good
But the ideology that brought economic disaster in 2008 is back on top - and seems likely to stay there until it brings disaster again
Correction : January 25 , 2011 In Monday 's column , Paul Krugman said that General Electric derives more than half its revenues from financial services
While financial services did account for roughly half of G.E. 's profits before the financial crisis , that segment has declined in importance since then
House Democrats and the White House have reached an agreement on an economic stimulus plan
Unfortunately , the plan which essentially consists of nothing but tax cuts and gives most of those tax cuts to people in fairly good financial shape looks like a lemon
Specifically , the Democrats appear to have buckled in the face of the Bush administration 's ideological rigidity , dropping demands for provisions that would have helped those most in need
And those happen to be the same provisions that might actually have made the stimulus plan effective
Those are harsh words , so let me explain what 's going on
Aside from business tax breaks which are an unhappy story for another column the plan gives each worker making less than $ 75,000 a $ 300 check , plus additional amounts to people who make enough to pay substantial sums in income tax
This ensures that the bulk of the money would go to people who are doing O.K. financially which misses the whole point
The goal of a stimulus plan should be to support overall spending , so as to avert or limit the depth of a recession
If the money the government lays out does n't get spent if it just gets added to people 's bank accounts or used to pay off debts the plan will have failed
And sending checks to people in good financial shape does little or nothing to increase overall spending
People who have good incomes , good credit and secure employment make spending decisions based on their long-term earning power rather than the size of their latest paycheck
Give such people a few hundred extra dollars , and they 'll just put it in the bank
In fact , that appears to be what mainly happened to the tax rebates affluent Americans received during the last recession in 2001
On the other hand , money delivered to people who are n't in good financial shape who are short on cash and living check to check does double duty : it alleviates hardship and also pumps up consumer spending
That 's why many of the stimulus proposals we were hearing just a few days ago focused in the first place on expanding programs that specifically help people who have fallen on hard times , especially unemployment insurance and food stamps
And these were the stimulus ideas that received the highest grades in a recent analysis by the nonpartisan Congressional Budget Office
There was also some talk among Democrats about providing temporary aid to state and local governments , whose finances are being pummeled by the weakening economy
Like help for the unemployed , this would have done double duty , averting hardship and heading off spending cuts that could worsen the downturn
But the Bush administration has apparently succeeded in killing all of these ideas , in favor of a plan that mainly gives money to those least likely to spend it
Why would the administration want to do this
It has nothing to do with economic efficacy : no economic theory or evidence I know of says that upper-middle-class families are more likely to spend rebate checks than the poor and unemployed
Instead , what seems to be happening is that the Bush administration refuses to sign on to anything that it ca n't call a `` tax cut .
Behind that refusal , in turn , lies the administration 's commitment to slashing tax rates on the affluent while blocking aid for families in trouble a commitment that requires maintaining the pretense that government spending is always bad
And the result is a plan that not only fails to deliver help where it 's most needed , but is likely to fail as an economic measure
The words of Franklin Delano Roosevelt come to mind : `` We have always known that heedless self-interest was bad morals ; we know now that it is bad economics .
And the worst of it is that the Democrats , who should have been in a strong position does this administration have any credibility left on economic policy
appear to have caved in almost completely
Yes , they extracted some concessions , increasing rebates for people with low income while reducing giveaways to the affluent
But basically they allowed themselves to be bullied into doing things the Bush administration 's way
And that could turn out to be a very bad thing
We do n't know for sure how deep the coming slump will be , or even whether it will meet the technical definition of a recession
But there 's a real chance not just that it will be a major downturn , but that the usual response to recession interest rate cuts by the Federal Reserve wo n't be sufficient to turn the economy around
-LRB- For more on this , see my blog at krugman.blogs.nytimes.com .
And if that happens , we 'll deeply regret the fact that the Bush administration insisted on , and Democrats accepted , a so-called stimulus plan that just wo n't do the job
A Republican won in Massachusetts and suddenly it 's not clear whether the Senate will confirm Ben Bernanke for a second term as Federal Reserve chairman
That 's not as strange as it sounds : Washington has suddenly noticed public rage over economic policies that bailed out big banks but failed to create jobs
And Mr. Bernanke has become a symbol of those policies
Where do I stand
I deeply admire Mr. Bernanke , both as an economist and for his response to the financial crisis
-LRB- Full disclosure : before going to the Fed he headed Princeton 's economics department , and hired me for my current position there .
Yet his critics have a strong case
In the end , I favor his reappointment , but only because rejecting him could make the Fed 's policies worse , not better
How did we get to the point where that 's the most I can say
Mr. Bernanke is a superb research economist
And from the spring of 2008 to the spring of 2009 his academic expertise and his policy role meshed perfectly , as he used aggressive , unorthodox tactics to head off a second Great Depression
Unfortunately , that 's not the whole story
Before the crisis struck , Mr. Bernanke was very much a conventional , mainstream Fed official , sharing fully in the institution 's complacency
Worse , after the acute phase of the crisis ended he slipped right back into that mainstream
Once again , the Fed is dangerously complacent and once again , Mr. Bernanke seems to share that complacency
Consider two issues : financial reform and unemployment
Back in July , Mr. Bernanke spoke out against a key reform proposal : the creation of a new consumer financial protection agency
He urged Congress to maintain the current situation , in which protection of consumers from unfair financial practices is the Fed 's responsibility
But here 's the thing : During the run-up to the crisis , as financial abuses proliferated , the Fed did nothing
In particular , it ignored warnings about subprime lending
So it was striking that in his testimony Mr. Bernanke did n't acknowledge that failure , did n't explain why it happened , and gave no reason to believe that the Fed would behave differently in the future
His message boiled down to `` We know what we 're doing trust us .
As I said , the Fed has returned to a dangerous complacency
And then there 's unemployment
The economy may not have collapsed , but it 's in terrible shape , with job-seekers outnumbering job openings six to one
Nor does Mr. Bernanke expect any quick improvement : last month , while predicting that unemployment will fall , he conceded that the rate of decline will be `` slower than we would like .
So what does he propose doing to create jobs
Mr. Bernanke has offered no hint that he feels the need to adopt policies that might bring unemployment down faster
Instead , he has responded to suggestions for further Fed action with boilerplate about `` the anchoring of inflation expectations .
It 's harsh but true to say that he 's acting as if it 's Mission Accomplished now that the big banks have been rescued
What happened here
My sense is that Mr. Bernanke , like so many people who work closely with the financial sector , has ended up seeing the world through bankers ' eyes
The same can be said about Timothy Geithner , the Treasury secretary , and Larry Summers , the Obama administration 's top economist
But they 're not up before the Senate , while Mr. Bernanke is
Given that , why not reject Mr. Bernanke
There are other people with the intellectual heft and policy savvy to take on his role : among the possible choices would be my Princeton colleague Alan Blinder , a former Fed vice chairman , and Janet Yellen , the president of the San Francisco Fed
But and here comes my defense of a Bernanke reappointment any good alternative for the position would face a bruising fight in the Senate
And choosing a bad alternative would have truly dire consequences for the economy
Furthermore , policy decisions at the Fed are made by committee vote
And while Mr. Bernanke seems insufficiently concerned about unemployment and too concerned about inflation , many of his colleagues are worse
Replacing him with someone less established , with less ability to sway the internal discussion , could end up strengthening the hands of the inflation hawks and doing even more damage to job creation
That 's not a ringing endorsement , but it 's the best I can do
If Mr. Bernanke is reappointed , he and his colleagues need to realize that what they consider a policy success is actually a policy failure
We have avoided a second Great Depression , but we are facing mass unemployment unemployment that will blight the lives of millions of Americans for years to come
And it 's the Fed 's responsibility to do all it can to end that blight
As the debate over President Obama 's economic stimulus plan gets under way , one thing is certain : many of the plan 's opponents are n't arguing in good faith
Conservatives really , really do n't want to see a second New Deal , and they certainly do n't want to see government activism vindicated
So they are reaching for any stick they can find with which to beat proposals for increased government spending
Some of these arguments are obvious cheap shots
John Boehner , the House minority leader , has already made headlines with one such shot : looking at an $ 825 billion plan to rebuild infrastructure , sustain essential services and more , he derided a minor provision that would expand Medicaid family-planning services and called it a plan to `` spend hundreds of millions of dollars on contraceptives .
But the obvious cheap shots do n't pose as much danger to the Obama administration 's efforts to get a plan through as arguments and assertions that are equally fraudulent but can seem superficially plausible to those who do n't know their way around economic concepts and numbers
So as a public service , let me try to debunk some of the major antistimulus arguments that have already surfaced
Any time you hear someone reciting one of these arguments , write him or her off as a dishonest flack
First , there 's the bogus talking point that the Obama plan will cost $ 275,000 per job created
Why is it bogus
Because it involves taking the cost of a plan that will extend over several years , creating millions of jobs each year , and dividing it by the jobs created in just one of those years
It 's as if an opponent of the school lunch program were to take an estimate of the cost of that program over the next five years , then divide it by the number of lunches provided in just one of those years , and assert that the program was hugely wasteful , because it cost $ 13 per lunch
-LRB- The actual cost of a free school lunch , by the way , is $ 2.57 .
The true cost per job of the Obama plan will probably be closer to $ 100,000 than $ 275,000 and the net cost will be as little as $ 60,000 once you take into account the fact that a stronger economy means higher tax receipts
Next , write off anyone who asserts that it 's always better to cut taxes than to increase government spending because taxpayers , not bureaucrats , are the best judges of how to spend their money
Here 's how to think about this argument : it implies that we should shut down the air traffic control system
After all , that system is paid for with fees on air tickets and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats
If that would mean lots of midair collisions , hey , stuff happens
The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending
Meanwhile , it 's clear that when it comes to economic stimulus , public spending provides much more bang for the buck than tax cuts and therefore costs less per job created -LRB- see the previous fraudulent argument -RRB- because a large fraction of any tax cut will simply be saved
This suggests that public spending rather than tax cuts should be the core of any stimulus plan
But rather than accept that implication , conservatives take refuge in a nonsensical argument against public spending in general
Finally , ignore anyone who tries to make something of the fact that the new administration 's chief economic adviser has in the past favored monetary policy over fiscal policy as a response to recessions
It 's true that the normal response to recessions is interest-rate cuts from the Fed , not government spending
And that might be the best option right now , if it were available
But it is n't , because we 're in a situation not seen since the 1930s : the interest rates the Fed controls are already effectively at zero
That 's why we 're talking about large-scale fiscal stimulus : it 's what 's left in the policy arsenal now that the Fed has shot its bolt
Anyone who cites old arguments against fiscal stimulus without mentioning that either does n't know much about the subject and therefore has no business weighing in on the debate or is being deliberately obtuse
These are only some of the fundamentally fraudulent antistimulus arguments out there
Basically , conservatives are throwing any objection they can think of against the Obama plan , hoping that something will stick
But here 's the thing : Most Americans are n't listening
The most encouraging thing I 've heard lately is Mr. Obama 's reported response to Republican objections to a spending-oriented economic plan : `` I won .
Indeed he did and he should disregard the huffing and puffing of those who lost
It 's starting to feel a bit like 1992 again
A Bush is in the White House , the economy is a mess , and there 's a candidate who , in the view of a number of observers , is running on a message of hope , of moving past partisan differences , that resembles Bill Clinton 's campaign 16 years ago
Now , I 'm not sure that 's a fair characterization of the 1992 Clinton campaign , which had a strong streak of populism , beginning with a speech in which Mr. Clinton described the 1980s as a `` gilded age of greed .
Still , to the extent that Barack Obama 2008 does sound like Bill Clinton 1992 , here 's my question : Has everyone forgotten what happened after the 1992 election
Let 's review the sad tale , starting with the politics
Whatever hopes people might have had that Mr. Clinton would usher in a new era of national unity were quickly dashed
Within just a few months the country was wracked by the bitter partisanship Mr. Obama has decried
This bitter partisanship was n't the result of anything the Clintons did
Instead , from Day 1 they faced an all-out assault from conservatives determined to use any means at hand to discredit a Democratic president
For those who are reaching for their smelling salts because Democratic candidates are saying slightly critical things about each other , it 's worth revisiting those years , simply to get a sense of what dirty politics really looks like
No accusation was considered too outlandish : a group supported by Jerry Falwell put out a film suggesting that the Clintons had arranged for the murder of an associate , and The Wall Street Journal 's editorial page repeatedly hinted that Bill Clinton might have been in cahoots with a drug smuggler
So what good did Mr. Clinton 's message of inclusiveness do him
Meanwhile , though Mr. Clinton may not have run as postpartisan a campaign as legend has it , he did avoid some conflict by being strategically vague about policy
In particular , he promised health care reform , but left the business of producing an actual plan until after the election
This turned out to be a disaster
Much has been written about the process by which the Clinton health care plan was put together : it was too secretive , too top-down , too politically tone-deaf
Above all , however , it was too slow
Mr. Clinton did n't deliver legislation to Congress until Nov. 20 , 1993 by which time the momentum from his electoral victory had evaporated , and opponents had had plenty of time to organize against him
The failure of health care reform , in turn , doomed the Clinton presidency to second-rank status
The government was well run -LRB- something we 've learned to appreciate now that we 've seen what a badly run government looks like -RRB- , but as Mr. Obama correctly says there was no change in the country 's fundamental trajectory
So what are the lessons for today 's Democrats
First , those who do n't want to nominate Hillary Clinton because they do n't want to return to the nastiness of the 1990s a sizable group , at least in the punditocracy are deluding themselves
Any Democrat who makes it to the White House can expect the same treatment : an unending procession of wild charges and fake scandals , dutifully given credence by major media organizations that somehow ca n't bring themselves to declare the accusations unequivocally false -LRB- at least not on Page 1 -RRB-
The point is that while there are valid reasons one might support Mr. Obama over Mrs. Clinton , the desire to avoid unpleasantness is n't one of them
Second , the policy proposals candidates run on matter
I have colleagues who tell me that Mr. Obama 's rejection of health insurance mandates which are an essential element of any workable plan for universal coverage does n't really matter , because by the time health care reform gets through Congress it will be very different from the president 's initial proposal anyway
But this misses the lesson of the Clinton failure : if the next president does n't arrive with a plan that is broadly workable in outline , by the time the thing gets fixed the window of opportunity may well have passed
My sense is that the fight for the Democratic nomination has gotten terribly off track
The blame is widely shared
Yes , Bill Clinton has been somewhat boorish -LRB- though I ca n't make sense of the claims that he 's somehow breaking unwritten rules , which seem to have been newly created for the occasion -RRB-
But many Obama supporters also seem far too ready to demonize their opponents
What the Democrats should do is get back to talking about issues a focus on issues has been the great contribution of John Edwards to this campaign and about who is best prepared to push their agenda forward
Otherwise , even if a Democrat wins the general election , it will be 1992 all over again
And that would be a bad thing
Their Own Private Europe President Obama 's State of the Union address was a ho-hum affair
But the official Republican response , from Representative Paul Ryan , was really interesting
And I do n't mean that in a good way
Mr. Ryan made highly dubious assertions about employment , health care and more
But what caught my eye , when I read the transcript , was what he said about other countries : `` Just take a look at what 's happening to Greece , Ireland , the United Kingdom and other nations in Europe
They did n't act soon enough ; and now their governments have been forced to impose painful austerity measures : large benefit cuts to seniors and huge tax increases on everybody .
It 's a good story : Europeans dithered on deficits , and that led to crisis
Unfortunately , while that 's more or less true for Greece , it is n't at all what happened either in Ireland or in Britain , whose experience actually refutes the current Republican narrative
But then , American conservatives have long had their own private Europe of the imagination - a place of economic stagnation and terrible health care , a collapsing society groaning under the weight of Big Government
The fact that Europe is n't actually like that - did you know that adults in their prime working years are more likely to be employed in Europe than they are in the United States
- has n't deterred them
So we should n't be surprised by similar tall tales about European debt problems
Let 's talk about what really happened in Ireland and Britain
On the eve of the financial crisis , conservatives had nothing but praise for Ireland , a low-tax , low-spending country by European standards
The Heritage Foundation 's Index of Economic Freedom ranked it above every other Western nation
In 2006 , George Osborne , now Britain 's chancellor of the Exchequer , declared Ireland `` a shining example of the art of the possible in long-term economic policy making .
And the truth was that in 2006-2007 Ireland was running a budget surplus , and had one of the lowest debt levels in the advanced world
So what went wrong
The answer is : out-of-control banks ; Irish banks ran wild during the good years , creating a huge property bubble
When the bubble burst , revenue collapsed , causing the deficit to surge , while public debt exploded because the government ended up taking over bank debts
And harsh spending cuts , while they have led to huge job losses , have failed to restore confidence
The lesson of the Irish debacle , then , is very nearly the opposite of what Mr. Ryan would have us believe
It does n't say `` cut spending now , or bad things will happen '' ; it says that balanced budgets wo n't protect you from crisis if you do n't effectively regulate your banks - a point made in the newly released report of the Financial Crisis Inquiry Commission , which concludes that `` 30 years of deregulation and reliance on self-regulation '' helped create our own catastrophe
Have I mentioned that Republicans are doing everything they can to undermine financial reform
What about Britain
Well , contrary to what Mr. Ryan seemed to imply , Britain has not , in fact , suffered a debt crisis
True , David Cameron , who became prime minister last May , has made a sharp turn toward fiscal austerity
But that was a choice , not a response to market pressure
And underlying that choice was the new British government 's adherence to the same theory offered by Republicans to justify their demand for immediate spending cuts here - the claim that slashing government spending in the face of a depressed economy will actually help growth rather than hurt it
So how 's that theory looking
Not good
The British economy , which seemed to be recovering earlier in 2010 , turned down again in the fourth quarter
Yes , weather was a factor , and , no , you should n't read too much into one quarter 's numbers
But there 's certainly no sign of the surging private-sector confidence that was supposed to offset the direct effects of eliminating half-a-million government jobs
And , as a result , there 's no comfort in the British experience for Republican claims that the United States needs spending cuts in the face of mass unemployment
Which brings me back to Paul Ryan and his response to President Obama
Again , American conservatives have long used the myth of a failing Europe to argue against progressive policies in America
More recently , they have tried to appropriate Europe 's debt problems on behalf of their own agenda , never mind the fact that events in Europe actually point the other way
But Mr. Ryan is widely portrayed as an intellectual leader within the G.O.P. , with special expertise on matters of debt and deficits
So the revelation that he literally does n't know the first thing about the debt crises currently in progress is , as I said , interesting - and not in a good way
Last week , the Center for American Progress , a think tank with close ties to the Obama administration , published an acerbic essay about the difference between true deficit hawks and showy `` deficit peacocks .
You can identify deficit peacocks , readers were told , by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending
One week later , in the State of the Union address , President Obama proposed a temporary freeze in nondefense discretionary spending
Wait , it gets worse
To justify the freeze , Mr. Obama used language that was almost identical to widely ridiculed remarks early last year by John Boehner , the House minority leader
Boehner then : `` American families are tightening their belt , but they do n't see government tightening its belt .
Obama now : `` Families across the country are tightening their belts and making tough decisions
The federal government should do the same .
What 's going on here
The answer , presumably , is that Mr. Obama 's advisers believed he could score some political points by doing the deficit-peacock strut
I think they were wrong , that he did himself more harm than good
Either way , however , the fact that anyone thought such a dumb policy idea was politically smart is bad news because it 's an indication of the extent to which we 're failing to come to grips with our economic and fiscal problems
The nature of America 's troubles is easy to state
We 're in the aftermath of a severe financial crisis , which has led to mass job destruction
The only thing that 's keeping us from sliding into a second Great Depression is deficit spending
And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment , and the government should be doing everything it can to bring unemployment down
In the long run , however , even the U.S. government has to pay its way
And the long-run budget outlook was dire even before the recent surge in the deficit , mainly because of inexorably rising health care costs
Looking ahead , we 're going to have to find a way to run smaller , not larger , deficits
How can this apparent conflict between short-run needs and long-run responsibilities be resolved
Intellectually , it 's not hard at all
We should combine actions that create jobs now with other actions that will reduce deficits later
And economic officials in the Obama administration understand that logic : for the past year they have been very clear that their vision involves combining fiscal stimulus to help the economy now with health care reform to help the budget later
The sad truth , however , is that our political system does n't seem capable of doing what 's necessary
On jobs , it 's now clear that the Obama stimulus was n't nearly big enough
No need now to resolve the question of whether the administration should or could have sought a bigger package early last year
Either way , the point is that the boost from the stimulus will start to fade out in around six months , yet we 're still facing years of mass unemployment
The latest projections from the Congressional Budget Office say that the average unemployment rate next year will be only slightly lower than the current , disastrous , 10 percent
Yet there is little sentiment in Congress for any major new job-creation efforts
Meanwhile , health care reform faces a troubled outlook
Congressional Democrats may yet manage to pass a bill ; they 'll be committing political suicide if they do n't
But there 's no question that Republicans were very successful at demonizing the plan
And , crucially , what they demonized most effectively were the cost-control efforts : modest , totally reasonable measures to ensure that Medicare dollars are spent wisely became evil `` death panels .
So if health reform fails , you can forget about any serious effort to rein in rising Medicare costs
And even if it succeeds , many politicians will have learned a hard lesson : you do n't get any credit for doing the fiscally responsible thing
It 's better , for the sake of your career , to just pretend that you 're fiscally responsible that is , to be a deficit peacock
So we 're paralyzed in the face of mass unemployment and out-of-control health care costs
Do n't blame Mr. Obama
There 's only so much one man can do , even if he sits in the White House
Blame our political culture instead , a culture that rewards hypocrisy and irresponsibility rather than serious efforts to solve America 's problems
And blame the filibuster , under which 41 senators can make the country ungovernable , if they choose and they have so chosen
I 'm sorry to say this , but the state of the union not the speech , but the thing itself is n't looking very good
Some of the whining almost defies belief
Did Alberto Gonzales , the former attorney general , really say , `` I consider myself a casualty , one of the many casualties of the war on terror ''
Did Rush Limbaugh really suggest that the financial crisis was the result of a conspiracy , masterminded by that evil genius Chuck Schumer
But most of the whining takes the form of claims that the Bush administration 's failure was simply a matter of bad luck either the bad luck of President Bush himself , who just happened to have disasters happen on his watch , or the bad luck of the G.O.P. , which just happened to send the wrong man to the White House
The fault , however , lies not in Republicans ' stars but in themselves
Forty years ago the G.O.P. decided , in effect , to make itself the party of racial backlash
And everything that has happened in recent years , from the choice of Mr. Bush as the party 's champion , to the Bush administration 's pervasive incompetence , to the party 's shrinking base , is a consequence of that decision
If the Bush administration became a byword for policy bungles , for government by the unqualified , well , it was just following the advice of leading conservative think tanks : after the 2000 election the Heritage Foundation specifically urged the new team to `` make appointments based on loyalty first and expertise second .
Contempt for expertise , in turn , rested on contempt for government in general
`` Government is not the solution to our problem , '' declared Ronald Reagan
`` Government is the problem .
So why worry about governing well
Where did this hostility to government come from
In 1981 Lee Atwater , the famed Republican political consultant , explained the evolution of the G.O.P. 's `` Southern strategy , '' which originally focused on opposition to the Voting Rights Act but eventually took a more coded form : `` You 're getting so abstract now you 're talking about cutting taxes , and all these things you 're talking about are totally economic things and a byproduct of them is blacks get hurt worse than whites .
In other words , government is the problem because it takes your money and gives it to Those People
Oh , and the racial element is n't all that abstract , even now : Chip Saltsman , currently a candidate for the chairmanship of the Republican National Committee , sent committee members a CD including a song titled `` Barack the Magic Negro '' and according to some reports , the controversy over his action has actually helped his chances
So the reign of George W. Bush , the first true Southern Republican president since Reconstruction , was the culmination of a long process
And despite the claims of some on the right that Mr. Bush betrayed conservatism , the truth is that he faithfully carried out both his party 's divisive tactics long before Sarah Palin , Mr. Bush declared that he visited his ranch to `` stay in touch with real Americans '' and its governing philosophy
That 's why the soon-to-be-gone administration 's failure is bigger than Mr. Bush himself : it represents the end of the line for a political strategy that dominated the scene for more than a generation
The reality of this strategy 's collapse has not , I believe , fully sunk in with some observers
Thus , some commentators warning President-elect Barack Obama against bold action have held up Bill Clinton 's political failures in his first two years as a cautionary tale
But America in 1993 was a very different country not just a country that had yet to see what happens when conservatives control all three branches of government , but also a country in which Democratic control of Congress depended on the votes of Southern conservatives
Today , Republicans have taken away almost all those Southern votes and lost the rest of the country
It was a grand ride for a while , but in the end the Southern strategy led the G.O.P. into a cul-de-sac
Mr. Obama therefore has room to be bold
If Republicans try a 1993-style strategy of attacking him for promoting big government , they 'll learn two things : not only has the financial crisis discredited their economic theories , the racial subtext of anti-government rhetoric does n't play the way it used to
Will the Republicans eventually stage a comeback
Yes , of course
But barring some huge missteps by Mr. Obama , that will not happen until they stop whining and look at what really went wrong
And when they do , they will discover that they need to get in touch with the real `` real America , '' a country that is more diverse , more tolerant , and more demanding of effective government than is dreamt of in their political philosophy
The whole world is in recession
But the United States is the only wealthy country in which the economic catastrophe will also be a health care catastrophe in which millions of people will lose their health insurance along with their jobs , and therefore lose access to essential care
Which raises a question : Why has the Obama administration been silent , at least so far , about one of President Obama 's key promises during last year 's campaign the promise of guaranteed health care for all Americans
Let 's talk about the magnitude of the looming health care disaster
Just about all economic forecasts , including those of the Obama administration 's own economists , say that we 're in for a prolonged period of very high unemployment
And high unemployment means a sharp rise in the number of Americans without health insurance
After the economy slumped at the beginning of this decade , five million people joined the ranks of the uninsured and that was with the unemployment rate peaking at only 6.3 percent
This time the Obama administration says that even with its stimulus plan , unemployment will reach 8 percent , and that it will stay above 6 percent until 2012
Many independent forecasts are even more pessimistic
Why , then , are n't we hearing more about ensuring health care access
Now , it 's possible that those of us who care about this issue are reading too much into the administration 's silence
But let me address three arguments that I suspect Mr. Obama is hearing against moving on health care , and explain why they 're wrong
First , some people are arguing that a major expansion of health care access would just be too expensive right now , given the vast sums we 're about to spend trying to rescue the economy
But research sponsored by the Commonwealth Fund shows that achieving universal coverage with a plan similar to Mr. Obama 's campaign proposals would add `` only '' about $ 104 billion to federal spending in 2010 not a small sum , of course , but not large compared with , say , the tax cuts in the Obama stimulus plan
It 's true that the cost of universal health care will be a continuing expense , reaching far into the future
But that has always been true , and Mr. Obama has always claimed that his health care plan was affordable
The temporary expenses of his stimulus plan should n't change that calculation
Second , some people in Mr. Obama 's circle may be arguing that health care reform is n't a priority right now , in the face of economic crisis
But helping families purchase health insurance as part of a universal coverage plan would be at least as effective a way of boosting the economy as the tax breaks that make up roughly a third of the stimulus plan and it would have the added benefit of directly helping families get through the crisis , ending one of the major sources of Americans ' current anxiety
Finally and this is , I suspect , the real reason for the administration 's health care silence there 's the political argument that this is a bad time to be pushing fundamental health care reform , because the nation 's attention is focused on the economic crisis
But if history is any guide , this argument is precisely wrong
Do n't take my word for it
Rahm Emanuel , the White House chief of staff , has declared that `` you never want a serious crisis to go to waste .
F.D.R. was able to enact Social Security in part because the Great Depression highlighted the need for a stronger social safety net
And the current crisis presents a real opportunity to fix the gaping holes that remain in that safety net , especially with regard to health care
And Mr. Obama really , really does n't want to repeat the mistakes of Bill Clinton , whose health care push failed politically partly because he moved too slowly : by the time his administration was ready to submit legislation , the economy was recovering from recession and the sense of urgency was fading
One more thing
There 's a populist rage building in this country , as Americans see bankers getting huge bailouts while ordinary citizens suffer
I agree with administration officials who argue that these financial bailouts are necessary -LRB- though I have problems with the specifics -RRB-
But I also agree with Barney Frank , the chairman of the House Financial Services Committee , who argues that as a matter of political necessity as well as social justice aid to bankers has to be linked to a strengthening of the social safety net , so that Americans can see that the government is ready to help everyone , not just the rich and powerful
The bottom line , then , is that this is no time to let campaign promises of guaranteed health care be quietly forgotten
It is , instead , a time to put the push for universal care front and center
Health care now
The Demands for Higher Interest Rates Last Saturday , reported The Financial Times , some of the world 's most powerful financial executives were going to hold a private meeting with finance ministers in Davos , the site of the World Economic Forum
The principal demand of the executives , the newspaper suggested , would be that governments `` stop banker-bashing .
Apparently bailing bankers out after they precipitated the worst slump since the Great Depression is n't enough - politicians have to stop hurting their feelings , too
But the bankers also had a more substantive demand : they want higher interest rates , despite the persistence of very high unemployment in the United States and Europe , because they say that low rates are feeding inflation
And what worries me is the possibility that policy makers might actually take their advice
To understand the issues , you need to know that we 're in the midst of what the International Monetary Fund calls a `` two speed '' recovery , in which some countries are speeding ahead , but others - including the United States - have yet to get out of first gear
The U.S. economy fell into recession at the end of 2007 ; the rest of the world followed a few months later
And advanced nations - the United States , Europe , Japan - have barely begun to recover
It 's true that these economies have been growing since the summer of 2009 , but the growth has been too slow to produce large numbers of jobs
To raise interest rates under these conditions would be to undermine any chance of doing better ; it would mean , in effect , accepting mass unemployment as a permanent fact of life
What about inflation
High unemployment has kept a lid on the measures of inflation that usually guide policy
The Federal Reserve 's preferred measure , which excludes volatile energy and food prices , is now running below half a percent at an annual rate , far below the informal target of 2 percent
But food and energy prices - and commodity prices in general - have , of course , been rising lately
Corn and wheat prices rose around 50 percent last year ; copper , cotton and rubber prices have been setting new records
What 's that about
The answer , mainly , is growth in emerging markets
While recovery in advanced nations has been sluggish , developing countries - China in particular - have come roaring back from the 2008 slump
This has created inflation pressures within many of these countries ; it has also led to sharply rising global demand for raw materials
Bad weather - especially an unprecedented heat wave in the former Soviet Union , which led to a sharp fall in world wheat production - has also played a role in driving up food prices
The question is , what bearing should all of this have on policy at the Federal Reserve and the European Central Bank
First of all , inflation in China is China 's problem , not ours
It 's true that right now China 's currency is pegged to the dollar
But that 's China 's choice ; if China does n't like U.S. monetary policy , it 's free to let its currency rise
Neither China nor anyone else has the right to demand that America strangle its nascent economic recovery just because Chinese exporters want to keep the renminbi undervalued
What about commodity prices
The Fed normally focuses on `` core '' inflation , which excludes food and energy , rather than `` headline '' inflation , because experience shows that while some prices fluctuate widely from month to month , others have a lot of inertia - and it 's the ones with inertia you want to worry about , because once either inflation or deflation gets built into these prices , it 's hard to get rid of
And this focus has served the Fed well in the past
In particular , the Fed was right not to raise rates in 2007-8 , when commodity prices soared - briefly pushing headline inflation above 5 percent - only to plunge right back to earth
It 's hard to see why the Fed should behave differently this time , with inflation nowhere near as high as it was during the last commodity boom
So why the demand for higher rates
Well , bankers have a long history of getting fixated on commodity prices
Traditionally , that meant insisting that any rise in the price of gold would mean the end of Western civilization
These days it means demanding that interest rates be raised because the prices of copper , rubber , cotton and tin have gone up , even though underlying inflation is on the decline
Ben Bernanke clearly understands that raising rates now would be a huge mistake
But Jean-Claude Trichet , his European counterpart , is making hawkish noises - and both the Fed and the European Central Bank are under a lot of external pressure to do the wrong thing
They need to resist this pressure
Yes , commodity prices are up - but that 's no reason to perpetuate mass unemployment
To paraphrase William Jennings Bryan , we must not crucify our economies upon a cross of rubber
Deep Hole Economics If there 's one piece of economic wisdom I hope people will grasp this year , it 's this : Even though we may finally have stopped digging , we 're still near the bottom of a very deep hole
Why do I need to point this out
Because I 've noticed many people overreacting to recent good economic news
What particularly concerns me is the risk of self-denying optimism - that is , I worry that policy makers will look at a few favorable economic indicators , decide that they no longer need to promote recovery , and take steps that send us sliding right back to the bottom
So , about that good news : various economic indicators , ranging from relatively good holiday sales to new claims for unemployment insurance -LRB- which have finally fallen below 400,000 a week -RRB- , suggest that the great post-bubble retrenchment may finally be ending
We 're not talking Morning in America here
Construction shows no sign of returning to bubble-era levels , nor are there any indications that debt-burdened families are going back to their old habits of spending all they earned
But all we needed for a modest economic rebound was for construction to stop falling and saving to stop rising - and that seems to be happening
Forecasters have been marking up their predictions ; growth as high as 4 percent this year now looks possible
But then again , not so much
Jobs , not G.D.P. numbers , are what matter to American families
And when you start from an unemployment rate of almost 10 percent , the arithmetic of job creation - the amount of growth you need to get back to a tolerable jobs picture - is daunting
First of all , we have to grow around 2.5 percent a year just to keep up with rising productivity and population , and hence keep unemployment from rising
That 's why the past year and a half was technically a recovery but felt like a recession : G.D.P. was growing , but not fast enough to bring unemployment down
Growth at a rate above 2.5 percent will bring unemployment down over time
But the gains are n't one for one : for a variety of reasons , it has historically taken about two extra points of growth over the course of a year to shave one point off the unemployment rate
Now do the math
Suppose that the U.S. economy were to grow at 4 percent a year , starting now and continuing for the next several years
Most people would regard this as excellent performance , even as an economic boom ; it 's certainly higher than almost all the forecasts I 've seen
Yet the math says that even with that kind of growth the unemployment rate would be close to 9 percent at the end of this year , and still above 8 percent at the end of 2012
We would n't get to anything resembling full employment until late in Sarah Palin 's first presidential term
Seriously , what we 're looking at over the next few years , even with pretty good growth , are unemployment rates that not long ago would have been considered catastrophic - because they are
Behind those dry statistics lies a vast landscape of suffering and broken dreams
And the arithmetic says that the suffering will continue as far as the eye can see
So what can be done to accelerate this all-too-slow process of healing
A rational political system would long since have created a 21st-century version of the Works Progress Administration - we 'd be putting the unemployed to work doing what needs to be done , repairing and improving our fraying infrastructure
In the political system we have , however , Senator-elect Kelly Ayotte , delivering the Republican weekly address on New Year 's Day , declared that `` Job one is to stop wasteful Washington spending .
Realistically , the best we can hope for from fiscal policy is that Washington does n't actively undermine the recovery
Beware , in particular , the Ides of March : by then , the federal government will probably have hit its debt limit and the G.O.P. will try to force President Obama into economically harmful spending cuts
I 'm also worried about monetary policy
Two months ago , the Federal Reserve announced a new plan to promote job growth by buying long-term bonds ; at the time , many observers believed that the initial $ 600 billion purchase was only the beginning of the story
But now it looks like the end , partly because Republicans are trying to bully the Fed into pulling back , but also because a run of slightly better economic news provides an excuse to do nothing
There 's even a significant chance that the Fed will raise interest rates later this year - or at least that 's what the futures market seems to think
Doing so in the face of high unemployment and minimal inflation would be crazy , but that does n't mean it wo n't happen
So back to my original point : whatever the recent economic news , we 're still near the bottom of a very deep hole
We can only hope that enough policy makers understand that point
On both Wednesday and Thursday , the price of oil briefly hit $ 100 a barrel
The new record made headlines , as well it should have
But what does it mean , aside from the obvious point that the economy is under extra pressure
Well , one thing it means is that we 're having the wrong discussion about foreign policy
Almost all the foreign policy talk in this presidential campaign has been motivated , one way or another , by 9\/11 and the war in Iraq
Yet it 's a very good bet that the biggest foreign policy issues for the next president will involve the Far East rather than the Middle East
In particular , the crucial questions are likely to involve the consequences of China 's economic growth
Turn to any of several major concerns now facing America , and in each case it 's startling how large a role China plays
Start with the soaring price of oil
Unlike the oil crises that followed the Yom Kippur War and the overthrow of the shah of Iran , this crisis was n't caused by events in the Middle East that disrupted world oil supply
Instead , it had its roots in Asia
It 's true that the global supply of oil has been growing sluggishly , mainly because the world is , bit by bit , running out of the stuff : big oil discoveries have become rare , and when oil is found , it 's harder to get at
But the reason oil supply has n't been able to keep up with demand is surging oil consumption in newly industrializing economies above all , in China
Even now , China accounts for about only 9 percent of the world 's demand for oil
But because China 's oil demand has been rising along with its economy , in recent years China has been responsible for about a third of the growth in world oil consumption
As a result , oil at $ 100 a barrel is , in large part , a made-in-China phenomenon
Speaking of made in China , that brings us to a second issue
There 's growing concern in this country about the effects of globalization on wages , largely because imports of manufactured goods from low-wage countries have surged , doubling as a share of G.D.P. since 1993
And more than half of that rise reflects the explosive growth of U.S. industrial imports from China , which went from less than 0.5 percent of G.D.P. in 1993 to more than 2 percent in 2006
Last , but most important , is the issue of climate change , which will eventually be recognized as the most crucial problem facing America and the world maybe not today , and maybe not tomorrow , but soon , and for the rest of our lives
Why is climate change a China issue
Well , China is already , by some estimates , the world 's largest emitter of greenhouse gases
And as with oil demand , China plays a disproportionate role in emissions growth
In fact , between 2000 and 2005 China accounted for more than half the increase in the world 's emissions of carbon dioxide
What this means is that any attempt to mitigate global warming will be woefully inadequate unless it includes China
Indeed , back in 2001 , when he reneged on his campaign promise to limit greenhouse gas emissions , President Bush cited the fact that the Kyoto treaty did n't include China and India as an excuse for doing nothing
But the real problem is how to make China part of the solution
So what does all this tell us about the presidential race
On the Republican side , foreign policy talk is all bluster and braggadocio
To listen to the G.O.P. candidates , you 'd think it was still February 2003 , when the national discourse was dominated by people who thought that American military might was sufficient to shock and awe the rest of the world into doing our bidding
Memo : China has 50 times the population of Iraq
The Democrats in general make far more sense
But among at least some of Barack Obama 's supporters there seems to be a belief that if their candidate is elected , the world 's problems will melt away in the face of his multicultural charisma
Memo : It wo n't work on the Chinese
The truth is that China is too big to be bullied , and the Chinese are too cynical to be charmed
But while they are our competitors in important respects , they 're not our enemies , and they can be dealt with
A lot of Americans , when they think about the next president 's foreign-policy qualifications , seem to be looking for a hero someone who will stand tall against terrorists , or transform the world with his optimism
But what they should be looking for is something more prosaic a good negotiator , someone who can bargain effectively with some very tough customers and get the deals we need on energy , currency policy and carbon credits
Here 's what 's coming in economic news : The next employment report could show the economy adding jobs for the first time in two years
The next G.D.P. report is likely to show solid growth in late 2009
There will be lots of bullish commentary and the calls we 're already hearing for an end to stimulus , for reversing the steps the government and the Federal Reserve took to prop up the economy , will grow even louder
But if those calls are heeded , we 'll be repeating the great mistake of 1937 , when the Fed and the Roosevelt administration decided that the Great Depression was over , that it was time for the economy to throw away its crutches
Spending was cut back , monetary policy was tightened and the economy promptly plunged back into the depths
This should n't be happening
Both Ben Bernanke , the Fed chairman , and Christina Romer , who heads President Obama 's Council of Economic Advisers , are scholars of the Great Depression
Ms. Romer has warned explicitly against re-enacting the events of 1937
But those who remember the past sometimes repeat it anyway
As you read the economic news , it will be important to remember , first of all , that blips occasional good numbers , signifying nothing are common even when the economy is , in fact , mired in a prolonged slump
In early 2002 , for example , initial reports showed the economy growing at a 5.8 percent annual rate
But the unemployment rate kept rising for another year
And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent , leading to triumphant proclamations that `` the economy has finally entered a phase of self-propelled recovery .
In fact , Japan was only halfway through its lost decade
Such blips are often , in part , statistical illusions
But even more important , they 're usually caused by an `` inventory bounce .
When the economy slumps , companies typically find themselves with large stocks of unsold goods
To work off their excess inventories , they slash production ; once the excess has been disposed of , they raise production again , which shows up as a burst of growth in G.D.P. Unfortunately , growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand , such as consumer spending and long-term investment , pick up
Which brings us to the still grim fundamentals of the economic situation
During the good years of the last decade , such as they were , growth was driven by a housing boom and a consumer spending surge
Neither is coming back
There ca n't be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom , and consumers who are $ 11 trillion poorer than they were before the housing bust are in no position to return to the buy-now-save-never habits of yore
What 's left
A boom in business investment would be really helpful right now
But it 's hard to see where such a boom would come from : industry is awash in excess capacity , and commercial rents are plunging in the face of a huge oversupply of office space
Can exports come to the rescue
For a while , a falling U.S. trade deficit helped cushion the economic slump
But the deficit is widening again , in part because China and other surplus countries are refusing to let their currencies adjust
So the odds are that any good economic news you hear in the near future will be a blip , not an indication that we 're on our way to sustained recovery
But will policy makers misinterpret the news and repeat the mistakes of 1937
Actually , they already are
The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year , then start fading out
That 's far too early : why withdraw support in the face of continuing mass unemployment
Congress should have enacted a second round of stimulus months ago , when it became clear that the slump was going to be deeper and longer than originally expected
But nothing was done and the illusory good numbers we 're about to see will probably head off any further possibility of action
Meanwhile , all the talk at the Fed is about the need for an `` exit strategy '' from its efforts to support the economy
One of those efforts , purchases of long-term U.S. government debt , has already come to an end
It 's widely expected that another , purchases of mortgage-backed securities , will end in a few months
This amounts to a monetary tightening , even if the Fed does n't raise interest rates directly and there 's a lot of pressure on Mr. Bernanke to do that too
Will the Fed realize , before it 's too late , that the job of fighting the slump is n't finished
Will Congress do the same
If they do n't , 2010 will be a year that began in false economic hope and ended in grief
`` If we do n't act swiftly and boldly , '' declared President-elect Barack Obama in his latest weekly address , `` we could see a much deeper economic downturn that could lead to double-digit unemployment .
If you ask me , he was understating the case
The fact is that recent economic numbers have been terrifying , not just in the United States but around the world
Manufacturing , in particular , is plunging everywhere
Banks are n't lending ; businesses and consumers are n't spending
Let 's not mince words : This looks an awful lot like the beginning of a second Great Depression
So will we `` act swiftly and boldly '' enough to stop that from happening
We 'll soon find out
We were n't supposed to find ourselves in this situation
For many years most economists believed that preventing another Great Depression would be easy
In 2003 , Robert Lucas of the University of Chicago , in his presidential address to the American Economic Association , declared that the `` central problem of depression-prevention has been solved , for all practical purposes , and has in fact been solved for many decades .
Milton Friedman , in particular , persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity , which would have prevented a sharp fall in the money supply
Ben Bernanke , the Federal Reserve chairman , famously apologized to Friedman on his institution 's behalf : `` You 're right
We did it
We 're very sorry
But thanks to you , we wo n't do it again .
It turns out , however , that preventing depressions is n't that easy after all
Under Mr. Bernanke 's leadership , the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire , and the money supply has been rising rapidly
Yet credit remains scarce , and the economy is still in free fall
Friedman 's claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes , who argued that monetary policy is ineffective under depression conditions and that fiscal policy large-scale deficit spending by the government is needed to fight mass unemployment
The failure of monetary policy in the current crisis shows that Keynes had it right the first time
And Keynesian thinking lies behind Mr. Obama 's plans to rescue the economy
But these plans may turn out to be a hard sell
News reports say that Democrats hope to pass an economic plan with broad bipartisan support
Good luck with that
In reality , the political posturing has already started , with Republican leaders setting up roadblocks to stimulus legislation while posing as the champions of careful Congressional deliberation which is pretty rich considering their party 's behavior over the past eight years
More broadly , after decades of declaring that government is the problem , not the solution , not to mention reviling both Keynesian economics and the New Deal , most Republicans are n't going to accept the need for a big-spending , F.D.R.-type solution to the economic crisis
The biggest problem facing the Obama plan , however , is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs a burden of proof never imposed on proposals for tax cuts
This is a problem with which Keynes was familiar : giving money away , he pointed out , tends to be met with fewer objections than plans for public investment `` which , because they are not wholly wasteful , tend to be judged on strict ` business ' principles .
What gets lost in such discussions is the key argument for economic stimulus namely , that under current conditions , a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle , and put both to work producing something useful
All of this leaves me concerned about the prospects for the Obama plan
I 'm sure that Congress will pass a stimulus plan , but I worry that the plan may be delayed and\/or downsized
And Mr. Obama is right : We really do need swift , bold action
Here 's my nightmare scenario : It takes Congress months to pass a stimulus plan , and the legislation that actually emerges is too cautious
As a result , the economy plunges for most of 2009 , and when the plan finally starts to kick in , it 's only enough to slow the descent , not stop it
Meanwhile , deflation is setting in , while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy well , you can see where this is going
So this is our moment of truth
Will we in fact do what 's necessary to prevent Great Depression II
The unemployment report on Friday was brutally bad
Unemployment rose in December , while job creation was minimal and it 's highly likely , for technical reasons , that the job number will be revised down , showing an actual decline in employment
It 's the latest piece of bad news about an economy in which the employment situation has actually been deteriorating for the past year
It 's no longer possible to hope that the effects of the housing slump will remain `` contained , '' as one of 2007 's buzzwords had it
The levees have been breached , and the repercussions of the housing crisis are spreading across the economy as a whole
It 's not certain , even now , that we 'll have a formal recession , although given the news on Friday you have to say that the odds are that we will
But what is clear is that 2008 will be a troubled year for the U.S. economy and that as a result , the overall economic record of the Bush years will have been dreary at best : two and a half years of slumping employment , three and a half years of good but not great growth , and two more years of renewed economic distress
The November election will take place against that background of economic distress , which ought to be good news for candidates running on a platform of change
But the opponents of change , those who want to keep the Bush legacy intact , are not without resources
In fact , they 've already made their standard pivot when things turn bad the pivot from hype to fear
And in case you have n't noticed , they 're very , very good at the fear thing
You see , for 30 years American politics has been dominated by a political movement practicing Robin-Hood-in-reverse , giving unto those that hath while taking from those who do n't
And one secret of that long domination has been a remarkable flexibility in economic debate
The policies never change but the arguments for these policies turn on a dime
When the economy is doing reasonably well , the debate is dominated by hype by the claim that America 's prosperity is truly wondrous , and that conservative economic policies deserve all the credit
But when things turn down , there is a seamless transition from `` It 's morning in America
Hurray for tax cuts !
to `` The economy is slumping
Raising taxes would be a disaster !
Thus , until just the other day Bush administration officials were in denial about the economy 's problems
They were still insisting that the economy was strong , and touting the `` Bush boom '' the improvement in the job situation that took place between the summer of 2003 and the end of 2006 as proof of the efficacy of tax cuts
But now , without ever acknowledging that maybe things were n't that great after all , President Bush is warning that given the economy 's problems , `` the worst thing the Congress could do is raise taxes on the American people and on American businesses .
And even more dire warnings are coming from some of the Republican presidential candidates
For example , John McCain 's campaign Web site cautions darkly that `` Entrepreneurs should not be taxed into submission
John McCain will make the Bush income and investment tax cuts permanent , keeping income tax rates at their current level and fighting the Democrats ' plans for a crippling tax increase in 2011 .
What `` crippling '' tax increase , which would tax entrepreneurs into submission , is Mr. McCain talking about
The answer is , proposals by Democrats to let the Bush tax cuts for people making more than $ 250,000 a year expire , returning upper-income tax rates to the levels that prevailed in the Clinton years
And we all remember how little entrepreneurship there was , how weakly the economy performed , during the Clinton years , right
Oh , wait
-LRB- I 've put some charts comparing job performance during the Clinton and Bush years on my Times blog , krugman.blogs.nytimes.com
It 's pretty startling how comparatively weak the Bush era looks .
Never mind
The whole point of scare tactics is that they can work even in the face of inconvenient facts
And what I 'm not sure about is whether the Democrats are ready for the fight they 're about to face
Not to put too fine a point on it , Barack Obama won his impressive victory in Iowa with a sunny , upbeat message of change
But there 's a powerful political faction in this country that understands very well that any real change will create losers as well as winners
In particular , any serious progressive reform of health care , let alone a broader attempt to reduce middle-class insecurity and inequality , will have to mean higher taxes on the affluent
And members of that faction will do whatever it takes to scare people into believing that change means disaster for the economy
I do n't think they 'll succeed
But it would be a big mistake to assume that they wo n't
The Texas Omen Wait - Texas
Was n't Texas supposed to be thriving even as the rest of America suffered
Did n't its governor declare , during his re-election campaign , that `` we have billions in surplus ''
Yes , it was , and yes , he did
But reality has now intruded , in the form of a deficit expected to run as high as $ 25 billion over the next two years
And that reality has implications for the nation as a whole
For Texas is where the modern conservative theory of budgeting - the belief that you should never raise taxes under any circumstances , that you can always balance the budget by cutting wasteful spending - has been implemented most completely
If the theory ca n't make it there , it ca n't make it anywhere
How bad is the Texas deficit
Comparing budget crises among states is tricky , for technical reasons
Still , data from the Center on Budget and Policy Priorities suggest that the Texas budget gap is worse than New York 's , about as bad as California 's , but not quite up to New Jersey levels
The point , however , is that just the other day Texas was being touted as a role model -LRB- and still is by commentators who have n't been keeping up with the news -RRB-
It was the state the recession supposedly passed by , thanks to its low taxes and business-friendly policies
Its governor boasted that its budget was in good shape thanks to his `` tough conservative decisions .
Oh , and at a time when there 's a full-court press on to demonize public-sector unions as the source of all our woes , Texas is nearly demon-free : less than 20 percent of public-sector workers there are covered by union contracts , compared with almost 75 percent in New York
So what happened to the `` Texas miracle '' many people were talking about even a few months ago
Part of the answer is that reports of a recession-proof state were greatly exaggerated
It 's true that Texas job losses have n't been as severe as those in the nation as a whole since the recession began in 2007
But Texas has a rapidly growing population - largely , suggests Harvard 's Edward Glaeser , because its liberal land-use and zoning policies have kept housing cheap
There 's nothing wrong with that ; but given that rising population , Texas needs to create jobs more rapidly than the rest of the country just to keep up with a growing work force
And when you look at unemployment , Texas does n't seem particularly special : its unemployment rate is below the national average , thanks in part to high oil prices , but it 's about the same as the unemployment rate in New York or Massachusetts
What about the budget
The truth is that the Texas state government has relied for years on smoke and mirrors to create the illusion of sound finances in the face of a serious `` structural '' budget deficit - that is , a deficit that persists even when the economy is doing well
When the recession struck , hitting revenue in Texas just as it did everywhere else , that illusion was bound to collapse
The only thing that let Gov. Rick Perry get away , temporarily , with claims of a surplus was the fact that Texas enacts budgets only once every two years , and the last budget was put in place before the depth of the economic downturn was clear
Now the next budget must be passed - and Texas may have a $ 25 billion hole to fill
Now what
Given the complete dominance of conservative ideology in Texas politics , tax increases are out of the question
So it has to be spending cuts
Yet Mr. Perry was n't lying about those `` tough conservative decisions '' : Texas has indeed taken a hard , you might say brutal , line toward its most vulnerable citizens
Among the states , Texas ranks near the bottom in education spending per pupil , while leading the nation in the percentage of residents without health insurance
It 's hard to imagine what will happen if the state tries to eliminate its huge deficit purely through further cuts
I do n't know how the mess in Texas will end up being resolved
But the signs do n't look good , either for the state or for the nation
Right now , triumphant conservatives in Washington are declaring that they can cut taxes and still balance the budget by slashing spending
Yet they have n't been able to do that even in Texas , which is willing both to impose great pain -LRB- by its stinginess on health care -RRB- and to shortchange the future -LRB- by neglecting education -RRB-
How are they supposed to pull it off nationally , especially when the incoming Republicans have declared Medicare , Social Security and defense off limits
People used to say that the future happens first in California , but these days what happens in Texas is probably a better omen
And what we 're seeing right now is a future that does n't work
Health care reform is almost -LRB- knock on wood -RRB- a done deal
Next up : fixing the financial system
I 'll be writing a lot about financial reform in the weeks ahead
Let me begin by asking a basic question : What should reformers try to accomplish
A lot of the public debate has been about protecting borrowers
Indeed , a new Consumer Financial Protection Agency to help stop deceptive lending practices is a very good idea
And better consumer protection might have limited the overall size of the housing bubble
But consumer protection , while it might have blocked many subprime loans , would n't have prevented the sharply rising rate of delinquency on conventional , plain-vanilla mortgages
And it certainly would n't have prevented the monstrous boom and bust in commercial real estate
Reform , in other words , probably ca n't prevent either bad loans or bubbles
But it can do a great deal to ensure that bubbles do n't collapse the financial system when they burst
Bear in mind that the implosion of the 1990s stock bubble , while nasty households took a $ 5 trillion hit did n't provoke a financial crisis
So what was different about the housing bubble that followed
The short answer is that while the stock bubble created a lot of risk , that risk was fairly widely diffused across the economy
By contrast , the risks created by the housing bubble were strongly concentrated in the financial sector
As a result , the collapse of the housing bubble threatened to bring down the nation 's banks
And banks play a special role in the economy
If they ca n't function , the wheels of commerce as a whole grind to a halt
Why did the bankers take on so much risk
Because it was in their self-interest to do so
By increasing leverage that is , by making risky investments with borrowed money banks could increase their short-term profits
And these short-term profits , in turn , were reflected in immense personal bonuses
If the concentration of risk in the banking sector increased the danger of a systemwide financial crisis , well , that was n't the bankers ' problem
Of course , that conflict of interest is the reason we have bank regulation
But in the years before the crisis , the rules were relaxed and , even more important , regulators failed to expand the rules to cover the growing `` shadow '' banking system , consisting of institutions like Lehman Brothers that performed banklike functions even though they did n't offer conventional bank deposits
The result was a financial industry that was hugely profitable as long as housing prices were going up finance accounted for more than a third of total U.S. profits as the bubble was inflating but was brought to the edge of collapse once the bubble burst
It took government aid on an immense scale , and the promise of even more aid if needed , to pull the industry back from the brink
And here 's the thing : Since that aid came with few strings in particular , no major banks were nationalized even though some clearly would n't have survived without government help there 's every incentive for bankers to engage in a repeat performance
After all , it 's now clear that they 're living in a heads-they-win , tails-taxpayers-lose world
The test for reform , then , is whether it reduces bankers ' incentives and ability to concentrate risk going forward
Transparency is part of the answer
Before the crisis , hardly anyone realized just how much risk the banks were taking on
More disclosure , especially with regard to complex financial derivatives , would clearly help
Beyond that , an important aspect of reform should be new rules limiting bank leverage
I 'll be delving into proposed legislation in future columns , but here 's what I can say about the financial reform bill the House passed with zero Republican votes last month : Its limits on leverage look O.K. Not great , but O.K.
It would , however , be all too easy for those rules to get weakened to the point where they would n't do the job
A few tweaks in the fine print and banks would be free to play the same game all over again
And reform really should take on the financial industry 's compensation practices
If Congress ca n't legislate away the financial rewards for excessive risk-taking , it can at least try to tax them
Let me conclude with a political note
The main reason for reform is to serve the nation
If we do n't get major financial reform now , we 're laying the foundations for the next crisis
But there are also political reasons to act
For there 's a populist rage building in this country , and President Obama 's kid-gloves treatment of the bankers has put Democrats on the wrong side of this rage
If Congressional Democrats do n't take a tough line with the banks in the months ahead , they will pay a big price in November
`` I do n't believe it 's too late to change course , but it will be if we do n't take dramatic action as soon as possible
If nothing is done , this recession could linger for years .
So declared President-elect Barack Obama on Thursday , explaining why the nation needs an extremely aggressive government response to the economic downturn
He 's right
This is the most dangerous economic crisis since the Great Depression , and it could all too easily turn into a prolonged slump
But Mr. Obama 's prescription does n't live up to his diagnosis
The economic plan he 's offering is n't as strong as his language about the economic threat
In fact , it falls well short of what 's needed
Bear in mind just how big the U.S. economy is
Given sufficient demand for its output , America would produce more than $ 30 trillion worth of goods and services over the next two years
But with both consumer spending and business investment plunging , a huge gap is opening up between what the American economy can produce and what it 's able to sell
And the Obama plan is nowhere near big enough to fill this `` output gap .
Earlier this week , the Congressional Budget Office came out with its latest analysis of the budget and economic outlook
The budget office says that in the absence of a stimulus plan , the unemployment rate would rise above 9 percent by early 2010 , and stay high for years to come
Grim as this projection is , by the way , it 's actually optimistic compared with some independent forecasts
Mr. Obama himself has been saying that without a stimulus plan , the unemployment rate could go into double digits
Even the C.B.O. says , however , that `` economic output over the next two years will average 6.8 percent below its potential .
This translates into $ 2.1 trillion of lost production
`` Our economy could fall $ 1 trillion short of its full capacity , '' declared Mr. Obama on Thursday
Well , he was actually understating things
To close a gap of more than $ 2 trillion possibly a lot more , if the budget office projections turn out to be too optimistic Mr. Obama offers a $ 775 billion plan
And that 's not enough
Now , fiscal stimulus can sometimes have a `` multiplier '' effect : In addition to the direct effects of , say , investment in infrastructure on demand , there can be a further indirect effect as higher incomes lead to higher consumer spending
Standard estimates suggest that a dollar of public spending raises G.D.P. by around $ 1.50
But only about 60 percent of the Obama plan consists of public spending
The rest consists of tax cuts and many economists are skeptical about how much these tax cuts , especially the tax breaks for business , will actually do to boost spending
-LRB- A number of Senate Democrats apparently share these doubts .
Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting : `` lots of buck , not much bang .
The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap , and could easily end up doing less than a third of the job
Why is n't Mr. Obama trying to do more
Is the plan being limited by fear of debt
There are dangers associated with large-scale government borrowing and this week 's C.B.O. report projected a $ 1.2 trillion deficit for this year
But it would be even more dangerous to fall short in rescuing the economy
The president-elect spoke eloquently and accurately on Thursday about the consequences of failing to act there 's a real risk that we 'll slide into a prolonged , Japanese-style deflationary trap but the consequences of failing to act adequately are n't much better
Is the plan being limited by a lack of spending opportunities
There are only a limited number of `` shovel-ready '' public investment projects that is , projects that can be started quickly enough to help the economy in the near term
But there are other forms of public spending , especially on health care , that could do good while aiding the economy in its hour of need
Or is the plan being limited by political caution
Press reports last month indicated that Obama aides were anxious to keep the final price tag on the plan below the politically sensitive trillion-dollar mark
There also have been suggestions that the plan 's inclusion of large business tax cuts , which add to its cost but will do little for the economy , is an attempt to win Republican votes in Congress
Whatever the explanation , the Obama plan just does n't look adequate to the economy 's need
To be sure , a third of a loaf is better than none
But right now we seem to be facing two major economic gaps : the gap between the economy 's potential and its likely performance , and the gap between Mr. Obama 's stern economic rhetoric and his somewhat disappointing economic plan
As soon as the Obama administration-in-waiting announced its stimulus plan this was before Inauguration Day some of us worried that the plan would prove inadequate
And we also worried that it might be hard , as a political matter , to come back for another round
Unfortunately , those worries have proved justified
The bad employment report for June made it clear that the stimulus was , indeed , too small
But it also damaged the credibility of the administration 's economic stewardship
There 's now a real risk that President Obama will find himself caught in a political-economic trap
I 'll talk about that trap , and how he can escape it , in a moment
First , however , let me step back and ask how concerned citizens should be reacting to the disappointing economic news
Should we be patient and give the Obama plan time to work
Should we call for bigger , bolder actions
Or should we declare the plan a failure and demand that the administration call the whole thing off
Before you answer , consider what happens in normal times
When there 's an ordinary , garden-variety recession , the job of fighting that recession is assigned to the Federal Reserve
The Fed responds by cutting interest rates in an incremental fashion
Reducing rates a bit at a time , it keeps cutting until the economy turns around
At times it pauses to assess the effects of its work ; if the economy is still weak , the cutting resumes
During the last recession , the Fed repeatedly cut rates as the slump deepened 11 times over the course of 2001
Then , amid early signs of recovery , it paused , giving the rate cuts time to work
When it became clear that the economy still was n't growing fast enough to create jobs , more rate cuts followed
Normally , then , we expect policy makers to respond to bad job numbers with a combination of patience and resolve
They should give existing policies time to work , but they should also consider making those policies stronger
And that 's what the Obama administration should be doing right now with its fiscal stimulus
-LRB- It 's important to remember that the stimulus was necessary because the Fed , having cut rates all the way to zero , has run out of ammunition to fight this slump .
That is , policy makers should stay calm in the face of disappointing early results , recognizing that the plan will take time to deliver its full benefit
But they should also be prepared to add to the stimulus now that it 's clear that the first round was n't big enough
Unfortunately , the politics of fiscal policy are very different from the politics of monetary policy
For the past 30 years , we 've been told that government spending is bad , and conservative opposition to fiscal stimulus -LRB- which might make people think better of government -RRB- has been bitter and unrelenting even in the face of the worst slump since the Great Depression
Predictably , then , Republicans and some Democrats have treated any bad news as evidence of failure , rather than as a reason to make the policy stronger
Hence the danger that the Obama administration will find itself caught in a political-economic trap , in which the very weakness of the economy undermines the administration 's ability to respond effectively
As I said , I was afraid this would happen
But that 's water under the bridge
The question is what the president and his economic team should do now
It 's perfectly O.K. for the administration to defend what it 's done so far
It 's fine to have Vice President Joseph Biden touring the country , highlighting the many good things the stimulus money is doing
It 's also reasonable for administration economists to call for patience , and point out , correctly , that the stimulus was never expected to have its full impact this summer , or even this year
But there 's a difference between defending what you 've done so far and being defensive
It was disturbing when President Obama walked back Mr. Biden 's admission that the administration `` misread '' the economy , declaring that `` there 's nothing we would have done differently .
There was a whiff of the Bush infallibility complex in that remark , a hint that the current administration might share some of its predecessor 's inability to admit mistakes
And that 's an attitude neither Mr. Obama nor the country can afford
What Mr. Obama needs to do is level with the American people
He needs to admit that he may not have done enough on the first try
He needs to remind the country that he 's trying to steer the country through a severe economic storm , and that some course adjustments including , quite possibly , another round of stimulus may be necessary
What he needs , in short , is to do for economic policy what he 's already done for race relations and foreign policy talk to Americans like adults
It was the worst of days , it was the best of days
On Wednesday , Senate Democrats capitulated to the Bush administration on wiretapping with Barack Obama joining the coalition of the craven
Later that day , however , those same Senate Democrats won a huge victory on Medicare
News reports stressed the cinematic quality of the event : Ted Kennedy , who is fighting a brain tumor , made a dramatic appearance on the Senate floor , casting the decisive vote amid cheers from his colleagues
-LRB- Only one senator was absent : John McCain .
But the vote was bigger than the theatrics
It was the first major health care victory that Democrats have won in a long time
And it was enormously encouraging for advocates of universal health care
Ostensibly , Wednesday 's vote was about restoring cuts in Medicare payments to doctors
What it was really about , however , was the fight against creeping privatization
Democrats finally took a stand and , thanks to Senator Kennedy , seem to have prevailed
The story really begins in 2003 , when the Bush administration rammed the Medicare Modernization Act through Congress , literally in the dead of night
That bill established large de facto subsidies for Medicare Advantage plans plans in which Medicare funds are funneled through private insurance companies , rather than directly paying for care
Since then , enrollment in these plans has been growing rapidly
This has had a destructive effect on Medicare 's finances : the fastest-growing type of Medicare Advantage plan , private fee-for-service , costs taxpayers 17 percent more per beneficiary than Medicare without the middleman
It also threatens to undermine Medicare 's universality , turning it into a system in which insurance companies cherry-pick healthier and more affluent older Americans , leaving the sicker and poorer behind
What does this have to do with cuts in doctors ' fees
Well , legislation passed a decade ago makes such cuts automatic whenever the growth in Medicare spending exceeds an unrealistically low target
This year , the automatic cuts would have reduced doctors ' payments by more than 10 percent , a pay reduction so deep that many physicians would probably have stopped taking Medicare patients
In previous years , payments to doctors were maintained through bipartisan fudging : politicians from both parties got together to waive the rules
In effect , Congress kept Medicare functioning by expanding the federal budget deficit
This year , the Democratic leadership decided , instead , to link the `` doctor fix '' to the fight against privatization and offered a bill that maintains doctors ' payments while reining in those expensive private fee-for-service plans
Last month , the Senate took up this bill but Democrats failed by one vote to override a Republican filibuster
And that seemed to be that : soon after that vote , Senators Max Baucus and Charles Grassley had another bipartisan fudge all ready to go
But then Democratic leaders decided to play brinkmanship
They let the doctors ' cuts stand for the Fourth of July holiday , daring Republicans to threaten the basic medical care of millions of Americans rather than give up subsidies to insurance companies
Over the recess period , there was an intense lobbying war between insurance companies and doctors
And when the Senate came back in session , it turned out that the doctors and the Democrats had won : Senator Kennedy was there to cast the extra vote needed to break the filibuster , a number of Republicans switched sides and the bill passed with a veto-proof majority
If the Democrats can win victories like this now , they should be able to put a definitive end to the privatization of Medicare next year , when they 're virtually certain to have a larger Congressional majority and will probably hold the White House
More than that , however , advocates of universal health care , like Health Care for America Now , the new group headlined by Elizabeth Edwards , have to be very encouraged by this week 's events
Here 's how it will play out , if all goes well : early next year , President Obama will send his health care plan to Congress
The plan will face vociferous opposition from the insurance industry but the Medicare vote suggests that this time , unlike in 1993 , Democrats will hold together
Unless Democrats win even bigger than expected , however , they wo n't have the 60 Senate votes needed to override a filibuster
What the Medicare fight shows is that the Democrats could nonetheless prevail by taking their case to the public , daring their opponents to stand in the way of health care security so that in the end they get some Republicans to switch sides , and get the legislation through
A lot can still go wrong with this vision
But the odds of achieving universal health care , soon , look a lot higher than they did just a couple of weeks ago
Back in 2002 , a professor turned Federal Reserve official by the name of Ben Bernanke gave a widely quoted speech titled `` Deflation : Making Sure ` It ' Does n't Happen Here .
Like other economists , myself included , Mr. Bernanke was deeply disturbed by Japan 's stubborn , seemingly incurable deflation , which in turn was `` associated with years of painfully slow growth , rising joblessness , and apparently intractable financial problems .
This sort of thing was n't supposed to happen to an advanced nation with sophisticated policy makers
Could something similar happen to the United States
Not to worry , said Mr. Bernanke : the Fed had the tools required to head off an American version of the Japan syndrome , and it would use them if necessary
Today , Mr. Bernanke is the Fed 's chairman - and his 2002 speech reads like famous last words
We are n't literally suffering deflation -LRB- yet -RRB-
But inflation is far below the Fed 's preferred rate of 1.7 to 2 percent , and trending steadily lower ; it 's a good bet that by some measures we 'll be seeing deflation by sometime next year
Meanwhile , we already have painfully slow growth , very high joblessness , and intractable financial problems
And what is the Fed 's response
It 's debating - with ponderous slowness - whether maybe , possibly , it should consider trying to do something about the situation , one of these days
The Fed 's fecklessness is , to be sure , not unique
It has been astonishing and infuriating , as the economic crisis has unfolded , to watch America 's political class defining normalcy down
As recently as two years ago , anyone predicting the current state of affairs -LRB- not only is unemployment disastrously high , but most forecasts say that it will stay very high for years -RRB- would have been dismissed as a crazy alarmist
Now that the nightmare has become reality , however - and yes , it is a nightmare for millions of Americans - Washington seems to feel absolutely no sense of urgency
Are hopes being destroyed , small businesses being driven into bankruptcy , lives being blighted
Never mind , let 's talk about the evils of budget deficits
Still , one might have hoped that the Fed would be different
For one thing , the Fed , unlike the Obama administration , retains considerable freedom of action
It does n't need 60 votes in the Senate ; the outer limits of its policies are n't determined by the views of senators from Nebraska and Maine
Beyond that , the Fed was supposed to be intellectually prepared for this situation
Mr. Bernanke has thought long and hard about how to avoid a Japanese-style economic trap , and the Fed 's researchers have been obsessed for years with the same question
But here we are , visibly sliding toward deflation - and the Fed is standing pat
What should it be doing
Conventional monetary policy , in which the Fed drives down short-term interest rates by buying short-term U.S. government debt , has reached its limit : those short-term rates are already near zero , and ca n't go significantly lower
-LRB- Investors wo n't buy bonds that yield negative interest , since they can always hoard cash instead .
But the message of Mr. Bernanke 's 2002 speech was that there are other things the Fed can do
It can buy longer-term government debt
It can buy private-sector debt
It can try to move expectations by announcing that it will keep short-term rates low for a long time
It can raise its long-run inflation target , to help convince the private sector that borrowing is a good idea and hoarding cash a mistake
Nobody knows how well any one of these actions would work
The point , however , is that there are things the Fed could and should be doing , but is n't
Why not
After all , Fed officials , like most observers , have a fairly grim view of the economy 's prospects
Not grim enough , in my view : Fed presidents , who make forecasts every time the committee that sets interest rates meets , are n't taking the trend toward deflation sufficiently seriously
Nonetheless , even their projections show high unemployment and below-target inflation persisting at least through late 2012
So why not try to do something about it
The closest thing I 've seen to an explanation is a recent speech by Kevin Warsh of the Fed 's Board of Governors , in which he declared that doing what Mr. Bernanke recommended back in 2002 risked undermining the Fed 's `` institutional credibility .
But how , exactly , does it serve the Fed 's credibility when it fails to confront high unemployment , while consistently missing its own inflation targets
How credible is the Bank of Japan after presiding over 15 years of deflation
Whatever is going on , the Fed needs to rethink its priorities , fast
Mr. Bernanke 's `` it '' is n't a hypothetical possibility , it 's on the verge of happening
And the Fed should be doing all it can to stop it
I 'm referring , of course , to the proverbial frog that , placed in a pot of cold water that is gradually heated , never realizes the danger it 's in and is boiled alive
Real frogs will , in fact , jump out of the pot but never mind
The hypothetical boiled frog is a useful metaphor for a very real problem : the difficulty of responding to disasters that creep up on you a bit at a time
And creeping disasters are what we mostly face these days
I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy
These are both areas in which there is a substantial lag before policy actions have their full effect a year or more in the case of the economy , decades in the case of the planet yet in which it 's very hard to get people to do what it takes to head off a catastrophe foretold
And right now , both the economic and the environmental frogs are sitting still while the water gets hotter
Start with economics : last winter the economy was in acute crisis , with a replay of the Great Depression seeming all too possible
And there was a fairly strong policy response in the form of the Obama stimulus plan , even if that plan was n't as strong as some of us thought it should have been
At this point , however , the acute crisis has given way to a much more insidious threat
Most economic forecasters now expect gross domestic product to start growing soon , if it has n't already
But all the signs point to a `` jobless recovery '' : on average , forecasters surveyed by The Wall Street Journal believe that the unemployment rate will keep rising into next year , and that it will be as high at the end of 2010 as it is now
Now , it 's bad enough to be jobless for a few weeks ; it 's much worse being unemployed for months or years
Yet that 's exactly what will happen to millions of Americans if the average forecast is right which means that many of the unemployed will lose their savings , their homes and more
To head off this outcome and remember , this is n't what economic Cassandras are saying ; it 's the forecasting consensus we 'd need to get another round of fiscal stimulus under way very soon
But neither Congress nor , alas , the Obama administration is showing any inclination to act
Now that the free fall is over , all sense of urgency seems to have vanished
This will probably change once the reality of the jobless recovery becomes all too apparent
But by then it will be too late to avoid a slow-motion human and social disaster
Still , the boiled-frog problem on the economy is nothing compared with the problem of getting action on climate change
Put it this way : if the consensus of the economic experts is grim , the consensus of the climate experts is utterly terrifying
At this point , the central forecast of leading climate models not the worst-case scenario but the most likely outcome is utter catastrophe , a rise in temperatures that will totally disrupt life as we know it , if we continue along our present path
How to head off that catastrophe should be the dominant policy issue of our time
But it is n't , because climate change is a creeping threat rather than an attention-grabbing crisis
The full dimensions of the catastrophe wo n't be apparent for decades , perhaps generations
In fact , it will probably be many years before the upward trend in temperatures is so obvious to casual observers that it silences the skeptics
Unfortunately , if we wait to act until the climate crisis is that obvious , catastrophe will already have become inevitable
And while a major environmental bill has passed the House , which was an amazing and inspiring political achievement , the bill fell well short of what the planet really needs and despite this faces steep odds in the Senate
What makes the apparent paralysis of policy especially alarming is that so little is happening when the political situation seems , on the surface , to be so favorable to action
After all , supply-siders and climate-change-deniers no longer control the White House and key Congressional committees
Democrats have a popular president to lead them , a large majority in the House of Representatives and 60 votes in the Senate
And this is n't the old Democratic majority , which was an awkward coalition between Northern liberals and Southern conservatives ; this is , by historical standards , a relatively solid progressive bloc
And let 's be clear : both the president and the party 's Congressional leadership understand the economic and environmental issues perfectly well
So if we ca n't get action to head off disaster now , what would it take
I do n't know the answer
And that 's why I keep thinking about boiling frogs
Republicans are feeling good about the midterms - so good that they 've started saying what they really think
This week the party 's Senate leadership stopped pretending that it cares about deficits , stating explicitly that while we ca n't afford to aid the unemployed or prevent mass layoffs of schoolteachers , cost is literally no object when it comes to tax cuts for the affluent
And that 's one reason - there are others - why you should fear the consequences if the G.O.P. actually does as well in November as it hopes
For a while , leading Republicans posed as stern foes of federal red ink
Two weeks ago , in the official G.O.P. response to President Obama 's weekly radio address , Senator Saxby Chambliss devoted his entire time to the evils of government debt , `` one of the most dangerous threats confronting America today .
He went on , `` At some point we have to say ` enough is enough . '
But this past Monday Jon Kyl of Arizona , the second-ranking Republican in the Senate , was asked the obvious question : if deficits are so worrisome , what about the budgetary cost of extending the Bush tax cuts for the wealthy , which the Obama administration wants to let expire but Republicans want to make permanent
What should replace $ 650 billion or more in lost revenue over the next decade
His answer was breathtaking : `` You do need to offset the cost of increased spending
And that 's what Republicans object to
But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans .
So $ 30 billion in aid to the unemployed is unaffordable , but 20 times that much in tax cuts for the rich does n't count
The next day , Mitch McConnell , the Senate minority leader , confirmed that Mr. Kyl was giving the official party line : `` There 's no evidence whatsoever that the Bush tax cuts actually diminished revenue
They increased revenue , because of the vibrancy of these tax cuts in the economy
So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject .
Now there are many things one could call the Bush economy , an economy that , even before recession struck , was characterized by sluggish job growth and stagnant family incomes ; `` vibrant '' is n't one of them
But the real news here is the confirmation that Republicans remain committed to deep voodoo , the claim that cutting taxes actually increases revenues
It 's not true , of course
Ronald Reagan said that his tax cuts would reduce deficits , then presided over a near-tripling of federal debt
When Bill Clinton raised taxes on top incomes , conservatives predicted economic disaster ; what actually followed was an economic boom and a remarkable swing from budget deficit to surplus
Then the Bush tax cuts came along , helping turn that surplus into a persistent deficit , even before the crash
But we 're talking about voodoo economics here , so perhaps it 's not surprising that belief in the magical powers of tax cuts is a zombie doctrine : no matter how many times you kill it with facts , it just keeps coming back
And despite repeated failure in practice , it is , more than ever , the official view of the G.O.P. Why should this scare you
On paper , solving America 's long-run fiscal problems is eminently doable : stronger cost control for Medicare plus a moderate rise in taxes would get us most of the way there
And the perception that the deficit is manageable has helped keep U.S. borrowing costs low
But if politicians who insist that the way to reduce deficits is to cut taxes , not raise them , start winning elections again , how much faith can anyone have that we 'll do what needs to be done
Yes , we can have a fiscal crisis
But if we do , it wo n't be because we 've spent too much trying to create jobs and help the unemployed
It will be because investors have looked at our politics and concluded , with justification , that we 've turned into a banana republic
Of course , flirting with crisis is arguably part of the plan
There has always been a sense in which voodoo economics was a cover story for the real doctrine , which was `` starve the beast '' : slash revenue with tax cuts , then demand spending cuts to close the resulting budget gap
The point is that starve the beast basically amounts to deliberately creating a fiscal crisis , in the belief that the crisis can be used to push through unpopular policies , like dismantling Social Security
Anyway , we really should thank Senators Kyl and McConnell for their sudden outbursts of candor
They 've now made it clear , in case anyone had doubts , that their previous posturing on the deficit was entirely hypocritical
If they really do have the kind of electoral win they 're expecting , they wo n't try to reduce the deficit - they 'll try to make it explode by demanding even more budget-busting tax cuts
The American economy remains in dire straits , with one worker in six unemployed or underemployed
Yet Goldman Sachs just reported record quarterly profits and it 's preparing to hand out huge bonuses , comparable to what it was paying before the crisis
What does this contrast tell us
First , it tells us that Goldman is very good at what it does
Unfortunately , what it does is bad for America
Second , it shows that Wall Street 's bad habits above all , the system of compensation that helped cause the financial crisis have not gone away
Third , it shows that by rescuing the financial system without reforming it , Washington has done nothing to protect us from a new crisis , and , in fact , has made another crisis more likely
Let 's start by talking about how Goldman makes money
Over the past generation ever since the banking deregulation of the Reagan years the U.S. economy has been `` financialized .
The business of moving money around , of slicing , dicing and repackaging financial claims , has soared in importance compared with the actual production of useful stuff
The sector officially labeled `` securities , commodity contracts and investments '' has grown especially fast , from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007
Such growth would be fine if financialization really delivered on its promises if financial firms made money by directing capital to its most productive uses , by developing innovative ways to spread and reduce risk
But can anyone , at this point , make those claims with a straight face
Financial firms , we now know , directed vast quantities of capital into the construction of unsellable houses and empty shopping malls
They increased risk rather than reducing it , and concentrated risk rather than spreading it
In effect , the industry was selling dangerous patent medicine to gullible consumers
Goldman 's role in the financialization of America was similar to that of other players , except for one thing : Goldman did n't believe its own hype
Other banks invested heavily in the same toxic waste they were selling to the public at large
Goldman , famously , made a lot of money selling securities backed by subprime mortgages then made a lot more money by selling mortgage-backed securities short , just before their value crashed
All of this was perfectly legal , but the net effect was that Goldman made profits by playing the rest of us for suckers
And Wall Streeters have every incentive to keep playing that kind of game
The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win , tails other people lose
If you 're a banker , and you generate big short-term profits , you get lavishly rewarded and you do n't have to give the money back if and when those profits turn out to have been a mirage
You have every reason , then , to steer investors into taking risks they do n't understand
And the events of the past year have skewed those incentives even more , by putting taxpayers as well as investors on the hook if things go wrong
I wo n't try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts , especially the government 's assumption of A.I.G. 's liabilities
What 's clear is that Wall Street in general , Goldman very much included , benefited hugely from the government 's provision of a financial backstop an assurance that it will rescue major financial players whenever things go wrong
You can argue that such rescues are necessary if we 're to avoid a replay of the Great Depression
In fact , I agree
But the result is that the financial system 's liabilities are now backed by an implicit government guarantee
Now the last time there was a comparable expansion of the financial safety net , the creation of federal deposit insurance in the 1930s , it was accompanied by much tighter regulation , to ensure that banks did n't abuse their privileges
This time , new regulations are still in the drawing-board stage and the finance lobby is already fighting against even the most basic protections for consumers
If these lobbying efforts succeed , we 'll have set the stage for an even bigger financial disaster a few years down the road
The next crisis could look something like the savings-and-loan mess of the 1980s , in which deregulated banks gambled with , or in some cases stole , taxpayers ' money except that it would involve the financial industry as a whole
The bottom line is that Goldman 's blowout quarter is good news for Goldman and the people who work there
It 's good news for financial superstars in general , whose paychecks are rapidly climbing back to precrisis levels
But it 's bad news for almost everyone else
It 's true that some prognosticators still expect a `` V-shaped '' recovery in which the economy springs back rapidly from its slump
On this view , any day now it will be morning in America
But if the experience of the last 20 years is any guide , the prospect for the economy is n't V-shaped , it 's L-ish : rather than springing back , we 'll have a prolonged period of flat or at best slowly improving performance
Let 's start with housing
According to the widely used Case-Shiller index , average U.S. home prices fell 17 percent over the past year
Yet we 're in the process of deflating a huge housing bubble , and housing prices probably still have a long way to fall
Specifically , real home prices , that is , prices adjusted for inflation in the rest of the economy , went up more than 70 percent from 2000 to 2006
Since then they 've come way down but they 're still more than 30 percent above the 2000 level
Should we expect prices to fall all the way back
Well , in the late 1980s , Los Angeles experienced a large localized housing bubble : real home prices rose about 50 percent before the bubble popped
Home prices then proceeded to fall by a quarter , which combined with ongoing inflation brought real housing prices right back to their prebubble level
And here 's the thing : this process took more than five years L.A. home prices did n't bottom out until the mid-1990s
If the current housing slump runs on the same schedule , we wo n't be seeing a recovery until 2011 or later
What about the broader economy
You might be tempted to take comfort from the fact that the last two recessions , in 1990-1991 and 2001 , were both quite short
But in each case , the official end of the recession was followed by a long period of sluggish economic growth and rising unemployment that felt to most Americans like a continued recession
Thus , the 1990 recession officially ended in March 1991 , but unemployment kept rising through much of 1992 , allowing Bill Clinton to win the election on the basis of the economy , stupid
The next recession officially began in March 2001 and ended in November , but unemployment kept rising until June 2003
These prolonged recession-like episodes probably reflect the changing nature of the business cycle
Earlier recessions were more or less deliberately engineered by the Federal Reserve , which raised interest rates to control inflation
Modern slumps , by contrast , have been hangovers from bouts of irrational exuberance the savings and loan free-for-all of the 1980s , the technology bubble of the 1990s and now the housing bubble
Ending those old-fashioned recessions was easy because all the Fed had to do was relent
Ending modern slumps is much more difficult because the economy needs to find something to replace the burst bubble
The Fed , in particular , has a hard time getting traction in modern recessions
In 2002 , there was a strong sense that the Fed was `` pushing on a string '' : it kept cutting interest rates , but nobody wanted to borrow until the housing bubble took off
And now it 's happening again
The Onion , as usual , hit the nail on the head with its recent headline : `` Recession-plagued nation demands new bubble to invest in .
But we probably wo n't find another bubble at least not one big enough to fuel a quick recovery
And this has , among other things , important political implications
Given the state of the economy , it 's hard to see how Barack Obama can lose the 2008 election
An anecdote : This week a passing motorist shouted at a crowd waiting outside a branch of IndyMac , the failed bank , `` Bush economics did n't work
They are right-wing Republican thieves !
The crowd cheered
But what the economy gives , it can also take away
If the current slump follows the typical modern pattern , the economy will stay depressed well into 2010 , if not beyond plenty of time for the public to start blaming the new incumbent , and punish him in the midterm elections
To avoid that fate , Mr. Obama if he is indeed the next president will have to move quickly and forcefully to address America 's economic discontent
That means another stimulus plan , bigger , better , and more sustained than the one Congress passed earlier this year
It also means passing longer-term measures to reduce economic anxiety above all , universal health care
If you ask me , there is n't much suspense in this year 's election : barring some extraordinary mistakes , Mr. Obama will win
Assuming he wins , the real question is what he 'll make of his victory
The latest hot political topic is the `` Obama paradox '' - the supposedly mysterious disconnect between the president 's achievements and his numbers
The line goes like this : The administration has had multiple big victories in Congress , most notably on health reform , yet President Obama 's approval rating is weak
What follows is speculation about what 's holding his numbers down : He 's too liberal for a center-right nation
No , he 's too intellectual , too Mr. Spock , for voters who want more passion
And so on
But the only real puzzle here is the persistence of the pundit delusion , the belief that the stuff of daily political reporting - who won the news cycle , who had the snappiest comeback - actually matters
This delusion is , of course , most prevalent among pundits themselves , but it 's also widespread among political operatives
And I 'd argue that susceptibility to the pundit delusion is part of the Obama administration 's problem
What political scientists , as opposed to pundits , tell us is that it really is the economy , stupid
Today , Ronald Reagan is often credited with godlike political skills - but in the summer of 1982 , when the U.S. economy was performing badly , his approval rating was only 42 percent
My Princeton colleague Larry Bartels sums it up as follows : `` Objective economic conditions - not clever television ads , debate performances , or the other ephemera of day-to-day campaigning - are the single most important influence upon an incumbent president 's prospects for re-election .
If the economy is improving strongly in the months before an election , incumbents do well ; if it 's stagnating or retrogressing , they do badly
Now , the fact that `` ephemera '' do n't matter seems reassuring , suggesting that voters are n't swayed by cheap tricks
Unfortunately , however , the evidence suggests that issues do n't matter either , in part because voters are often deeply ill informed
Suppose , for example , that you believed claims that voters are more concerned about the budget deficit than they are about jobs
-LRB- That 's not actually true , but never mind .
Even so , how much credit would you expect Democrats to get for reducing the deficit
In 1996 voters were asked whether the deficit had gone up or down under Bill Clinton
It had , in fact , plunged - but a plurality of voters , and a majority of Republicans , said that it had risen
There 's no point berating voters for their ignorance : people have bills to pay and children to raise , and most do n't spend their free time studying fact sheets
Instead , they react to what they see in their own lives and the lives of people they know
Given the realities of a bleak employment picture , Americans are unhappy - and they 're set to punish those in office
What should Mr. Obama have done
Some political analysts , like Charlie Cook , say that he made a mistake by pursuing health reform , that he should have focused on the economy
As far as I can tell , however , these analysts are n't talking about pursuing different policies - they 're saying that he should have talked more about the subject
But what matters is actual economic results
The best way for Mr. Obama to have avoided an electoral setback this fall would have been enacting a stimulus that matched the scale of the economic crisis
Obviously , he did n't do that
Maybe he could n't have passed an adequate-sized plan , but the fact is that he did n't even try
True , senior economic officials reportedly downplayed the need for a really big effort , in effect overruling their staff ; but it 's also clear that political advisers believed that a smaller package would get more friendly headlines , and that the administration would look better if it won its first big Congressional test
In short , it looks as if the administration itself was taken in by the pundit delusion , focusing on how its policies would play in the news rather than on their actual impact on the economy
Republicans , by the way , seem less susceptible to this delusion
Since Mr. Obama took office , they have engaged in relentless obstruction , obviously unworried about how their actions would look or be reported
And it 's working : by blocking Democratic efforts to alleviate the economy 's woes , the G.O.P. is helping its chances of a big victory in November
Can Mr. Obama do anything in the time that remains
Midterm elections , where turnout is crucial , are n't quite like presidential elections , where the economy is all
Mr. Obama 's best hope at this point is to close the `` enthusiasm gap '' by taking strong stands that motivate Democrats to come out and vote
But I do n't expect to see that happen
What I expect , instead , if and when the midterms go badly , is that the usual suspects will say that it was because Mr. Obama was too liberal - when his real mistake was doing too little to create jobs
For a couple of years , it was the love that dared not speak his name
In 2008 , Republican candidates hardly ever mentioned the president still sitting in the White House
After the election , the G.O.P. did its best to shout down all talk about how we got into the mess we 're in , insisting that we needed to look forward , not back
And many in the news media played along , acting as if it was somehow uncouth for Democrats even to mention the Bush era and its legacy
The truth , however , is that the only problem Republicans ever had with George W. Bush was his low approval rating
They always loved his policies and his governing style - and they want them back
In recent weeks , G.O.P. leaders have come out for a complete return to the Bush agenda , including tax breaks for the rich and financial deregulation
They 've even resurrected the plan to cut future Social Security benefits
But they have a problem : how can they embrace President Bush 's policies , given his record
After all , Mr. Bush 's two signature initiatives were tax cuts and the invasion of Iraq ; both , in the eyes of the public , were abject failures
Tax cuts never yielded the promised prosperity , but along with other policies - especially the unfunded war in Iraq - they converted a budget surplus into a persistent deficit
Meanwhile , the W.M.D. we invaded Iraq to eliminate turned out not to exist , and by 2008 a majority of the public believed not just that the invasion was a mistake but that the Bush administration deliberately misled the nation into war
What 's a Republican to do
You know the answer
There 's now a concerted effort under way to rehabilitate Mr. Bush 's image on at least three fronts : the economy , the deficit and the war
On the economy : Last week Mitch McConnell , the Senate minority leader , declared that `` there 's no evidence whatsoever that the Bush tax cuts actually diminished revenue
They increased revenue , because of the vibrancy of these tax cuts in the economy .
So now the word is that the Bush-era economy was characterized by `` vibrancy .
I guess it depends on the meaning of the word `` vibrant .
The actual record of the Bush years was -LRB- i -RRB- two and half years of declining employment , followed by -LRB- ii -RRB- four and a half years of modest job growth , at a pace significantly below the eight-year average under Bill Clinton , followed by -LRB- iii -RRB- a year of economic catastrophe
In 2007 , at the height of the `` Bush boom , '' such as it was , median household income , adjusted for inflation , was still lower than it had been in 2000
But the Bush apologists hope that you wo n't remember all that
And they also have a theory , which I 've been hearing more and more - namely , that President Obama , though not yet in office or even elected , caused the 2008 slump
You see , people were worried in advance about his future policies , and that 's what caused the economy to tank
On the deficit : Republicans are now claiming that the Bush administration was actually a paragon of fiscal responsibility , and that the deficit is Mr. Obama 's fault
`` The last year of the Bush administration , '' said Mr. McConnell recently , `` the deficit as a percentage of gross domestic product was 3.2 percent , well within the range of what most economists think is manageable
A year and a half later , it 's almost 10 percent .
But that 3.2 percent figure , it turns out , is for fiscal 2008 - which was n't the last year of the Bush administration , because it ended in September of 2008
In other words , it ended just as the failure of Lehman Brothers - on Mr. Bush 's watch - was triggering a broad financial and economic collapse
This collapse caused the deficit to soar : By the first quarter of 2009 - with only a trickle of stimulus funds flowing - federal borrowing had already reached almost 9 percent of G.D.P. To some of us , this says that the economic crisis that began under Mr. Bush is responsible for the great bulk of our current deficit
But the Republican Party is having none of it
Finally , on the war : For most Americans , the whole debate about the war is old if painful news - but not for those obsessed with refurbishing the Bush image
Karl Rove now claims that his biggest mistake was letting Democrats get away with the `` shameful '' claim that the Bush administration hyped the case for invading Iraq
Let the whitewashing begin
Again , Republicans are n't trying to rescue George W. Bush 's reputation for sentimental reasons ; they 're trying to clear the way for a return to Bush policies
And this carries a message for anyone hoping that the next time Republicans are in power , they 'll behave differently
If you believe that they 've learned something - say , about fiscal prudence or the importance of effective regulation - you 're kidding yourself
You might as well face it : they 're addicted to Bush
Shame on them
The health care system is in crisis
The fate of America 's middle class hangs in the balance
And there on our TVs was a president with an impressive command of the issues , who truly understands the stakes
Mr. Obama was especially good when he talked about controlling medical costs
And there 's a crucial lesson there namely , that when it comes to reforming health care , compassion and cost-effectiveness go hand in hand
To see what I mean , compare what Mr. Obama has said and done about health care with the statements and actions of his predecessor
President Bush , you may remember , was notably unconcerned with the plight of the uninsured
`` I mean , people have access to health care in America , '' he once remarked
`` After all , you just go to an emergency room .
Meanwhile , Mr. Bush claimed to be against excessive government expenditure
So what did he do to rein in the cost of Medicare , the biggest single item driving federal spending
In fact , the 2003 Medicare Modernization Act drove costs up both by preventing bargaining over drug prices and by locking in subsidies to insurance companies
Now President Obama is trying to provide every American with access to health insurance and he 's also doing more to control health care costs than any previous president
I do n't know how many people understand the significance of Mr. Obama 's proposal to give MedPAC , the expert advisory board to Medicare , real power
But it 's a major step toward reducing the useless spending the proliferation of procedures with no medical benefits that bloats American health care costs
And both the Obama administration and Congressional Democrats have also been emphasizing the importance of `` comparative effectiveness research '' seeing which medical procedures actually work
So the Obama administration 's commitment to health care for all goes along with an unprecedented willingness to get serious about spending health care dollars wisely
And that 's part of a broader pattern
Many health care experts believe that one main reason we spend far more on health than any other advanced nation , without better health outcomes , is the fee-for-service system in which hospitals and doctors are paid for procedures , not results
As the president said Wednesday , this creates an incentive for health providers to do more tests , more operations , and so on , whether or not these procedures actually help patients
So where in America is there serious consideration of moving away from fee-for-service to a more comprehensive , integrated approach to health care
The answer is : Massachusetts which introduced a health-care plan three years ago that was , in some respects , a dress rehearsal for national health reform , and is now looking for ways to help control costs
Why does meaningful action on medical costs go along with compassion
One answer is that compassion means not closing your eyes to the human consequences of rising costs
When health insurance premiums doubled during the Bush years , our health care system `` controlled costs '' by dropping coverage for many workers but as far as the Bush administration was concerned , that was n't a problem
If you believe in universal coverage , on the other hand , it is a problem , and demands a solution
Beyond that , I 'd suggest that would-be health reformers wo n't have the moral authority to confront our system 's inefficiency unless they 're also prepared to end its cruelty
If President Bush had tried to rein in Medicare spending , he would have been accused , with considerable justice , of cutting benefits so that he could give the wealthy even more tax cuts
President Obama , by contrast , can link Medicare reform with the goal of protecting less fortunate Americans and making the middle class more secure
As a practical , political matter , then , controlling health care costs and expanding health care access are n't opposing alternatives you have to do both , or neither
At one point in his remarks Mr. Obama talked about a red pill and a blue pill
I suspect , though I 'm not sure , that he was alluding to the scene in the movie `` The Matrix '' in which one pill brings ignorance and the other knowledge
Well , in the case of health care , one pill means continuing on our current path a path along which health care premiums will continue to soar , the number of uninsured Americans will skyrocket and Medicare costs will break the federal budget
The other pill means reforming our system , guaranteeing health care for all Americans at the same time we make medicine more cost-effective
Which pill would you choose
Never say that the gods lack a sense of humor
I bet they 're still chuckling on Olympus over the decision to make the first half of 2010 - the year in which all hope of action to limit climate change died - the hottest such stretch on record
Of course , you ca n't infer trends in global temperatures from one year 's experience
But ignoring that fact has long been one of the favorite tricks of climate-change deniers : they point to an unusually warm year in the past , and say `` See , the planet has been cooling , not warming , since 1998 !
Actually , 2005 , not 1998 , was the warmest year to date - but the point is that the record-breaking temperatures we 're currently experiencing have made a nonsense argument even more nonsensical ; at this point it does n't work even on its own terms
But will any of the deniers say `` O.K. , I guess I was wrong , '' and support climate action
And the planet will continue to cook
So why did n't climate-change legislation get through the Senate
Let 's talk first about what did n't cause the failure , because there have been many attempts to blame the wrong people
First of all , we did n't fail to act because of legitimate doubts about the science
Every piece of valid evidence - long-term temperature averages that smooth out year-to-year fluctuations , Arctic sea ice volume , melting of glaciers , the ratio of record highs to record lows - points to a continuing , and quite possibly accelerating , rise in global temperatures
Nor is this evidence tainted by scientific misbehavior
You 've probably heard about the accusations leveled against climate researchers - allegations of fabricated data , the supposedly damning e-mail messages of `` Climategate , '' and so on
What you may not have heard , because it has received much less publicity , is that every one of these supposed scandals was eventually unmasked as a fraud concocted by opponents of climate action , then bought into by many in the news media
You do n't believe such things can happen
Think Shirley Sherrod
Did reasonable concerns about the economic impact of climate legislation block action
It has always been funny , in a gallows humor sort of way , to watch conservatives who laud the limitless power and flexibility of markets turn around and insist that the economy would collapse if we were to put a price on carbon
All serious estimates suggest that we could phase in limits on greenhouse gas emissions with at most a small impact on the economy 's growth rate
So it was n't the science , the scientists , or the economics that killed action on climate change
What was it
The answer is , the usual suspects : greed and cowardice
If you want to understand opposition to climate action , follow the money
The economy as a whole would n't be significantly hurt if we put a price on carbon , but certain industries - above all , the coal and oil industries - would
And those industries have mounted a huge disinformation campaign to protect their bottom lines
Look at the scientists who question the consensus on climate change ; look at the organizations pushing fake scandals ; look at the think tanks claiming that any effort to limit emissions would cripple the economy
Again and again , you 'll find that they 're on the receiving end of a pipeline of funding that starts with big energy companies , like Exxon Mobil , which has spent tens of millions of dollars promoting climate-change denial , or Koch Industries , which has been sponsoring anti-environmental organizations for two decades
Or look at the politicians who have been most vociferously opposed to climate action
Where do they get much of their campaign money
You already know the answer
By itself , however , greed would n't have triumphed
It needed the aid of cowardice - above all , the cowardice of politicians who know how big a threat global warming poses , who supported action in the past , but who deserted their posts at the crucial moment
There are a number of such climate cowards , but let me single out one in particular : Senator John McCain
There was a time when Mr. McCain was considered a friend of the environment
Back in 2003 he burnished his maverick image by co-sponsoring legislation that would have created a cap-and-trade system for greenhouse gas emissions
He reaffirmed support for such a system during his presidential campaign , and things might look very different now if he had continued to back climate action once his opponent was in the White House
But he did n't - and it 's hard to see his switch as anything other than the act of a man willing to sacrifice his principles , and humanity 's future , for the sake of a few years added to his political career
Alas , Mr. McCain was n't alone ; and there will be no climate bill
Greed , aided by cowardice , has triumphed
And the whole world will pay the price
Right now the fate of health care reform seems to rest in the hands of relatively conservative Democrats mainly members of the Blue Dog Coalition , created in 1995
And you might be tempted to say that President Obama needs to give those Democrats what they want
But he ca n't because the Blue Dogs are n't making sense
To grasp the problem , you need to understand the outline of the proposed reform -LRB- all of the Democratic plans on the table agree on the essentials .
Reform , if it happens , will rest on four main pillars : regulation , mandates , subsidies and competition
By regulation I mean the nationwide imposition of rules that would prevent insurance companies from denying coverage based on your medical history , or dropping your coverage when you get sick
This would stop insurers from gaming the system by covering only healthy people
On the other side , individuals would also be prevented from gaming the system : Americans would be required to buy insurance even if they 're currently healthy , rather than signing up only when they need care
And all but the smallest businesses would be required either to provide their employees with insurance , or to pay fees that help cover the cost of subsidies subsidies that would make insurance affordable for lower-income American families
Finally , there would be a public option : a government-run insurance plan competing with private insurers , which would help hold down costs
The subsidy portion of health reform would cost around a trillion dollars over the next decade
In all the plans currently on the table , this expense would be offset with a combination of cost savings elsewhere and additional taxes , so that there would be no overall effect on the federal deficit
So what are the objections of the Blue Dogs
Well , they talk a lot about fiscal responsibility , which basically boils down to worrying about the cost of those subsidies
And it 's tempting to stop right there , and cry foul
After all , where were those concerns about fiscal responsibility back in 2001 , when most conservative Democrats voted enthusiastically for that year 's big Bush tax cut a tax cut that added $ 1.35 trillion to the deficit
But it 's actually much worse than that because even as they complain about the plan 's cost , the Blue Dogs are making demands that would greatly increase that cost
There has been a lot of publicity about Blue Dog opposition to the public option , and rightly so : a plan without a public option to hold down insurance premiums would cost taxpayers more than a plan with such an option
But Blue Dogs have also been complaining about the employer mandate , which is even more at odds with their supposed concern about spending
The Congressional Budget Office has already weighed in on this issue : without an employer mandate , health care reform would be undermined as many companies dropped their existing insurance plans , forcing workers to seek federal aid and causing the cost of subsidies to balloon
It makes no sense at all to complain about the cost of subsidies and at the same time oppose an employer mandate
So what do the Blue Dogs want
Maybe they 're just being complete hypocrites
It 's worth remembering the history of one of the Blue Dog Coalition 's founders : former Representative Billy Tauzin of Louisiana
Mr. Tauzin switched to the Republicans soon after the group 's creation ; eight years later he pushed through the 2003 Medicare Modernization Act , a deeply irresponsible bill that included huge giveaways to drug and insurance companies
And then he left Congress to become , yes , the lavishly paid president of PhRMA , the pharmaceutical industry lobby
One interpretation , then , is that the Blue Dogs are basically following in Mr. Tauzin 's footsteps : if their position is incoherent , it 's because they 're nothing but corporate tools , defending special interests
And as the Center for Responsive Politics pointed out in a recent report , drug and insurance companies have lately been pouring money into Blue Dog coffers
But I guess I 'm not quite that cynical
After all , today 's Blue Dogs are politicians who did n't go the Tauzin route they did n't switch parties even when the G.O.P. seemed to hold all the cards and pundits were declaring the Republican majority permanent
So these are Democrats who , despite their relative conservatism , have shown some commitment to their party and its values
Now , however , they face their moment of truth
For they ca n't extract major concessions on the shape of health care reform without dooming the whole project : knock away any of the four main pillars of reform , and the whole thing will collapse and probably take the Obama presidency down with it
Is that what the Blue Dogs really want to see happen
We 'll soon find out
So the big housing bill has passed Congress
That 's good news : Fannie and Freddie had to be rescued , and the bill 's other main provision a special loan program to head off foreclosures will help some hard-pressed families
It 's much better to have this bill than not
But I hope nobody thinks that Congress has done all , or even a large fraction , of what needs to be done
This bill is the latest in a series of temporary fixes to the financial system attempts to hold the thing together with bungee cords and masking tape that have , at least so far , succeeded in staving off complete collapse
But those fixes have done nothing to resolve the system 's underlying flaws
In fact , they set the stage for even bigger future disasters unless they 're followed up with fundamental reforms
Before I get to that , let 's be clear about one thing : Even if this bill succeeds in its aims , heading off a severe credit contraction and helping some homeowners avoid foreclosure , it wo n't change the fact that this decade 's double bubble , in housing prices and loose lending , has been a disaster for millions of Americans
After all , the new bill will , at best , make a modest dent in the rate of foreclosures
And it does nothing at all for those who are n't in danger of losing their houses but are seeing much if not all of their net worth wiped out a particularly bitter blow to Americans who are nearing retirement , or thought they were until they discovered that they could n't afford to stop working
It 's too late to avoid that pain
But we can try to ensure that we do n't face more and bigger crises in the future
The back story to the current crisis is the way traditional banks banks with federally insured deposits , which are limited in the risks they 're allowed to take and the amount of leverage they can take on have been pushed aside by unregulated financial players
We were assured by the likes of Alan Greenspan that this was no problem : the market would enforce disciplined risk-taking , and anyway , taxpayer funds were n't on the line
And then reality struck
Far from being disciplined in their risk-taking , lenders went wild
Concerns about the ability of borrowers to repay were waved aside ; so were questions about whether soaring house prices made sense
Lenders ignored the warning signs because they were part of a system built around the principle of heads I win , tails someone else loses
Mortgage originators did n't worry about the solvency of borrowers , because they quickly sold off the loans they made , generally to investors who had no idea what they were buying
Throughout the financial industry , executives received huge bonuses when they seemed to be earning big profits , but did n't have to give the money back when those profits turned into even bigger losses
And as for that business about taxpayers ' money not being at risk
Never mind
Over the past year the Federal Reserve and the U.S. Treasury have put hundreds of billions of taxpayer dollars on the line , propping up financial institutions deemed too big or too strategic to fail
-LRB- I 'm not blaming them I do n't think they had any alternative .
Meanwhile , those traditional , regulated banks played a minor role in the lending frenzy , except to the extent that they had unregulated , `` off balance sheet '' subsidiaries
The case of IndyMac which failed because it specialized in risky Alt-A loans while regulators looked the other way is the exception that proves the rule
The moral of this story seems clear and it 's what Barney Frank , the chairman of the House Financial Services Committee , has been saying for some time : financial regulation needs to be extended to cover a much wider range of institutions
Basically , the financial framework created in the 1930s , which brought generations of relative stability , needs to be updated to 21st-century conditions
The desperate rescue efforts of the past year make expanded regulation even more urgent
If the government is going to stand behind financial institutions , those institutions had better be carefully regulated because otherwise the game of heads I win , tails you lose will be played more furiously than ever , at taxpayers ' expense
Of course , proponents of expanded regulation , no matter how compelling their arguments , will have to contend with very well-financed opposition from the financial industry
And as Upton Sinclair pointed out , it 's hard to get a man to understand something when his salary or , we might add , his campaign war chest depends on his not understanding it
But let 's hope that the sheer scale of this financial crisis has concentrated enough minds to make reform possible
Otherwise , the next crisis will be even bigger
When I was young and na ve , I believed that important people took positions based on careful consideration of the options
Now I know better
Much of what Serious People believe rests on prejudices , not analysis
And these prejudices are subject to fads and fashions
Which brings me to the subject of today 's column
For the last few months , I and others have watched , with amazement and horror , the emergence of a consensus in policy circles in favor of immediate fiscal austerity
That is , somehow it has become conventional wisdom that now is the time to slash spending , despite the fact that the world 's major economies remain deeply depressed
This conventional wisdom is n't based on either evidence or careful analysis
Instead , it rests on what we might charitably call sheer speculation , and less charitably call figments of the policy elite 's imagination - specifically , on belief in what I 've come to think of as the invisible bond vigilante and the confidence fairy
Bond vigilantes are investors who pull the plug on governments they perceive as unable or unwilling to pay their debts
Now there 's no question that countries can suffer crises of confidence -LRB- see Greece , debt of -RRB-
But what the advocates of austerity claim is that -LRB- a -RRB- the bond vigilantes are about to attack America , and -LRB- b -RRB- spending anything more on stimulus will set them off
What reason do we have to believe that any of this is true
Yes , America has long-run budget problems , but what we do on stimulus over the next couple of years has almost no bearing on our ability to deal with these long-run problems
As Douglas Elmendorf , the director of the Congressional Budget Office , recently put it , `` There is no intrinsic contradiction between providing additional fiscal stimulus today , while the unemployment rate is high and many factories and offices are underused , and imposing fiscal restraint several years from now , when output and employment will probably be close to their potential .
Nonetheless , every few months we 're told that the bond vigilantes have arrived , and we must impose austerity now now now to appease them
Three months ago , a slight uptick in long-term interest rates was greeted with near hysteria : `` Debt Fears Send Rates Up , '' was the headline at The Wall Street Journal , although there was no actual evidence of such fears , and Alan Greenspan pronounced the rise a `` canary in the mine .
Since then , long-term rates have plunged again
Far from fleeing U.S. government debt , investors evidently see it as their safest bet in a stumbling economy
Yet the advocates of austerity still assure us that bond vigilantes will attack any day now if we do n't slash spending immediately
But do n't worry : spending cuts may hurt , but the confidence fairy will take away the pain
`` The idea that austerity measures could trigger stagnation is incorrect , '' declared Jean-Claude Trichet , the president of the European Central Bank , in a recent interview
Because `` confidence-inspiring policies will foster and not hamper economic recovery .
What 's the evidence for the belief that fiscal contraction is actually expansionary , because it improves confidence
-LRB- By the way , this is precisely the doctrine expounded by Herbert Hoover in 1932 .
Well , there have been historical cases of spending cuts and tax increases followed by economic growth
But as far as I can tell , every one of those examples proves , on closer examination , to be a case in which the negative effects of austerity were offset by other factors , factors not likely to be relevant today
For example , Ireland 's era of austerity-with-growth in the 1980s depended on a drastic move from trade deficit to trade surplus , which is n't a strategy everyone can pursue at the same time
And current examples of austerity are anything but encouraging
Ireland has been a good soldier in this crisis , grimly implementing savage spending cuts
Its reward has been a Depression-level slump - and financial markets continue to treat it as a serious default risk
Other good soldiers , like Latvia and Estonia , have done even worse - and all three nations have , believe it or not , had worse slumps in output and employment than Iceland , which was forced by the sheer scale of its financial crisis to adopt less orthodox policies
So the next time you hear serious-sounding people explaining the need for fiscal austerity , try to parse their argument
Almost surely , you 'll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy , on the belief that invisible vigilantes will punish us if we 're bad and the confidence fairy will reward us if we 're good
And real-world policy - policy that will blight the lives of millions of working families - is being built on that foundation
Why does the Obama administration keep looking for love in all the wrong places
Why does it go out of its way to alienate its friends , while wooing people who will never waver in their hatred
These questions were inspired by the ongoing suspense over whether President Obama will do the obviously right thing and nominate Elizabeth Warren to lead the new consumer financial protection agency
But the Warren affair is only the latest chapter in an ongoing saga
Mr. Obama rode into office on a vast wave of progressive enthusiasm
This enthusiasm was bound to be followed by disappointment , and not just because the president was always more centrist and conventional than his fervent supporters imagined
Given the facts of politics , and above all the difficulty of getting anything done in the face of lock step Republican opposition , he was n't going to be the transformational figure some envisioned
And Mr. Obama has delivered in important ways
Above all , he managed -LRB- with a lot of help from Nancy Pelosi -RRB- to enact a health reform that , imperfect as it is , will greatly improve Americans ' lives - unless a Republican Congress manages to sabotage its implementation
But progressive disillusionment is n't just a matter of sky-high expectations meeting prosaic reality
Threatened filibusters did n't force Mr. Obama to waffle on torture ; to escalate in Afghanistan ; to choose , with exquisitely bad timing , to loosen the rules on offshore drilling early this year
Then there are the appointments
Yes , the administration needed experienced hands
But did all the senior members of the economics team have to be prot g s of Robert Rubin , the apostle of financial deregulation
Was it necessary to install Ken Salazar at the Interior Department over the objections of environmentalists who feared , rightly , that his ties to extractive industries would make him slow to clean up a corrupt agency
And where 's this administration 's Frances Perkins
As F.D.R. 's labor secretary , Perkins , a longtime crusader for workers ' rights , served as a symbol of the New Deal 's commitment to change
I have nothing against Hilda Solis , the current labor secretary - but neither she nor any other senior figure in the administration is a progressive with enough independent stature to play that kind of role
What explains Mr. Obama 's consistent snubbing of those who made him what he is
Does he fear that his enemies would use any support for progressive people or ideas as an excuse to denounce him as a left-wing extremist
Well , as you may have noticed , they do n't need such excuses : He 's been portrayed as a socialist because he enacted Mitt Romney 's health-care plan , as a virulent foe of business because he 's been known to mention that corporations sometimes behave badly
The point is that Mr. Obama 's attempts to avoid confrontation have been counterproductive
His opponents remain filled with a passionate intensity , while his supporters , having received no respect , lack all conviction
And in a midterm election , where turnout is crucial , the `` enthusiasm gap '' between Republicans and Democrats could spell catastrophe for the Obama agenda
Which brings me back to Ms. Warren
The debate over financial reform , in which the G.O.P. has taken the side of the bad guys , should be a political winner for Democrats
Much of the reform , however , is deeply technical : `` Maintain the requirement that derivatives be traded on public exchanges !
does n't fit on a placard
But protecting consumers , ensuring that they are n't the victims of predatory financial practices , is something voters can relate to
And choosing a high-profile consumer advocate to lead the agency providing that protection - someone whose scholarship and advocacy were largely responsible for the agency 's creation - is the natural move , both substantively and politically
Meanwhile , the alternative - disappointing supporters yet again by choosing some little-known technocrat - seems like an obvious error
So why is this issue still up in the air
Yes , Republicans might well try to filibuster a Warren appointment , but that 's a fight the administration should welcome
O.K. , I do n't really know what 's going on
But I worry that Mr. Obama is still wrapped up in his dream of transcending partisanship , while his aides dislike the idea of having to deal with strong , independent voices
And the end result of this game-playing is an administration that seems determined to alienate its friends
Just to be clear , progressives would be foolish to sit out this election : Mr. Obama may not be the politician of their dreams , but his enemies are definitely the stuff of their nightmares
But Mr. Obama has a responsibility , too
He ca n't expect strong support from people his administration keeps ignoring and insulting
At a recent town hall meeting , a man stood up and told Representative Bob Inglis to `` keep your government hands off my Medicare .
The congressman , a Republican from South Carolina , tried to explain that Medicare is already a government program but the voter , Mr. Inglis said , `` was n't having any of it .
It 's a funny story but it illustrates the extent to which health reform must climb a wall of misinformation
It 's not just that many Americans do n't understand what President Obama is proposing ; many people do n't understand the way American health care works right now
They do n't understand , in particular , that getting the government involved in health care would n't be a radical step : the government is already deeply involved , even in private insurance
And that government involvement is the only reason our system works at all
The key thing you need to know about health care is that it depends crucially on insurance
You do n't know when or whether you 'll need treatment but if you do , treatment can be extremely expensive , well beyond what most people can pay out of pocket
Triple coronary bypasses , not routine doctor 's visits , are where the real money is , so insurance is essential
Yet private markets for health insurance , left to their own devices , work very badly : insurers deny as many claims as possible , and they also try to avoid covering people who are likely to need care
Horror stories are legion : the insurance company that refused to pay for urgently needed cancer surgery because of questions about the patient 's acne treatment ; the healthy young woman denied coverage because she briefly saw a psychologist after breaking up with her boyfriend
And in their efforts to avoid `` medical losses , '' the industry term for paying medical bills , insurers spend much of the money taken in through premiums not on medical treatment , but on `` underwriting '' screening out people likely to make insurance claims
In the individual insurance market , where people buy insurance directly rather than getting it through their employers , so much money goes into underwriting and other expenses that only around 70 cents of each premium dollar actually goes to care
Still , most Americans do have health insurance , and are reasonably satisfied with it
How is that possible , when insurance markets work so badly
The answer is government intervention
Most obviously , the government directly provides insurance via Medicare and other programs
Before Medicare was established , more than 40 percent of elderly Americans lacked any kind of health insurance
Today , Medicare which is , by the way , one of those `` single payer '' systems conservatives love to demonize covers everyone 65 and older
And surveys show that Medicare recipients are much more satisfied with their coverage than Americans with private insurance
Still , most Americans under 65 do have some form of private insurance
The vast majority , however , do n't buy it directly : they get it through their employers
There 's a big tax advantage to doing it that way , since employer contributions to health care are n't considered taxable income
But to get that tax advantage employers have to follow a number of rules ; roughly speaking , they ca n't discriminate based on pre-existing medical conditions or restrict benefits to highly paid employees
And it 's thanks to these rules that employment-based insurance more or less works , at least in the sense that horror stories are a lot less common than they are in the individual insurance market
So here 's the bottom line : if you currently have decent health insurance , thank the government
It 's true that if you 're young and healthy , with nothing in your medical history that could possibly have raised red flags with corporate accountants , you might have been able to get insurance without government intervention
But time and chance happen to us all , and the only reason you have a reasonable prospect of still having insurance coverage when you need it is the large role the government already plays
Which brings us to the current debate over reform
Right-wing opponents of reform would have you believe that President Obama is a wild-eyed socialist , attacking the free market
But unregulated markets do n't work for health care never have , never will
To the extent we have a working health care system at all right now it 's only because the government covers the elderly , while a combination of regulation and tax subsidies makes it possible for many , but not all , nonelderly Americans to get decent private coverage
Now Mr. Obama basically proposes using additional regulation and subsidies to make decent insurance available to all of us
That 's not radical ; it 's as American as , well , Medicare
O.K. , Thursday 's jobs report settles it
We 're going to need a bigger stimulus
But does the president know that
Since the recession began , the U.S. economy has lost 6 million jobs and as that grim employment report confirmed , it 's continuing to lose jobs at a rapid pace
Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population , we 're about 8 million jobs in the hole
And the deeper the hole gets , the harder it will be to dig ourselves out
The job figures were n't the only bad news in Thursday 's report , which also showed wages stalling and possibly on the verge of outright decline
That 's a recipe for a descent into Japanese-style deflation , which is very difficult to reverse
Lost decade , anyone
Wait there 's more bad news : the fiscal crisis of the states
Unlike the federal government , states are required to run balanced budgets
And faced with a sharp drop in revenue , most states are preparing savage budget cuts , many of them at the expense of the most vulnerable
Aside from directly creating a great deal of misery , these cuts will depress the economy even further
So what do we have to counter this scary prospect
We have the Obama stimulus plan , which aims to create 3 million jobs by late next year
That 's much better than nothing , but it 's not remotely enough
And there does n't seem to be much else going on
Do you remember the administration 's plan to sharply reduce the rate of foreclosures , or its plan to get the banks lending again by taking toxic assets off their balance sheets
Neither do I. All of this is depressingly familiar to anyone who has studied economic policy in the 1930s
Once again a Democratic president has pushed through job-creation policies that will mitigate the slump but are n't aggressive enough to produce a full recovery
Once again much of the stimulus at the federal level is being undone by budget retrenchment at the state and local level
So have we failed to learn from history , and are we , therefore , doomed to repeat it
Not necessarily but it 's up to the president and his economic team to ensure that things are different this time
President Obama and his officials need to ramp up their efforts , starting with a plan to make the stimulus bigger
Just to be clear , I 'm well aware of how difficult it will be to get such a plan enacted
There wo n't be any cooperation from Republican leaders , who have settled on a strategy of total opposition , unconstrained by facts or logic
Indeed , these leaders responded to the latest job numbers by proclaiming the failure of the Obama economic plan
That 's ludicrous , of course
The administration warned from the beginning that it would be several quarters before the plan had any major positive effects
But that did n't stop the chairman of the Republican Study Committee from issuing a statement demanding : `` Where are the jobs ?
It 's also not clear whether the administration will get much help from Senate `` centrists , '' who partially eviscerated the original stimulus plan by demanding cuts in aid to state and local governments aid that , as we 're now seeing , was desperately needed
I 'd like to think that some of these centrists are feeling remorse , but if they are , I have n't seen any evidence to that effect
And as an economist , I 'd add that many members of my profession are playing a distinctly unhelpful role
It has been a rude shock to see so many economists with good reputations recycling old fallacies like the claim that any rise in government spending automatically displaces an equal amount of private spending , even when there is mass unemployment and lending their names to grossly exaggerated claims about the evils of short-run budget deficits
-LRB- Right now the risks associated with additional debt are much less than the risks associated with failing to give the economy adequate support .
Also , as in the 1930s , the opponents of action are peddling scare stories about inflation even as deflation looms
So getting another round of stimulus will be difficult
But it 's essential
Obama administration economists understand the stakes
Indeed , just a few weeks ago , Christina Romer , the chairwoman of the Council of Economic Advisers , published an article on the `` lessons of 1937 '' the year that F.D.R. gave in to the deficit and inflation hawks , with disastrous consequences both for the economy and for his political agenda
What I do n't know is whether the administration has faced up to the inadequacy of what it has done so far
So here 's my message to the president : You need to get both your economic team and your political people working on additional stimulus , now
Because if you do n't , you 'll soon be facing your own personal 1937
Al Gore never claimed that he invented the Internet
Howard Dean did n't scream
Hillary Clinton did n't say she was staying in the race because Barack Obama might be assassinated
And Wesley Clark did n't impugn John McCain 's military service
Scott McClellan , the former White House press secretary , titled his tell-all memoir `` What Happened .
But a true account of modern American politics should be titled `` What Did n't Happen .
Again and again we 've had media firestorms over supposedly revealing incidents that never actually took place
The latest fake scandal fit the usual pattern as an awkwardly phrased remark , lifted out of context and willfully misinterpreted , exploded across the airwaves
What General Clark actually said was that Mr. McCain 's war service , though heroic , did n't necessarily constitute a qualification for the presidency
It was a blunt but truthful remark , and not at all outrageous especially given the fact that General Clark is himself a bona fide war hero
Yet the Clark affair did reveal something important not about General Clark , but about Mr. McCain
Now we know what a McCain administration would represent : namely , a third term for Karl Rove
It was predictable that the McCain campaign would go wild over the Clark remarks
Mr. McCain 's run for the White House has always been based on persona rather than policy : he does n't have ideas that voters agree with , but he does have an inspiring life story which , contrary to the myth of the modest maverick , he talks about all the time
The suggestion that this life story is n't relevant to his quest for office was bound to provoke a violent reaction
But the McCain campaign went beyond condemning General Clark 's remarks ; it went out of its way to distort them
`` This backhanded slap against John as not being a worthy warrior because he just got shot down is one of the more surprising insults in my military history , '' said retired Col. Bud Day , who participated in a conference call organized by the campaign
In fact , General Clark had said no such thing
The irony , not lost on Democrats , is that Col. Day himself has done what he falsely accused Wesley Clark of doing : he appeared in the 2004 Swift boat ads that impugned John Kerry 's wartime service
The willingness of the McCain campaign to engage in these tactics , employing such tainted spokesmen , tells us that the campaign has decided to go negative specifically , to apply the strategy Karl Rove used so effectively in 2002 and 2004 -LRB- but not so effectively in 2006 -RRB- , that of portraying Democrats as unpatriotic
And sure enough , Adam Nagourney of The New York Times reports signs of the `` increasing influence of veterans of Mr. Rove 's shop in the McCain operation .
Will Rovian tactics work this year
In 2002 and 2004 , Republicans were so successful at playing the patriotism card thanks to a combination of compliant media and cowering Democrats
At first , the Clark affair suggested that nothing has changed
News organizations reported as fact the false assertion that General Clark criticized Mr. McCain 's military service , and the Obama campaign rushed to `` reject '' his remarks
`` Two days into the Wesley Clark fallout , '' wrote the Columbia Journalism Review on Tuesday morning , `` the press , the G.O.P. , and the Obama campaign all seem to have agreed that Clark 's recent remarks on John McCain 's service record were at best impolitic and at worst despicable .
Since then , however , both the press and the Obama campaign seem to have recovered some of their balance
Opinion pieces have started to appear pointing out that General Clark did n't say what he 's accused of saying
Mr. Obama has also declared that General Clark does n't owe Mr. McCain an apology for his `` inartful '' remarks and denies that his own condemnation , in a speech given on Monday , of those who `` devalue '' military service was aimed at the general
In the end , the Clark affair may have strengthened the Obama campaign
Last week , with his cave-in on wiretapping , Mr. Obama was showing disturbing signs of falling into the usual Democratic cringe on national security
This may have been the week he rediscovered the virtues of standing tall
Furthermore , my sense , though it 's hard to prove , is that the press is feeling a bit ashamed about the way it piled on General Clark
If so , news organizations may think twice before buying into the next fake scandal
If so , the campaign has just taken a major turn in Mr. Obama 's favor
After all , if this campaign is n't dominated by faux outrage over fake scandals , it will have to be about things that really did happen , like a failed economic policy and a disastrous war both of which Mr. McCain promises will continue if he wins
There was a time when everyone took it for granted that unemployment insurance , which normally terminates after 26 weeks , would be extended in times of persistent joblessness
It was , most people agreed , the decent thing to do
But that was then
Today , American workers face the worst job market since the Great Depression , with five job seekers for every job opening , with the average spell of unemployment now at 35 weeks
Yet the Senate went home for the holiday weekend without extending benefits
How was that possible
The answer is that we 're facing a coalition of the heartless , the clueless and the confused
Nothing can be done about the first group , and probably not much about the second
But maybe it 's possible to clear up some of the confusion
By the heartless , I mean Republicans who have made the cynical calculation that blocking anything President Obama tries to do - including , or perhaps especially , anything that might alleviate the nation 's economic pain - improves their chances in the midterm elections
Do n't pretend to be shocked : you know they 're out there , and make up a large share of the G.O.P. caucus
By the clueless I mean people like Sharron Angle , the Republican candidate for senator from Nevada , who has repeatedly insisted that the unemployed are deliberately choosing to stay jobless , so that they can keep collecting benefits
A sample remark : `` You can make more money on unemployment than you can going down and getting one of those jobs that is an honest job but it does n't pay as much
We 've put in so much entitlement into our government that we really have spoiled our citizenry .
Now , I do n't have the impression that unemployed Americans are spoiled ; desperate seems more like it
One doubts , however , that any amount of evidence could change Ms. Angle 's view of the world - and there are , unfortunately , a lot of people in our political class just like her
But there are also , one hopes , at least a few political players who are honestly misinformed about what unemployment benefits do - who believe , for example , that Senator Jon Kyl , Republican of Arizona , was making sense when he declared that extending benefits would make unemployment worse , because `` continuing to pay people unemployment compensation is a disincentive for them to seek new work .
So let 's talk about why that belief is dead wrong
Do unemployment benefits reduce the incentive to seek work
Yes : workers receiving unemployment benefits are n't quite as desperate as workers without benefits , and are likely to be slightly more choosy about accepting new jobs
The operative word here is `` slightly '' : recent economic research suggests that the effect of unemployment benefits on worker behavior is much weaker than was previously believed
Still , it 's a real effect when the economy is doing well
But it 's an effect that is completely irrelevant to our current situation
When the economy is booming , and lack of sufficient willing workers is limiting growth , generous unemployment benefits may keep employment lower than it would have been otherwise
But as you may have noticed , right now the economy is n't booming - again , there are five unemployed workers for every job opening
Cutting off benefits to the unemployed will make them even more desperate for work - but they ca n't take jobs that are n't there
Wait : there 's more
One main reason there are n't enough jobs right now is weak consumer demand
Helping the unemployed , by putting money in the pockets of people who badly need it , helps support consumer spending
That 's why the Congressional Budget Office rates aid to the unemployed as a highly cost-effective form of economic stimulus
And unlike , say , large infrastructure projects , aid to the unemployed creates jobs quickly - while allowing that aid to lapse , which is what is happening right now , is a recipe for even weaker job growth , not in the distant future but over the next few months
But wo n't extending unemployment benefits worsen the budget deficit
Yes , slightly - but as I and others have been arguing at length , penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems
And penny-pinching at the expense of the unemployed is cruel as well as misguided
So , is there any chance that these arguments will get through
Not , I fear , to Republicans : `` It is difficult to get a man to understand something , '' said Upton Sinclair , `` when his salary '' - or , in this case , his hope of retaking Congress - `` depends upon his not understanding it .
But there are also centrist Democrats who have bought into the arguments against helping the unemployed
It 's up to them to step back , realize that they have been misled - and do the right thing by passing extended benefits
The Congressional Budget Office has looked at the future of American health insurance , and it works
A few weeks ago there was a furor when the budget office `` scored '' two incomplete Senate health reform proposals that is , estimated their costs and likely impacts over the next 10 years
One proposal came in more expensive than expected ; the other did n't cover enough people
Health reform , it seemed , was in trouble
But last week the budget office scored the full proposed legislation from the Senate committee on Health , Education , Labor and Pensions -LRB- HELP -RRB-
And the news which got far less play in the media than the downbeat earlier analysis was very , very good
Yes , we can reform health care
Let me start by pointing out something serious health economists have known all along : on general principles , universal health insurance should be eminently affordable
After all , every other advanced country offers universal coverage , while spending much less on health care than we do
For example , the French health care system covers everyone , offers excellent care and costs barely more than half as much per person as our system
And even if we did n't have this international evidence to reassure us , a look at the U.S. numbers makes it clear that insuring the uninsured should n't cost all that much , for two reasons
First , the uninsured are disproportionately young adults , whose medical costs tend to be relatively low
The big spending is mainly on the elderly , who are already covered by Medicare
Second , even now the uninsured receive a considerable -LRB- though inadequate -RRB- amount of `` uncompensated '' care , whose costs are passed on to the rest of the population
So the net cost of giving the uninsured explicit coverage is substantially less than it might seem
Putting these observations together , what sounds at first like a daunting prospect extending coverage to most or all of the 45 million people in America without health insurance should , in the end , add only a few percent to our overall national health bill
And that 's exactly what the budget office found when scoring the HELP proposal
Now , about those specifics : The HELP plan achieves near-universal coverage through a combination of regulation and subsidies
Insurance companies would be required to offer the same coverage to everyone , regardless of medical history ; on the other side , everyone except the poor and near-poor would be obliged to buy insurance , with the aid of subsidies that would limit premiums as a share of income
Employers would also have to chip in , with all firms employing more than 25 people required to offer their workers insurance or pay a penalty
By the way , the absence of such an `` employer mandate '' was the big problem with the earlier , incomplete version of the plan
And those who prefer not to buy insurance from the private sector would be able to choose a public plan instead
This would , among other things , bring some real competition to the health insurance market , which is currently a collection of local monopolies and cartels
The budget office says that all this would cost $ 597 billion over the next decade
But that does n't include the cost of insuring the poor and near-poor , whom HELP suggests covering via an expansion of Medicaid -LRB- which is outside the committee 's jurisdiction -RRB-
Add in the cost of this expansion , and we 're probably looking at between $ 1 trillion and $ 1.3 trillion
There are a number of ways to look at this number , but maybe the best is to point out that it 's less than 4 percent of the $ 33 trillion the U.S. government predicts we 'll spend on health care over the next decade
And that in turn means that much of the expense can be offset with straightforward cost-saving measures , like ending Medicare overpayments to private health insurers and reining in spending on medical procedures with no demonstrated health benefits
So fundamental health reform reform that would eliminate the insecurity about health coverage that looms so large for many Americans is now within reach
The `` centrist '' senators , most of them Democrats , who have been holding up reform can no longer claim either that universal coverage is unaffordable or that it wo n't work
The only question now is whether a combination of persuasion from President Obama , pressure from health reform activists and , one hopes , senators ' own consciences will get the centrists on board or at least get them to vote for cloture , so that diehard opponents of reform ca n't block it with a filibuster
This is a historic opportunity arguably the best opportunity since 1947 , when the A.M.A. killed Harry Truman 's health-care dreams
We 're right on the cusp
All it takes is a few more senators , and HELP will be on the way
By huge margins , Americans think the economy is in lousy shape and they blame President Bush
This fact , more than anything else , makes it hard to see how the Democrats can lose this election
But is the public right to be so disgusted with Mr. Bush 's economic leadership
Not exactly
We really do have a lousy economy , a fact of which Mr. Bush seems spectacularly unaware
But that 's not the same thing as saying that the bad economy is Mr. Bush 's fault
On the other hand , there 's a certain rough justice in the public 's attitude
Other politicians besides Mr. Bush share the blame for the mess we 're in but most of them are Republicans
First things first : pay no attention to apologists who try to defend the Bush economic record
Since 2001 , economic conditions have alternated between so-so and outright bad : a recession , followed by one of the weakest expansions since World War II , and then by a renewed job slump that is n't officially a recession yet , but certainly feels like one
Over all , Mr. Bush will be lucky to leave office with a net gain of five million jobs , far short of the number needed to keep up with population growth
For comparison , Bill Clinton presided over an economy that added 22 million jobs
And what does Mr. Bush have to say about this dismal record
`` I think when people take a look back at this moment in our economic history , they 'll recognize tax cuts work .
Clueless to the end
Yet even liberal economists have a hard time arguing that Mr. Bush 's cluelessness actually caused the poor economic performance on his watch
Tax cuts did n't work , but they did n't create the Bush bust
So what did
At the top of my list of causes for the lousy economy are three factors : the housing bubble and its aftermath , rising health care costs and soaring raw materials prices
I 've written a lot about housing , so today let 's talk about the others
Most public discussion of health care focuses on the problems of the uninsured and underinsured
But insurance premiums are also a major business expense : auto makers famously spend more on health care than they do on steel
One of the underemphasized keys to the Clinton boom , I 'd argue , was the way the cost disease of health care went into remission between 1993 and 2000
For a while , the spread of managed care put a lid on premiums , encouraging companies to expand their work forces
But premiums surged again after 2000 , imposing huge new burdens on business
It 's a good bet that this played an important role in weak job creation
What about raw materials prices
During the Clinton years basic commodities stayed cheap by historical standards
Since then , however , food and energy prices have exploded , directly lopping about 5 percent off the typical American family 's real income , and raising business costs throughout the economy
Much of this pain could have been avoided
If Bill Clinton 's attempt to reform health care had succeeded , the U.S. economy would be in much better shape today
But the attempt failed and let 's remember why
Yes , the Clinton administration botched the politics
But it was Republicans in Congress who blocked reform , as Newt Gingrich pursued a strategy of `` coagulation '' designed to `` clot everyone away '' from Mr. Clinton
As for high food and fuel prices , they 're mainly the result of growing demand from China and other emerging economies
But oil prices would n't be as high as they are , and the United States would have been much less vulnerable to the current price spike , if we had taken steps in the past to limit our oil consumption
Mr. Bush certainly deserves some blame here , and not just for his destructive embrace of ethanol as the answer to our energy problems
After 9\/11 he could easily have called for higher gas taxes and fuel efficiency standards as a national security measure , but the thought never seems to have crossed his mind
Still , in energy as in health care the biggest missed opportunities came 15 or more years ago , when Mr. Gingrich and other conservative Republicans in Congress , aided by Democrats with ties to energy-intensive industries , blocked conservation measures
So here 's the bottom line : Mr. Bush deserves some blame for the poor performance of the economy on his watch , but much of the blame lies with other , earlier political figures , who squandered chances for reform
As it happens , however , most though not all of the politicians responsible for our current economic difficulties were Republicans
And bear in mind that John McCain has gone to great lengths to affirm his support for Republican economic orthodoxy
So he 'll have no reason to complain if , as seems likely , the economy costs him the election
Job creation has been disappointing , but first-quarter corporate profits were up 44 percent from a year earlier
Consumers are nervous , but the Dow , which was below 8,000 on the day President Obama was inaugurated , is now over 10,000
In a rational universe , American business would be very happy with Mr. Obama
But no.
All the buzz lately is that the Obama administration is '' antibusiness .
And there are widespread claims that fears about taxes , regulation and budget deficits are holding down business spending and blocking economic recovery
How much truth is there to these claims
Business spending is indeed low , but no lower than one would have expected given widespread overcapacity and weak consumer spending
Business leaders are feeling unloved , but giving them a group hug wo n't cure what ails the economy
Ask the Obama-is-scaring-business crowd for some actual evidence supporting their claim , and they 'll tell you that business spending on plant and equipment is at its lowest level , as a share of G.D.P. , in 40 years
What they do n't mention is the fact that business investment always falls sharply when the economy is depressed
After all , why should businesses expand their production capacity when they 're not selling enough to use the capacity they already have
And in case you have n't noticed , we still have a deeply depressed economy
Historically , there has been a close relationship between the level of business investment and the '' output gap , '' the difference between the economy 's actual output and its long-run trend -- which means that there 's nothing surprising about low investment now , given the fact that the output gap is hugely negative
If anything , it 's surprising how well business investment has been holding up
Alternatively , we can look directly at measures of unused business capacity
Capacity utilization in industry is up over the past year , but still far below historical norms
Vacancy rates at industrial and retail properties are at historic highs
Again , given that businesses have plenty of idle structures and machines , why should they be building or buying even more
So where 's the evidence that an antibusiness climate is depressing spending
The answer , supposedly , is that this is what you hear when you talk to entrepreneurs
But do n't believe it
Yes , when you talk to business people they complain about taxes , regulations and the deficit ; they always do
But the Obama 's - socialist-policies-are-wrecking-the-economy chorus is n't coming from businesses ; it 's coming from business lobbyists , which is n't at all the same thing
Read the report on the U.S. Chamber of Commerce in the latest Washington Monthly : peddling scare stories about what Democrats are up to is a large part of what organizations like the chamber do for a living
Or read through the latest survey of small business trends by the National Federation for Independent Business , an advocacy group
The commentary at the front of the report is largely a diatribe against government -- '' Washington is applying leeches and performing blood-letting as a cure '' -- and you might na vely imagine that this diatribe reflects what the surveyed businesses said
But while a few businesses declared that the political climate was deterring expansion , they were vastly outnumbered by those citing a poor economy
The charts at the back of the report , showing trends in business perceptions of their '' most important problem , '' are even more revealing
It turns out that business is less concerned about taxes and regulation than during the 1990s , an era of booming investment
Concerns about poor sales , on the other hand , have surged
The weak economy , not fear about government actions , is what 's holding investment down
So why are we hearing so much about the alleged harm being inflicted by an antibusiness climate
For the most part it 's the same old , same old : lobbyists trying to bully Washington into cutting taxes and dismantling regulations , while extracting bigger fees from their clients along the way
Beyond that , business leaders are , as I said , feeling unloved : the financial crisis , health insurance scandals , and the catastrophe in the Gulf of Mexico have taken a toll on their reputation
Somehow , however , rather than blaming their peers for bad behavior , C.E.O. 's blame Mr. Obama for '' demonizing '' business -- by which they apparently mean speaking frankly about the culpability of the guilty parties
Well , C.E.O. 's are people , too -- but soothing their hurt feelings is n't a priority right now , and it has nothing at all to do with promoting economic recovery
If we want stronger business spending , we need to give businesses a reason to spend
And to do that , the government needs to start doing more , not less , to promote overall economic recovery
Back in April , there was a huge fuss over an internal report by the Department of Homeland Security warning that current conditions resemble those in the early 1990s a time marked by an upsurge of right-wing extremism that culminated in the Oklahoma City bombing
Conservatives were outraged
The chairman of the Republican National Committee denounced the report as an attempt to `` segment out conservatives in this country who have a different philosophy or view from this administration '' and label them as terrorists
But with the murder of Dr. George Tiller by an anti-abortion fanatic , closely followed by a shooting by a white supremacist at the United States Holocaust Memorial Museum , the analysis looks prescient
There is , however , one important thing that the D.H.S. report did n't say : Today , as in the early years of the Clinton administration but to an even greater extent , right-wing extremism is being systematically fed by the conservative media and political establishment
Now , for the most part , the likes of Fox News and the R.N.C. have n't directly incited violence , despite Bill O'Reilly 's declarations that `` some '' called Dr. Tiller `` Tiller the Baby Killer , '' that he had `` blood on his hands , '' and that he was a `` guy operating a death mill .
But they have gone out of their way to provide a platform for conspiracy theories and apocalyptic rhetoric , just as they did the last time a Democrat held the White House
And at this point , whatever dividing line there was between mainstream conservatism and the black-helicopter crowd seems to have been virtually erased
Exhibit A for the mainstreaming of right-wing extremism is Fox News 's new star , Glenn Beck
Here we have a network where , like it or not , millions of Americans get their news and it gives daily airtime to a commentator who , among other things , warned viewers that the Federal Emergency Management Agency might be building concentration camps as part of the Obama administration 's `` totalitarian '' agenda -LRB- although he eventually conceded that nothing of the kind was happening -RRB-
But let 's not neglect the print news media
In the Bush years , The Washington Times became an important media player because it was widely regarded as the Bush administration 's house organ
Earlier this week , the newspaper saw fit to run an opinion piece declaring that President Obama `` not only identifies with Muslims , but actually may still be one himself , '' and that in any case he has `` aligned himself '' with the radical Muslim Brotherhood
And then there 's Rush Limbaugh
His rants today are n't very different from his rants in 1993
But he occupies a different position in the scheme of things
Remember , during the Bush years Mr. Limbaugh became very much a political insider
Indeed , according to a recent Gallup survey , 10 percent of Republicans now consider him the `` main person who speaks for the Republican Party today , '' putting him in a three-way tie with Dick Cheney and Newt Gingrich
So when Mr. Limbaugh peddles conspiracy theories suggesting , for example , that fears over swine flu were being hyped `` to get people to respond to government orders '' that 's a case of the conservative media establishment joining hands with the lunatic fringe
It 's not surprising , then , that politicians are doing the same thing
The R.N.C. says that `` the Democratic Party is dedicated to restructuring American society along socialist ideals .
And when Jon Voight , the actor , told the audience at a Republican fund-raiser this week that the president is a `` false prophet '' and that `` we and we alone are the right frame of mind to free this nation from this Obama oppression , '' Mitch McConnell , the Senate minority leader , thanked him , saying that he `` really enjoyed '' the remarks
Credit where credit is due
Some figures in the conservative media have refused to go along with the big hate people like Fox 's Shepard Smith and Catherine Herridge , who debunked the attacks on that Homeland Security report two months ago
But this does n't change the broad picture , which is that supposedly respectable news organizations and political figures are giving aid and comfort to dangerous extremism
What will the consequences be
Nobody knows , of course , although the analysts at Homeland Security fretted that things may turn out even worse than in the 1990s that thanks , in part , to the election of an African-American president , `` the threat posed by lone wolves and small terrorist cells is more pronounced than in past years .
And that 's a threat to take seriously
Yes , the worst terrorist attack in our history was perpetrated by a foreign conspiracy
But the second worst , the Oklahoma City bombing , was perpetrated by an all-American lunatic
Politicians and media organizations wind up such people at their , and our , peril
That little ditty famously summarized the message of `` The Jungle , '' Upton Sinclair 's 1906 expos of conditions in America 's meat-packing industry
Sinclair 's muckraking helped Theodore Roosevelt pass the Pure Food and Drug Act and the Meat Inspection Act and for most of the next century , Americans trusted government inspectors to keep their food safe
Lately , however , there always seems to be at least one food-safety crisis in the headlines tainted spinach , poisonous peanut butter and , currently , the attack of the killer tomatoes
The declining credibility of U.S. food regulation has even led to a foreign-policy crisis : there have been mass demonstrations in South Korea protesting the pro-American prime minister 's decision to allow imports of U.S. beef , banned after mad cow disease was detected in 2003
How did America find itself back in The Jungle
It started with ideology
Hard-core American conservatives have long idealized the Gilded Age , regarding everything that followed not just the New Deal , but even the Progressive Era as a great diversion from the true path of capitalism
Thus , when Grover Norquist , the anti-tax advocate , was asked about his ultimate goal , he replied that he wanted a restoration of the way America was `` up until Teddy Roosevelt , when the socialists took over
The income tax , the death tax , regulation , all that .
The late Milton Friedman agreed , calling for the abolition of the Food and Drug Administration
It was unnecessary , he argued : private companies would avoid taking risks with public health to safeguard their reputations and to avoid damaging class-action lawsuits
-LRB- Friedman , unlike almost every other conservative I can think of , viewed lawyers as the guardians of free-market capitalism .
Such hard-core opponents of regulation were once part of the political fringe , but with the rise of modern movement conservatism they moved into the corridors of power
They never had enough votes to abolish the F.D.A. or eliminate meat inspections , but they could and did set about making the agencies charged with ensuring food safety ineffective
They did this in part by simply denying these agencies enough resources to do the job
For example , the work of the F.D.A. has become vastly more complex over time thanks to the combination of scientific advances and globalization
Yet the agency has a substantially smaller work force now than it did in 1994 , the year Republicans took over Congress
Perhaps even more important , however , was the systematic appointment of foxes to guard henhouses
Thus , when mad cow disease was detected in the U.S. in 2003 , the Department of Agriculture was headed by Ann M. Veneman , a former food-industry lobbyist
And the department 's response to the crisis which amounted to consistently downplaying the threat and rejecting calls for more extensive testing seemed driven by the industry 's agenda
One amazing decision came in 2004 , when a Kansas producer asked for permission to test its own cows , so that it could resume exports to Japan
You might have expected the Bush administration to applaud this example of self-regulation
But permission was denied , because other beef producers feared consumer demands that they follow suit
When push comes to shove , it seems , the imperatives of crony capitalism trump professed faith in free markets
Eventually , the department did expand its testing , and at this point most countries that initially banned U.S. beef have allowed it back into their markets
But the South Koreans still do n't trust us
And while some of that distrust may be irrational the beef issue has become entangled with questions of Korean national pride , which has been insulted by clumsy American diplomacy it 's hard to blame them
The ironic thing is that the Agriculture Department 's deference to the beef industry actually ended up backfiring : because potential foreign buyers did n't trust our safety measures , beef producers spent years excluded from their most important overseas markets
But then , the same thing can be said of other cases in which the administration stood in the way of effective regulation
Most notably , the administration 's refusal to countenance any restraints on predatory lending helped prepare the ground for the subprime crisis , which has cost the financial industry far more than it ever made on overpriced loans
The moral of this story is that failure to regulate effectively is n't just bad for consumers , it 's bad for business
And in the case of food , what we need to do now for the sake of both our health and our export markets is to go back to the way it was after Teddy Roosevelt , when the Socialists took over
It 's time to get back to the business of ensuring that American food is safe
Correction : June 20 , 2008 In his June 13 column , Paul Krugman misidentified the Korean official who reversed a ban on American beef
It was the president , not the prime minister
The debate over economic policy has taken a predictable yet ominous turn : the crisis seems to be easing , and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts
For those who know their history , it 's d j vu all over again literally
For this is the third time in history that a major economy has found itself in a liquidity trap , a situation in which interest-rate cuts , the conventional way to perk up the economy , have reached their limit
When this happens , unconventional measures are the only way to fight recession
Yet such unconventional measures make the conventionally minded uncomfortable , and they keep pushing for a return to normalcy
In previous liquidity-trap episodes , policy makers gave in to these pressures far too soon , plunging the economy back into crisis
And if the critics have their way , we 'll do the same thing this time
The first example of policy in a liquidity trap comes from the 1930s
The U.S. economy grew rapidly from 1933 to 1937 , helped along by New Deal policies
America , however , remained well short of full employment
Yet policy makers stopped worrying about depression and started worrying about inflation
The Federal Reserve tightened monetary policy , while F.D.R. tried to balance the federal budget
Sure enough , the economy slumped again , and full recovery had to wait for World War II
The second example is Japan in the 1990s
After slumping early in the decade , Japan experienced a partial recovery , with the economy growing almost 3 percent in 1996
Policy makers responded by shifting their focus to the budget deficit , raising taxes and cutting spending
Japan proceeded to slide back into recession
And here we go again
On one side , the inflation worriers are harassing the Fed
The latest example : Arthur Laffer , he of the curve , warns that the Fed 's policies will cause devastating inflation
He recommends , among other things , possibly raising banks ' reserve requirements , which happens to be exactly what the Fed did in 1936 and 1937 a move that none other than Milton Friedman condemned as helping to strangle economic recovery
Meanwhile , there are demands from several directions that President Obama 's fiscal stimulus plan be canceled
Some , especially in Europe , argue that stimulus is n't needed , because the economy is already turning around
Others claim that government borrowing is driving up interest rates , and that this will derail recovery
And Republicans , providing a bit of comic relief , are saying that the stimulus has failed , because the enabling legislation was passed four months ago wow , four whole months
yet unemployment is still rising
This suggests an interesting comparison with the economic record of Ronald Reagan , whose 1981 tax cut was followed by no less than 16 months of rising unemployment
O.K. , time for some reality checks
First of all , while stock markets have been celebrating the economy 's `` green shoots , '' the fact is that unemployment is very high and still rising
That is , we 're not even experiencing the kind of growth that led to the big mistakes of 1937 and 1997
It 's way too soon to declare victory
What about the claim that the Fed is risking inflation
It is n't
Mr. Laffer seems panicked by a rapid rise in the monetary base , the sum of currency in circulation and the reserves of banks
But a rising monetary base is n't inflationary when you 're in a liquidity trap
America 's monetary base doubled between 1929 and 1939 ; prices fell 19 percent
Japan 's monetary base rose 85 percent between 1997 and 2003 ; deflation continued apace
Well then , what about all that government borrowing
All it 's doing is offsetting a plunge in private borrowing total borrowing is down , not up
Indeed , if the government were n't running a big deficit right now , the economy would probably be well on its way to a full-fledged depression
Oh , and investors ' growing confidence that we 'll manage to avoid a full-fledged depression not the pressure of government borrowing explains the recent rise in long-term interest rates
These rates , by the way , are still low by historical standards
They 're just not as low as they were at the peak of the panic , earlier this year
To sum up : A few months ago the U.S. economy was in danger of falling into depression
Aggressive monetary policy and deficit spending have , for the time being , averted that danger
And suddenly critics are demanding that we call the whole thing off , and revert to business as usual
Those demands should be ignored
It 's much too soon to give up on policies that have , at most , pulled us a few inches back from the edge of the abyss
As I read the nonpartisan Tax Policy Center 's analysis of the presidential candidates ' tax proposals , I realized that the tax cuts enacted by the Bush administration are , in effect , a fiscal poison pill aimed at future administrations
True , the tax cuts wo n't prevent a change in management the Constitution sees to that
But they will make it hard for the next president to change the country 's direction
Exhibit A of the poison pill in action is the sad case of John McCain , part of whose lingering image as a maverick rests on his early opposition to the Bush tax cuts , which he declared excessive and too tilted toward the rich
Since then the budget surpluses of the Clinton years have given way to persistent deficits , and income inequality has risen to new heights , vindicating his opposition
But instead of pointing this out , Mr. McCain now promises to make those tax cuts permanent and proposes further cuts that are , if anything , tilted even more toward the wealthy
And how is the loss of revenue to be made up
Mr. McCain has n't offered a realistic answer
You can explain though not excuse Mr. McCain 's behavior by his need to shore up relations with the Republican base , which suspects him of being a closet moderate
But he 's not the only one seemingly trapped by the Bush fiscal legacy
Barack Obama 's tax plan is more responsible than Mr. McCain 's : relative to current policy , the Tax Policy Center estimates , the Obama plan would raise revenue by $ 700 billion over the next decade , compared with a $ 600 billion loss for Mr. McCain
The Obama plan is also far more progressive , sharply reducing after-tax incomes for the richest 1 percent of Americans while raising incomes for the bottom 80 percent
But while $ 700 billion may sound like a lot of money , it 's probably not enough to pay for universal health care , which was supposed to be the overriding progressive priority in this election
Why does n't Mr. Obama propose raising more money
Blame the Bush poison pill
First of all , Mr. Obama like , to be fair , his main rivals for the Democratic nomination is n't willing to challenge the Bush tax cuts as a whole
He only proposes rolling back tax cuts for those making more than $ 250,000 a year
Second , Mr. Obama proposes giving back a substantial part of the revenue raised by this partial tax-cut rollback in the form of new tax cuts
These tax cuts would mainly benefit lower - and-middle-income families , although this ca n't be said of Mr. Obama 's plan to eliminate income taxes on seniors with incomes under $ 50,000 : since most seniors already pay no income taxes , this would do nothing for those most in need
And one wonders why we should create the precedent of exempting particular demographic groups from taxes
But the big question is , are these tax cuts , however appealing , a top priority
The most expensive proposal , under the title Making Work Pay , would give most workers $ 500 in tax credits , at a 10-year cost of more than $ 700 billion
Is n't it more important that workers be assured of health care
The problem , I believe , is that even Democrats have bought into the underlying premise of the Bush years that the best thing you can do for American families , or at least the only thing that can win their votes , is to give them a tax break
One more thing : on Friday Mr. Obama declared that he would `` extend the promise '' of Social Security by imposing a payroll-tax surcharge on people making more than $ 250,000 a year
The Tax Policy Center estimates that this would raise an additional $ 629 billion over the next decade
But if the revenue from this tax hike really would be reserved for the Social Security trust fund , it would n't be available for current initiatives
Again , one wonders about priorities
Whatever would-be privatizers may say , Social Security is n't in crisis : the Congressional Budget Office says that the trust fund is good until 2046 , and a number of analysts think that even this estimate is overly pessimistic
So is adding to the trust fund the best use a progressive can find for scarce additional revenue
Anyway , back to my main theme : looking at the tax proposals of the two presidential candidates , it 's remarkable and disheartening to see how effective President Bush 's fiscal poison pill has been in restricting the terms of debate
Progressives , in particular , have to hope that Mr. Obama will be more willing to challenge the Bush legacy in office than he has been in the campaign
Suddenly , creating jobs is out , inflicting pain is in
Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere , including the United States , where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s
Many economists , myself included , regard this turn to austerity as a huge mistake
It raises memories of 1937 , when F.D.R. 's premature attempt to balance the budget helped plunge a recovering economy back into severe recession
And here in Germany , a few scholars see parallels to the policies of Heinrich Br ning , the chancellor from 1930 to 1932 , whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic
But despite these warnings , the deficit hawks are prevailing in most places - and nowhere more than here , where the government has pledged 80 billion euros , almost $ 100 billion , in tax increases and spending cuts even though the economy continues to operate far below capacity
What 's the economic logic behind the government 's moves
The answer , as far as I can tell , is that there is n't any
Press German officials to explain why they need to impose austerity on a depressed economy , and you get rationales that do n't add up
Point this out , and they come up with different rationales , which also do n't add up
Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002 : They know what they want to do , and every time you refute one argument , they just come up with another
Here 's roughly how the typical conversation goes -LRB- this is based both on my own experience and that of other American economists -RRB- : German hawk : `` We must cut deficits immediately , because we have to deal with the fiscal burden of an aging population .
Ugly American : `` But that does n't make sense
Even if you manage to save 80 billion euros - which you wo n't , because the budget cuts will hurt your economy and reduce revenues - the interest payments on that much debt would be less than a tenth of a percent of your G.D.P.
So the austerity you 're pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position .
German hawk : `` I wo n't try to argue the arithmetic
You have to take into account the market reaction .
Ugly American : `` But how do you know how the market will react
And anyway , why should the market be moved by policies that have almost no impact on the long-run fiscal position ?
German hawk : `` You just do n't understand our situation .
The key point is that while the advocates of austerity pose as hardheaded realists , doing what has to be done , they ca n't and wo n't justify their stance with actual numbers - because the numbers do not , in fact , support their position
Nor can they claim that markets are demanding austerity
On the contrary , the German government remains able to borrow at rock-bottom interest rates
So the real motivations for their obsession with austerity lie somewhere else
In America , many self-described deficit hawks are hypocrites , pure and simple : They 're eager to slash benefits for those in need , but their concerns about red ink vanish when it comes to tax breaks for the wealthy
Thus , Senator Ben Nelson , who sanctimoniously declared that we ca n't afford $ 77 billion in aid to the unemployed , was instrumental in passing the first Bush tax cut , which cost a cool $ 1.3 trillion
German deficit hawkery seems more sincere
But it still has nothing to do with fiscal realism
Instead , it 's about moralizing and posturing
Germans tend to think of running deficits as being morally wrong , while balancing budgets is considered virtuous , never mind the circumstances or economic logic
`` The last few hours were a singular show of strength , '' declared Angela Merkel , the German chancellor , after a special cabinet meeting agreed on the austerity plan
And showing strength - or what is perceived as strength - is what it 's all about
There will , of course , be a price for this posturing
Only part of that price will fall on Germany : German austerity will worsen the crisis in the euro area , making it that much harder for Spain and other troubled economies to recover
Europe 's troubles are also leading to a weak euro , which perversely helps German manufacturing , but also exports the consequences of German austerity to the rest of the world , including the United States
But German politicians seem determined to prove their strength by imposing suffering - and politicians around the world are following their lead
How bad will it be
Will it really be 1937 all over again
I do n't know
What I do know is that economic policy around the world has taken a major wrong turn , and that the odds of a prolonged slump are rising by the day
Yes , the plan would plug some big holes in regulation
But as described , it would n't end the skewed incentives that made the current crisis inevitable
Our current system of financial regulation dates back to a time when everything that functioned as a bank looked like a bank
As long as you regulated big marble buildings with rows of tellers , you pretty much had things nailed down
But today you do n't have to look like a bank to be a bank
As Tim Geithner , the Treasury secretary , put it in a widely cited speech last summer , banking is anything that involves financing `` long-term risky and relatively illiquid assets '' with `` very short-term liabilities .
Cases in point : Bear Stearns and Lehman , both of which financed large investments in risky securities primarily with short-term borrowing
And as Mr. Geithner pointed out , by 2007 more than half of America 's banking , in this sense , was being handled by a `` parallel financial system '' others call it `` shadow banking '' of largely unregulated institutions
These non-bank banks , he ruefully noted , were `` vulnerable to a classic type of run , but without the protections such as deposit insurance that the banking system has in place to reduce such risks .
When Lehman fell , we learned just how vulnerable shadow banking was : a global run on the system brought the world economy to its knees
One thing financial reform must do , then , is bring non-bank banking out of the shadows
The Obama plan does this by giving the Federal Reserve the power to regulate any large financial institution it deems `` systemically important '' that is , able to create havoc if it fails whether or not that institution is a traditional bank
Such institutions would be required to hold relatively large amounts of capital to cover possible losses , relatively large amounts of cash to cover possible demands from creditors , and so on
And the government would have the authority to seize such institutions if they appear insolvent the kind of power that the Federal Deposit Insurance Corporation already has with regard to traditional banks , but that has been lacking with regard to institutions like Lehman or A.I.G. Good stuff
But what about the broader problem of financial excess
President Obama 's speech outlining the financial plan described the underlying problem very well
Wall Street developed a `` culture of irresponsibility , '' the president said
Lenders did n't hold on to their loans , but instead sold them off to be repackaged into securities , which in turn were sold to investors who did n't understand what they were buying
`` Meanwhile , '' he said , `` executive compensation unmoored from long-term performance or even reality rewarded recklessness rather than responsibility .
Unfortunately , the plan as released does n't live up to the diagnosis
True , the proposed new Consumer Financial Protection Agency would help control abusive lending
And the proposal that lenders be required to hold on to 5 percent of their loans , rather than selling everything off to be repackaged , would provide some incentive to lend responsibly
But 5 percent is n't enough to deter much risky lending , given the huge rewards to financial executives who book short-term profits
So what should be done about those rewards
Tellingly , the administration 's executive summary of its proposals highlights `` compensation practices '' as a key cause of the crisis , but then fails to say anything about addressing those practices
The long-form version says more , but what it says `` Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value '' is a description of what should happen , rather than a plan to make it happen
Furthermore , the plan says very little of substance about reforming the rating agencies , whose willingness to give a seal of approval to dubious securities played an important role in creating the mess we 're in
In short , Mr. Obama has a clear vision of what went wrong , but aside from regulating shadow banking no small thing , to be sure his plan basically punts on the question of how to keep it from happening all over again , pushing the hard decisions off to future regulators
I 'm aware of the political realities : getting financial reform through Congress wo n't be easy
And even as it stands the Obama plan would be a lot better than nothing
But to live up to its own analysis , the Obama administration needs to come down harder on the rating agencies and , even more important , get much more specific about reforming the way bankers are paid
`` This bill is the most important legislation for financial institutions in the last 50 years
It provides a long-term solution for troubled thrift institutions
... All in all , I think we hit the jackpot .
So declared Ronald Reagan in 1982 , as he signed the Garn-St
Germain Depository Institutions Act
He was , as it happened , wrong about solving the problems of the thrifts
On the contrary , the bill turned the modest-sized troubles of savings-and-loan institutions into an utter catastrophe
But he was right about the legislation 's significance
And as for that jackpot well , it finally came more than 25 years later , in the form of the worst economic crisis since the Great Depression
For the more one looks into the origins of the current disaster , the clearer it becomes that the key wrong turn the turn that made crisis inevitable took place in the early 1980s , during the Reagan years
Attacks on Reaganomics usually focus on rising inequality and fiscal irresponsibility
Indeed , Reagan ushered in an era in which a small minority grew vastly rich , while working families saw only meager gains
He also broke with longstanding rules of fiscal prudence
On the latter point : traditionally , the U.S. government ran significant budget deficits only in times of war or economic emergency
Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980
But indebtedness began rising under Reagan ; it fell again in the Clinton years , but resumed its rise under the Bush administration , leaving us ill prepared for the emergency now upon us
The increase in public debt was , however , dwarfed by the rise in private debt , made possible by financial deregulation
The change in America 's financial rules was Reagan 's biggest legacy
And it 's the gift that keeps on taking
The immediate effect of Garn-St
Germain , as I said , was to turn the thrifts from a problem into a catastrophe
The S. & L. crisis has been written out of the Reagan hagiography , but the fact is that deregulation in effect gave the industry whose deposits were federally insured a license to gamble with taxpayers ' money , at best , or simply to loot it , at worst
By the time the government closed the books on the affair , taxpayers had lost $ 130 billion , back when that was a lot of money
But there was also a longer-term effect
Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending restrictions that , in particular , limited the ability of families to buy homes without putting a significant amount of money down
These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis , and were trying to prevent another
But by 1980 the memory of the Depression had faded
Government , declared Reagan , is the problem , not the solution ; the magic of the marketplace must be set free
And so the precautionary rules were scrapped
Together with looser lending standards for other kinds of consumer credit , this led to a radical change in American behavior
We were n't always a nation of big debts and low savings : in the 1970s Americans saved almost 10 percent of their income , slightly more than in the 1960s
It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life , culminating in the near-zero savings rate that prevailed on the eve of the great crisis
Household debt was only 60 percent of income when Reagan took office , about the same as it was during the Kennedy administration
By 2007 it was up to 119 percent
All this , we were assured , was a good thing : sure , Americans were piling up debt , and they were n't putting aside any of their income , but their finances looked fine once you took into account the rising values of their houses and their stock portfolios
Now , the proximate causes of today 's economic crisis lie in events that took place long after Reagan left office in the global savings glut created by surpluses in China and elsewhere , and in the giant housing bubble that savings glut helped inflate
But it was the explosion of debt over the previous quarter-century that made the U.S. economy so vulnerable
Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise
These defaults in turn wreaked havoc with a financial system that also mainly thanks to Reagan-era deregulation took on too much risk with too little capital
There 's plenty of blame to go around these days
But the prime villains behind the mess we 're in were Reagan and his circle of advisers men who forgot the lessons of America 's last great financial crisis , and condemned the rest of us to repeat it
Blaming environmentalists for high energy prices , never mind the evidence , has been a hallmark of the Bush administration
Thus , in 2001 Dick Cheney attributed the California electricity crisis to environmental regulations that , he claimed , were blocking power-plant construction
He completely missed the real story , which was that energy companies probably some of the same companies that participated in his secret task force , which was supposed to be drawing up a national energy strategy were driving up prices by deliberately withholding electricity from the market
And the administration has spent the last eight years trying to convince Congress that the key to America 's energy security is opening up the Arctic National Wildlife Refuge to oil drilling even though estimates from the Energy Information Administration suggest that drilling in the refuge would make very little difference to the energy outlook , and the oil companies themselves are n't especially interested in punching holes in the tundra
But it still comes as a surprise and a disappointment to see John McCain joining that unfortunate tradition
I 've never taken Mr. McCain 's media reputation as a maverick seriously , because on most issues , he 's a thoroughly conventional conservative
On energy policy , however , he has in the past seemed to show some independence
Most notably , he voted against the really terrible , special-interest-driven 2005 energy bill , which was backed by the Bush administration and by Barack Obama
But that was then
In his Monday speech on energy , Mr. McCain tried to touch all the bases
He talked about conservation
He denounced the evils of speculation : `` While a few reckless speculators are counting their paper profits , most Americans are coming up on the short end .
A weird aspect of the current energy debate , incidentally , is the fact that many of the same market-worshipping conservatives who first denied that there was a dot-com bubble , then denied that there was a housing bubble , are utterly convinced that nasty speculators are responsible for high oil prices
The item that made news , however , was Mr. McCain 's call for more offshore drilling
On Tuesday , he made this more explicit , calling for exploration and development of the currently protected outer continental shelf
This was a reversal of his previous position , and it went a long way toward aligning his energy policy with that of the Bush administration
That 's not a good thing
As many reports have noted , the McCain\/Bush policy on offshore drilling does n't make sense as a response to $ 4-a-gallon gas : the White House 's own Energy Information Administration says that exploiting the outer shelf would n't yield noticeable amounts of oil until the 2020s , and even at peak production its impact on oil prices would be `` insignificant .
But what I have n't seen emphasized is the broader picture : Mr. McCain has now aligned himself with an administration that , even aside from its blame-the-environmental-movement tendencies , has established an extensive track record as the gang that could n't think straight about energy policy
Remember , they did n't just insist that the Iraqis would welcome us as liberators ; on the eve of the Iraq war , administration officials were also adamant that regime change in Iraq would add millions of barrels a day to the world oil supply , driving oil prices way down
-LRB- In fact , Iraq 's oil output took five years just to recover to preinvasion levels .
So why would Mr. McCain associate himself with these characters
The answer , presumably , is that it 's a cynical political calculation
I 'm reasonably sure that Mr. McCain 's advisers realize that offshore drilling would do nothing for current gas prices
But they may believe that the public can be conned
A Rasmussen poll taken before Mr. McCain 's announcement suggests that the public favors expanded offshore drilling , and believes -LRB- wrongly -RRB- that this would lower gasoline prices
And Mr. McCain may also hope to shore up his still fragile relations with the Republican base
As anyone who has read what 's in his inbox after publishing an article on oil prices can testify , there are many people on the right who believe that all our energy problems have been caused by sanctimonious tree-huggers
Mr. McCain has just thrown that constituency some red meat
But I very much doubt that Mr. McCain 's gambit will work
In fact , it 's almost certainly self-destructive
To have a chance in November , Mr. McCain has to convince voters that he is n't just Bush , continued
Energy policy is one of the areas where he could best have made that case
Instead , he has ceded the high ground on energy to Mr. Obama , and linked himself firmly to the most unpopular president on record
Spend now , while the economy remains depressed ; save later , once it has recovered
How hard is that to understand
Very hard , if the current state of political debate is any indication
All around the world , politicians seem determined to do the reverse
They 're eager to shortchange the economy when it needs help , even as they balk at dealing with long-run budget problems
But maybe a clear explanation of the issues can change some minds
So let 's talk about the long and the short of budget deficits
I 'll focus on the U.S. position , but a similar story can be told for other nations
At the moment , as you may have noticed , the U.S. government is running a large budget deficit
Much of this deficit , however , is the result of the ongoing economic crisis , which has depressed revenues and required extraordinary expenditures to rescue the financial system
As the crisis abates , things will improve
The Congressional Budget Office , in its analysis of President Obama 's budget proposals , predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014
Unfortunately , that 's not enough
Even if the government 's annual borrowing were to stabilize at 4 percent of G.D.P. , its total debt would continue to grow faster than its revenues
Furthermore , the budget office predicts that after bottoming out in 2014 , the deficit will start rising again , largely because of rising health care costs
So America has a long-run budget problem
Dealing with this problem will require , first and foremost , a real effort to bring health costs under control - without that , nothing will work
It will also require finding additional revenues and\/or spending cuts
As an economic matter , this should n't be hard - in particular , a modest value-added tax , say at a 5 percent rate , would go a long way toward closing the gap , while leaving overall U.S. taxes among the lowest in the advanced world
But if we need to raise taxes and cut spending eventually , should n't we start now
No , we should n't
Right now , we have a severely depressed economy - and that depressed economy is inflicting long-run damage
Every year that goes by with extremely high unemployment increases the chance that many of the long-term unemployed will never come back to the work force , and become a permanent underclass
Every year that there are five times as many people seeking work as there are job openings means that hundreds of thousands of Americans graduating from school are denied the chance to get started on their working lives
And with each passing month we drift closer to a Japanese-style deflationary trap
Penny-pinching at a time like this is n't just cruel ; it endangers the nation 's future
And it does n't even do much to reduce our future debt burden , because stinting on spending now threatens the economic recovery , and with it the hope for rising revenues
So now is not the time for fiscal austerity
How will we know when that time has come
The answer is that the budget deficit should become a priority when , and only when , the Federal Reserve has regained some traction over the economy , so that it can offset the negative effects of tax increases and spending cuts by reducing interest rates
Currently , the Fed ca n't do that , because the interest rates it can control are near zero , and ca n't go any lower
Eventually , however , as unemployment falls - probably when it goes below 7 percent or less - the Fed will want to raise rates to head off possible inflation
At that point we can make a deal : the government starts cutting back , and the Fed holds off on rate hikes so that these cutbacks do n't tip the economy back into a slump
But the time for such a deal is a long way off - probably two years or more
The responsible thing , then , is to spend now , while planning to save later
As I said , many politicians seem determined to do the reverse
Many members of Congress , in particular , oppose aid to the long-term unemployed , let alone to hard-pressed state and local governments , on the grounds that we ca n't afford it
In so doing , they are undermining spending at a time when we really need it , and endangering the recovery
Yet efforts to control health costs were met with cries of `` death panels .
And some of the most vocal deficit scolds in Congress are working hard to reduce taxes for the handful of lucky Americans who are heirs to multimillion-dollar estates
This would do nothing for the economy now , but it would reduce revenues by billions of dollars a year , permanently
But some politicians must be sincere about being fiscally responsible
And to them I say , please get your timing right
Yes , we need to fix our long-run budget problems - but not by refusing to help our economy in its hour of need
America 's political scene has changed immensely since the last time a Democratic president tried to reform health care
So has the health care picture : with costs soaring and insurance dwindling , nobody can now say with a straight face that the U.S. health care system is O.K. And if surveys like the New York Times\/CBS News poll released last weekend are any indication , voters are ready for major change
The question now is whether we will nonetheless fail to get that change , because a handful of Democratic senators are still determined to party like it 's 1993
And yes , I mean Democratic senators
The Republicans , with a few possible exceptions , have decided to do all they can to make the Obama administration a failure
Their role in the health care debate is purely that of spoilers who keep shouting the old slogans Government-run health care
hoping that someone still cares
The polls suggest that hardly anyone does
Voters , it seems , strongly favor a universal guarantee of coverage , and they mostly accept the idea that higher taxes may be needed to achieve that guarantee
What 's more , they overwhelmingly favor precisely the feature of Democratic plans that Republicans denounce most fiercely as `` socialized medicine '' the creation of a public health insurance option that competes with private insurers
Or to put it another way , in effect voters support the health care plan jointly released by three House committees last week , which relies on a combination of subsidies and regulation to achieve universal coverage , and introduces a public plan to compete with insurers and hold down costs
Yet it remains all too possible that health care reform will fail , as it has so many times before
I 'm not that worried about the issue of costs
Yes , the Congressional Budget Office 's preliminary cost estimates for Senate plans were higher than expected , and caused considerable consternation last week
But the fundamental fact is that we can afford universal health insurance even those high estimates were less than the $ 1.8 trillion cost of the Bush tax cuts
Furthermore , Democratic leaders know that they have to pass a health care bill for the sake of their own survival
One way or another , the numbers will be brought in line
The real risk is that health care reform will be undermined by `` centrist '' Democratic senators who either prevent the passage of a bill or insist on watering down key elements of reform
I use scare quotes around `` centrist , '' by the way , because if the center means the position held by most Americans , the self-proclaimed centrists are in fact way out in right field
What the balking Democrats seem most determined to do is to kill the public option , either by eliminating it or by carrying out a bait-and-switch , replacing a true public option with something meaningless
For the record , neither regional health cooperatives nor state-level public plans , both of which have been proposed as alternatives , would have the financial stability and bargaining power needed to bring down health care costs
Whatever may be motivating these Democrats , they do n't seem able to explain their reasons in public
Thus Senator Ben Nelson of Nebraska initially declared that the public option which , remember , has overwhelming popular support was a `` deal-breaker .
Because he did n't think private insurers could compete : `` At the end of the day , the public plan wins the day .
Um , is n't the purpose of health care reform to protect American citizens , not insurance companies
Mr. Nelson softened his stand after reform advocates began a public campaign targeting him for his position on the public option
And Senator Kent Conrad of North Dakota offers a perfectly circular argument : we ca n't have the public option , because if we do , health care reform wo n't get the votes of senators like him
`` In a 60-vote environment , '' he says -LRB- implicitly rejecting the idea , embraced by President Obama , of bypassing the filibuster if necessary -RRB- , `` you 've got to attract some Republicans as well as holding virtually all the Democrats together , and that , I do n't believe , is possible with a pure public option .
Honestly , I do n't know what these Democrats are trying to achieve
Yes , some of the balking senators receive large campaign contributions from the medical-industrial complex but who in politics does n't
If I had to guess , I 'd say that what 's really going on is that relatively conservative Democrats still cling to the old dream of becoming kingmakers , of recreating the bipartisan center that used to run America
But this fantasy ca n't be allowed to stand in the way of giving America the health care reform it needs
This time , the alleged center must not hold
`` Owning a home lies at the heart of the American dream .
So declared President Bush in 2002 , introducing his `` Homeownership Challenge '' a set of policy initiatives that were supposed to sharply increase homeownership , especially for minority groups
While homeownership rose as the housing bubble inflated , temporarily giving Mr. Bush something to boast about , it plunged especially for African-Americans when the bubble popped
Today , the percentage of American families owning their own homes is no higher than it was six years ago , and it 's a good bet that by the time Mr. Bush leaves the White House homeownership will be lower than it was when he moved in
But here 's a question rarely asked , at least in Washington : Why should ever-increasing homeownership be a policy goal
How many people should own homes , anyway
Listening to politicians , you 'd think that every family should own its home in fact , that you 're not a real American unless you 're a homeowner
`` If you own something , '' Mr. Bush once declared , `` you have a vital stake in the future of our country .
Presumably , then , citizens who live in rented housing , and therefore lack that `` vital stake , '' ca n't be properly patriotic
Bring back property qualifications for voting
Even Democrats seem to share the sense that Americans who do n't own houses are second-class citizens
Early last year , just as the mortgage meltdown was beginning , Austan Goolsbee , a University of Chicago economist who is one of Barack Obama 's top advisers , warned against a crackdown on subprime lending
`` For be it ever so humble , '' he wrote , `` there really is no place like home , even if it does come with a balloon payment mortgage .
And the belief that you 're nothing if you do n't own a home is reflected in U.S. policy
Because the I.R.S. lets you deduct mortgage interest from your taxable income but does n't let you deduct rent , the federal tax system provides an enormous subsidy to owner-occupied housing
On top of that , government-sponsored enterprises Fannie Mae , Freddie Mac and the Federal Home Loan Banks provide cheap financing for home buyers ; investors who want to provide rental housing are on their own
In effect , U.S. policy is based on the premise that everyone should be a homeowner
But here 's the thing : There are some real disadvantages to homeownership
First of all , there 's the financial risk
Although it 's rarely put this way , borrowing to buy a home is like buying stocks on margin : if the market value of the house falls , the buyer can easily lose his or her entire stake
This is n't a hypothetical worry
From 2005 through 2007 alone that is , at the peak of the housing bubble more than 22 million Americans bought either new or existing houses
Now that the bubble has burst , many of those homebuyers have lost heavily on their investment
At this point there are probably around 10 million households with negative home equity that is , with mortgages that exceed the value of their houses
Owning a home also ties workers down
Even in the best of times , the costs and hassle of selling one home and buying another one estimate put the average cost of a house move at more than $ 60,000 tend to make workers reluctant to go where the jobs are
And these are not the best of times
Right now , economic distress is concentrated in the states with the biggest housing busts : Florida and California have experienced much steeper rises in unemployment than the nation as a whole
Yet homeowners in these states are constrained from seeking opportunities elsewhere , because it 's very hard to sell their houses
Finally , there 's the cost of commuting
Buying a home usually though not always means buying a single-family house in the suburbs , often a long way out , where land is cheap
In an age of $ 4 gas and concerns about climate change , that 's an increasingly problematic choice
There are , of course , advantages to homeownership and yes , my wife and I do own our home
But homeownership is n't for everyone
In fact , given the way U.S. policy favors owning over renting , you can make a good case that America already has too many homeowners
O.K. , I know how some people will respond : anyone who questions the ideal of homeownership must want the population `` confined to Soviet-style concrete-block high-rises '' -LRB- as a Bloomberg columnist recently put it -RRB-
Um , no.
All I 'm suggesting is that we drop the obsession with ownership , and try to level the playing field that , at the moment , is hugely tilted against renting
And while we 're at it , let 's try to open our minds to the possibility that those who choose to rent rather than buy can still share in the American dream and still have a stake in the nation 's future
Last weekend China announced a change in its currency policy , a move clearly intended to head off pressure from the United States and other countries at this weekend 's G-20 summit meeting
Unfortunately , the new policy does n't address the real issue , which is that China has been promoting its exports at the rest of the world 's expense
In fact , far from representing a step in the right direction , the Chinese announcement was an exercise in bad faith - an attempt to exploit U.S. restraint
To keep the rhetorical temperature down , the Obama administration has used diplomatic language in its efforts to persuade the Chinese government to end its bad behavior
Now the Chinese have responded by seizing on the form of American language to avoid dealing with the substance of American complaints
In short , they 're playing games
To understand what 's going on , we need to get back to the basics of the situation
China 's exchange-rate policy is neither complicated nor unprecedented , except for its sheer scale
It 's a classic example of a government keeping the foreign-currency value of its money artificially low by selling its own currency and buying foreign currency
This policy is especially effective in China 's case because there are legal restrictions on the movement of funds both into and out of the country , allowing government intervention to dominate the currency market
And the proof that China is , in fact , keeping the value of its currency , the renminbi , artificially low is precisely the fact that the central bank is accumulating so many dollars , euros and other foreign assets - more than $ 2 trillion worth so far
There have been all sorts of calculations purporting to show that the renminbi is n't really undervalued , or at least not by much
But if the renminbi is n't deeply undervalued , why has China had to buy around $ 1 billion a day of foreign currency to keep it from rising
The effect of this currency undervaluation is twofold : it makes Chinese goods artificially cheap to foreigners , while making foreign goods artificially expensive to the Chinese
That is , it 's as if China were simultaneously subsidizing its exports and placing a protective tariff on its imports
This policy is very damaging at a time when much of the world economy remains deeply depressed
In normal times , you could argue that Chinese purchases of U.S. bonds , while distorting trade , were at least supplying us with cheap credit - and you could argue that it was n't China 's fault that we used that credit to inflate a vast , destructive housing bubble
But right now we 're awash in cheap credit ; what 's lacking is sufficient demand for goods and services to generate the jobs we need
And China , by running an artificial trade surplus , is aggravating that problem
This does not , by the way , mean that China gains from its currency policy
The undervalued renminbi is good for politically influential export companies
But these companies hoard cash rather than passing on the benefits to their workers , hence the recent wave of strikes
Meanwhile , the weak renminbi creates inflationary pressures and diverts a huge fraction of China 's national income into the purchase of foreign assets with a very low rate of return
So where does last week 's policy announcement fit into all this
Well , China has allowed the renminbi to rise - but barely
As of Thursday , the currency was only about half a percent higher than its typical level before the announcement
And all indications are that watching the future movement of the renminbi will be like watching paint dry : Chinese officials are still making statements denying that a rise in their currency will do anything to reduce trade imbalances , and prices in the forward market , in which traders agree to exchange currencies at various points in the future , suggest a rise of only about 2 percent in the renminbi by the end of this year
This is basically a joke
What the Chinese have done , they claim , to increase the `` flexibility '' of their exchange rate : it 's moving around more from day to day than it did in the past , sometimes up , sometimes down
Of course , Chinese policy makers know perfectly well that although U.S. officials have indeed called for more currency flexibility , that was just a diplomatic euphemism for what America , and the world , wants -LRB- and has the right to demand -RRB- : a much stronger renminbi
Having the currency bob up or down slightly makes no difference to the fundamentals
So what comes next
China 's government is clearly trying to string the rest of us along , putting off action until something - it 's hard to say what - comes up
That 's not acceptable
China needs to stop giving us the runaround and deliver real change
And if it refuses , it 's time to talk about trade sanctions
On one side there 's Barack the Policy Wonk , whose command of the issues and ability to explain those issues in plain English is a joy to behold
But on the other side there 's Barack the Post-Partisan , who searches for common ground where none exists , and whose negotiations with himself lead to policies that are far too weak
Both Baracks were on display in the president 's press conference earlier this week
First , Mr. Obama offered a crystal-clear explanation of the case for health care reform , and especially of the case for a public option competing with private insurers
`` If private insurers say that the marketplace provides the best quality health care , if they tell us that they 're offering a good deal , '' he asked , `` then why is it that the government , which they say ca n't run anything , suddenly is going to drive them out of business
That 's not logical .
But when asked whether the public option was non-negotiable he waffled , declaring that there are no `` lines in the sand .
That evening , Rahm Emanuel met with Democratic senators and told them well , it 's not clear what he said
Initial reports had him declaring willingness to abandon the public option , but Senator Kent Conrad 's staff later denied that
Still , the impression everyone got was of a White House all too eager to make concessions
The big question here is whether health care is about to go the way of the stimulus bill
At the beginning of this year , you may remember , Mr. Obama made an eloquent case for a strong economic stimulus then delivered a proposal falling well short of what independent analysts -LRB- and , I suspect , his own economists -RRB- considered necessary
The goal , presumably , was to attract bipartisan support
But in the event , Mr. Obama was able to pick up only three Senate Republicans by making a plan that was already too weak even weaker
At the time , some of us warned about what might happen : if unemployment surpassed the administration 's optimistic projections , Republicans would n't accept the need for more stimulus
Instead , they 'd declare the whole economic policy a failure
And that 's exactly how it 's playing out
With the unemployment rate now almost certain to pass 10 percent , there 's an overwhelming economic case for more stimulus
But as a political matter it 's going to be harder , not easier , to get that extra stimulus now than it would have been to get the plan right in the first place
The point is that if you 're making big policy changes , the final form of the policy has to be good enough to do the job
You might think that half a loaf is always better than none but it is n't if the failure of half-measures ends up discrediting your whole policy approach
Which brings us back to health care
It would be a crushing blow to progressive hopes if Mr. Obama does n't succeed in getting some form of universal care through Congress
But even so , reform is n't worth having if you can only get it on terms so compromised that it 's doomed to fail
What will determine the success or failure of reform
Above all , the success of reform depends on successful cost control
We really , really do n't want to get into a position a few years from now where premiums are rising rapidly , many Americans are priced out of the insurance market despite government subsidies , and the cost of health care subsidies is a growing strain on the budget
And that 's why the public plan is an important part of reform : it would help keep costs down through a combination of low overhead and bargaining power
That 's not an abstract hypothesis , it 's a conclusion based on solid experience
Currently , Medicare has much lower administrative costs than private insurance companies , while federal health care programs other than Medicare -LRB- which is n't allowed to bargain over drug prices -RRB- pay much less for prescription drugs than non-federal buyers
There 's every reason to believe that a public option could achieve similar savings
Indeed , the prospects for such savings are precisely what have the opponents of a public plan so terrified
Mr. Obama was right : if they really believed their own rhetoric about government waste and inefficiency , they would n't be so worried that the public option would put private insurers out of business
Behind the boilerplate about big government , rationing and all that lies the real concern : fear that the public plan would succeed
So Mr. Obama and Democrats in Congress have to hang tough no more gratuitous giveaways in the attempt to sound reasonable
And reform advocates have to keep up the pressure to stay on track
Yes , the perfect is the enemy of the good ; but so is the not-good-enough-to-work
Health reform has to be done right
Congress has always had a soft spot for `` experts '' who tell members what they want to hear , whether it 's supply-side economists declaring that tax cuts increase revenue or climate-change skeptics insisting that global warming is a myth
Right now , the welcome mat is out for analysts who claim that out-of-control speculators are responsible for $ 4-a-gallon gas
Back in May , Michael Masters , a hedge fund manager , made a big splash when he told a Senate committee that speculation is the main cause of rising prices for oil and other raw materials
He presented charts showing the growth of the oil futures market , in which investors buy and sell promises to deliver oil at a later date , and claimed that `` the increase in demand from index speculators '' his term for institutional investors who buy commodity futures `` is almost equal to the increase in demand from China .
Many economists scoffed : Mr. Masters was making the bizarre claim that betting on a higher price of oil for that is what it means to buy a futures contract is equivalent to actually burning the stuff
But members of Congress liked what they heard , and since that testimony much of Capitol Hill has jumped on the blame-the-speculators bandwagon
Somewhat surprisingly , Republicans have been at least as willing as Democrats to denounce evil speculators
But it turns out that conservative faith in free markets somehow evaporates when it comes to oil
For example , National Review has been publishing articles blaming speculators for high oil prices for years , ever since the price passed $ 50 a barrel
And it was John McCain , not Barack Obama , who recently said this : `` While a few reckless speculators are counting their paper profits , most Americans are coming up on the short end using more and more of their hard-earned paychecks to buy gas .
Why are politicians so eager to pin the blame for oil prices on speculators
Because it lets them believe that we do n't have to adapt to a world of expensive gas
Indeed , this past Monday Mr. Masters assured a House subcommittee that a return to the days of cheap oil is more or less there for the asking
If Congress passed legislation restricting speculation , he said , gasoline prices would fall almost 50 percent in a matter of weeks
O.K. , let 's talk about the reality
Is speculation playing a role in high oil prices
It 's not out of the question
Economists were right to scoff at Mr. Masters buying a futures contract does n't directly reduce the supply of oil to consumers but under some circumstances , speculation in the oil futures market can indirectly raise prices , encouraging producers and other players to hoard oil rather than making it available for use
Whether that 's happening now is a subject of highly technical dispute
-LRB- Readers who want to wonk themselves out can go to my blog , krugman.blogs.nytimes.com , and follow the links .
Suffice it to say that some economists , myself included , make much of the fact that the usual telltale signs of a speculative price boom are missing
But other economists argue , in effect , that absence of evidence is n't solid evidence of absence
What about those who argue that speculative excess is the only way to explain the speed with which oil prices have risen
Well , I have two words for them : iron ore.
You see , iron ore is n't traded on a global exchange ; its price is set in direct deals between producers and consumers
So there 's no easy way to speculate on ore prices
Yet the price of iron ore , like that of oil , has surged over the past year
In particular , the price Chinese steel makers pay to Australian mines has just jumped 96 percent
This suggests that growing demand from emerging economies , not speculation , is the real story behind rising prices of raw materials , oil included
In any case , one thing is clear : the hyperventilation over oil-market speculation is distracting us from the real issues
Regulating futures markets more tightly is n't a bad idea , but it wo n't bring back the days of cheap oil
Nothing will
Oil prices will fluctuate in the coming years I would n't be surprised if they slip for a while as consumers drive less , switch to more fuel-efficient cars , and so on but the long-term trend is surely up
Most of the adjustment to higher oil prices will take place through private initiative , but the government can help the private sector in a variety of ways , such as helping develop alternative-energy technologies and new methods of conservation and expanding the availability of public transit
But we wo n't have even the beginnings of a rational energy policy if we listen to people who assure us that we can just wish high oil prices away
Recessions are common ; depressions are rare
As far as I can tell , there were only two eras in economic history that were widely described as `` depressions '' at the time : the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31
Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline - on the contrary , both included periods when the economy grew
But these episodes of improvement were never enough to undo the damage from the initial slump , and were followed by relapses
We are now , I fear , in the early stages of a third depression
It will probably look more like the Long Depression than the much more severe Great Depression
But the cost - to the world economy and , above all , to the millions of lives blighted by the absence of jobs - will nonetheless be immense
And this third depression will be primarily a failure of policy
Around the world - most recently at last weekend 's deeply discouraging G-20 meeting - governments are obsessing about inflation when the real threat is deflation , preaching the need for belt-tightening when the real problem is inadequate spending
In 2008 and 2009 , it seemed as if we might have learned from history
Unlike their predecessors , who raised interest rates in the face of financial crisis , the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets
Unlike governments of the past , which tried to balance budgets in the face of a plunging economy , today 's governments allowed deficits to rise
And better policies helped the world avoid complete collapse : the recession brought on by the financial crisis arguably ended last summer
But future historians will tell us that this was n't the end of the third depression , just as the business upturn that began in 1933 was n't the end of the Great Depression
After all , unemployment - especially long-term unemployment - remains at levels that would have been considered catastrophic not long ago , and shows no sign of coming down rapidly
And both the United States and Europe are well on their way toward Japan-style deflationary traps
In the face of this grim picture , you might have expected policy makers to realize that they have n't yet done enough to promote recovery
But no : over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy
As far as rhetoric is concerned , the revival of the old-time religion is most evident in Europe , where officials seem to be getting their talking points from the collected speeches of Herbert Hoover , up to and including the claim that raising taxes and cutting spending will actually expand the economy , by improving business confidence
As a practical matter , however , America is n't doing much better
The Fed seems aware of the deflationary risks - but what it proposes to do about these risks is , well , nothing
The Obama administration understands the dangers of premature fiscal austerity - but because Republicans and conservative Democrats in Congress wo n't authorize additional aid to state governments , that austerity is coming anyway , in the form of budget cuts at the state and local levels
Why the wrong turn in policy
The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions
And it 's true that bond investors have turned on governments with intractable deficits
But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors
On the contrary : Greece has agreed to harsh austerity , only to find its risk spreads growing ever wider ; Ireland has imposed savage cuts in public spending , only to be treated by the markets as a worse risk than Spain , which has been far more reluctant to take the hard-liners ' medicine
It 's almost as if the financial markets understand what policy makers seemingly do n't : that while long-term fiscal responsibility is important , slashing spending in the midst of a depression , which deepens that depression and paves the way for deflation , is actually self-defeating
So I do n't think this is really about Greece , or indeed about any realistic appreciation of the tradeoffs between deficits and jobs
It is , instead , the victory of an orthodoxy that has little to do with rational analysis , whose main tenet is that imposing suffering on other people is how you show leadership in tough times
And who will pay the price for this triumph of orthodoxy
The answer is , tens of millions of unemployed workers , many of whom will go jobless for years , and some of whom will never work again
But 212 representatives voted no.
A handful of these no votes came from representatives who considered the bill too weak , but most rejected the bill because they rejected the whole notion that we have to do something about greenhouse gases
And as I watched the deniers make their arguments , I could n't help thinking that I was watching a form of treason treason against the planet
To fully appreciate the irresponsibility and immorality of climate-change denial , you need to know about the grim turn taken by the latest climate research
The fact is that the planet is changing faster than even pessimists expected : ice caps are shrinking , arid zones spreading , at a terrifying rate
And according to a number of recent studies , catastrophe a rise in temperature so large as to be almost unthinkable can no longer be considered a mere possibility
It is , instead , the most likely outcome if we continue along our present course
Thus researchers at M.I.T. , who were previously predicting a temperature rise of a little more than 4 degrees by the end of this century , are now predicting a rise of more than 9 degrees
Global greenhouse gas emissions are rising faster than expected ; some mitigating factors , like absorption of carbon dioxide by the oceans , are turning out to be weaker than hoped ; and there 's growing evidence that climate change is self-reinforcing that , for example , rising temperatures will cause some arctic tundra to defrost , releasing even more carbon dioxide into the atmosphere
Temperature increases on the scale predicted by the M.I.T. researchers and others would create huge disruptions in our lives and our economy
As a recent authoritative U.S. government report points out , by the end of this century New Hampshire may well have the climate of North Carolina today , Illinois may have the climate of East Texas , and across the country extreme , deadly heat waves the kind that traditionally occur only once in a generation may become annual or biannual events
In other words , we 're facing a clear and present danger to our way of life , perhaps even to civilization itself
How can anyone justify failing to act
Well , sometimes even the most authoritative analyses get things wrong
And if dissenting opinion-makers and politicians based their dissent on hard work and hard thinking if they had carefully studied the issue , consulted with experts and concluded that the overwhelming scientific consensus was misguided they could at least claim to be acting responsibly
But if you watched the debate on Friday , you did n't see people who 've thought hard about a crucial issue , and are trying to do the right thing
What you saw , instead , were people who show no sign of being interested in the truth
They do n't like the political and policy implications of climate change , so they 've decided not to believe in it and they 'll grab any argument , no matter how disreputable , that feeds their denial
Indeed , if there was a defining moment in Friday 's debate , it was the declaration by Representative Paul Broun of Georgia that climate change is nothing but a `` hoax '' that has been `` perpetrated out of the scientific community .
I 'd call this a crazy conspiracy theory , but doing so would actually be unfair to crazy conspiracy theorists
After all , to believe that global warming is a hoax you have to believe in a vast cabal consisting of thousands of scientists a cabal so powerful that it has managed to create false records on everything from global temperatures to Arctic sea ice
Yet Mr. Broun 's declaration was met with applause
Given this contempt for hard science , I 'm almost reluctant to mention the deniers ' dishonesty on matters economic
But in addition to rejecting climate science , the opponents of the climate bill made a point of misrepresenting the results of studies of the bill 's economic impact , which all suggest that the cost will be relatively low
Still , is it fair to call climate denial a form of treason
Is n't it politics as usual
Yes , it is and that 's why it 's unforgivable
Do you remember the days when Bush administration officials claimed that terrorism posed an `` existential threat '' to America , a threat in whose face normal rules no longer applied
That was hyperbole but the existential threat from climate change is all too real
Yet the deniers are choosing , willfully , to ignore that threat , placing future generations of Americans in grave danger , simply because it 's in their political interest to pretend that there 's nothing to worry about
If that 's not betrayal , I do n't know what is
Not long ago it seemed as if everyone watching the carnage in financial markets was drawing scary parallels with the 1930s
This time , however , Ben Bernanke and his colleagues at the Federal Reserve did what their predecessors failed to do during the banking crisis of 1930-31 : they acted forcefully to avert a collapse of the financial system
And their efforts seem , provisionally , to have worked
While things are far from normal in the financial markets , over the last few months the sense of panic has been gradually subsiding
You might think , then , that everyone would be congratulating Mr. Bernanke and company for their good work
But at an economic conference I recently attended , many of the participants including people with a lot of influence in the policy world seemed to be bashing the Bernanke Fed
You see , fears of a 1930s-style financial meltdown are apparently out ; fears of 1970s-style stagflation are in
And the Fed stands accused of being soft on inflation
The emerging conventional wisdom , if what I heard is any indication , is that Mr. Bernanke has been fighting the wrong enemy all along : inflation , not financial collapse , is the real threat
And to head off that threat , the critics say , the Fed has to reverse course and raise interest rates never mind the risks of recession
So this seems like a good time to declare that the new conventional wisdom is all wrong
We 're not watching a rerun of that '70s show and the misguided belief that we are could do a lot of harm
It 's true that the soaring prices of oil and other raw materials have led to public anguish over the rising cost of living
But this time around there 's no sign whatsoever of the wage-price spiral that , in the 1970s , turned a temporary shock from higher oil prices into a persistently high rate of inflation Here 's an example of the way things used to be : In May 1981 , the United Mine Workers signed a contract with coal mine operators locking in wage increases averaging 11 percent a year over the next three years
The union demanded such a large pay hike because it expected the double-digit inflation of the late 1970s to continue ; the mine owners thought they could afford to meet the union 's demands because they expected big future increases in coal prices , which had risen 40 percent over the previous three years
At the time , the mine workers ' settlement was n't at all unusual : many workers were getting comparable contracts
Workers and employers were , in effect , engaged in a game of leapfrog : workers would demand big wage increases to keep up with inflation , corporations would pass these higher wages on in prices , rising prices would lead to another round of wage demands , and so on
Once that sort of self-sustaining inflationary process gets under way , it 's very hard to stop
In fact , it took a very severe recession , the worst slump since the 1930s , to get rid of the inflationary legacy of the 1970s
But as I said , this time around there 's no wage-price spiral in sight
The inflation hawks point out that consumers are , for the first time in decades , telling pollsters that they expect a sharp rise in prices over the next year
Fair enough
But where are the unions demanding 11-percent-a-year wage increases
-LRB- Where are the unions , period ?
Consumers are worried about inflation , but you have to search far and wide to find workers demanding compensation in the form of higher wages , let alone employers willing to accept those demands
In fact , wage growth actually seems to be slowing , thanks to the weakness of the job market
And since there is n't a wage-price spiral , we do n't need higher interest rates to get inflation under control
When the surge in commodity prices levels off and it will ; the laws of supply and demand have n't been repealed inflation will subside on its own
Still , why not raise interest rates a bit , as extra insurance against inflation
Part of the answer is that the financial crisis , which seems to be in remission right now , could flare up again if money gets more expensive
And even if the financial crisis does n't come back , higher rates would further weaken an already weak real economy
Never mind whether we 're technically in a recession : it feels like a recession to most people , and higher interest rates would make it worse
The bottom line is that while expensive gas and food are inflicting real harm on American families , they are n't setting off a '70s - type inflationary spiral
The only thing we have to fear on that front is inflation fear itself , which could lead to policies that make a bad economic situation worse
It 's feeling a lot like 1992 right now
It 's also feeling a lot like 1980
But which parallel is closer
Is Barack Obama going to be a Ronald Reagan of the left , a president who fundamentally changes the country 's direction
Or will he be just another Bill Clinton
Current polls not horse-race polls , which are notoriously uninformative until later in the campaign , but polls gauging the public mood are strikingly similar to those in both 1980 and 1992 , years in which an overwhelming majority of Americans were dissatisfied with the country 's direction
So the odds are that this will be a `` change '' election which means that it 's very much Mr. Obama 's election to lose
But if he wins , how much change will he actually deliver
Reagan , for better or worse I 'd say for worse , but that 's another discussion brought a lot of change
He ran as an unabashed conservative , with a clear ideological agenda
And he had enormous success in getting that agenda implemented
He had his failures , most notably on Social Security , which he tried to dismantle but ended up strengthening
But America at the end of the Reagan years was not the same country it was when he took office
Bill Clinton also ran as a candidate of change , but it was much less clear what kind of change he was offering
He portrayed himself as someone who transcended the traditional liberal-conservative divide , proposing `` a government that offers more empowerment and less entitlement .
The economic plan he announced during the campaign was something of a hodgepodge : higher taxes on the rich , lower taxes for the middle class , public investment in things like high-speed rail , health care reform without specifics
We all know what happened next
The Clinton administration achieved a number of significant successes , from the revitalization of veterans ' health care and federal emergency management to the expansion of the Earned Income Tax Credit and health insurance for children
But the big picture is summed up by the title of a new book by the historian Sean Wilentz : `` The Age of Reagan : A history , 1974-2008 .
So whom does Mr. Obama resemble more
At this point , he 's definitely looking Clintonesque
Like Mr. Clinton , Mr. Obama portrays himself as transcending traditional divides
Near the end of last week 's `` unity '' event with Hillary Clinton , he declared that `` the choice in this election is not between left or right , it 's not between liberal or conservative , it 's between the past and the future .
Mr. Obama 's economic plan also looks remarkably like the Clinton 1992 plan : a mixture of higher taxes on the rich , tax breaks for the middle class and public investment -LRB- this time with a focus on alternative energy -RRB-
Sometimes the Clinton-Obama echoes are almost scary
During his speech accepting the nomination , Mr. Clinton led the audience in a chant of `` We can do it !
Remind you of anything
Just to be clear , we could and still might do a lot worse than a rerun of the Clinton years
But Mr. Obama 's most fervent supporters expect much more
Progressive activists , in particular , overwhelmingly supported Mr. Obama during the Democratic primary even though his policy positions , particularly on health care , were often to the right of his rivals '
In effect , they convinced themselves that he was a transformational figure behind a centrist facade
They may have had it backward
Mr. Obama looks even more centrist now than he did before wrapping up the nomination
Most notably , he has outraged many progressives by supporting a wiretapping bill that , among other things , grants immunity to telecom companies for any illegal acts they may have undertaken at the Bush administration 's behest
The candidate 's defenders argue that he 's just being pragmatic that he needs to do whatever it takes to win , and win big , so that he has the power to effect major change
But critics argue that by engaging in the same `` triangulation and poll-driven politics '' he denounced during the primary , Mr. Obama actually hurts his election prospects , because voters prefer candidates who take firm stands
In any case , what about after the election
The Reagan-Clinton comparison suggests that a candidate who runs on a clear agenda is more likely to achieve fundamental change than a candidate who runs on the promise of change but is n't too clear about what that change would involve
Of course , there 's always the possibility that Mr. Obama really is a centrist , after all
One thing is clear : for Democrats , winning this election should be the easy part
Everything is going their way : sky-high gas prices , a weak economy and a deeply unpopular president
The real question is whether they will take advantage of this once-in-a-generation chance to change the country 's direction
And that 's mainly up to Mr. Obama
`` I appreciate your efforts , and look forward to working with you so that the Congress can complete health care reform by October .
So declared President Obama in a letter this week to Senators Max Baucus and Edward Kennedy
The big health care push is officially on
But the devil is in the details
Health reform will fail unless we get serious cost control and we wo n't get that kind of control unless we fundamentally change the way the insurance industry , in particular , behaves
So let me offer Congress two pieces of advice : 1 -RRB- Do n't trust the insurance industry
2 -RRB- Do n't trust the insurance industry
The Democratic strategy for health reform is based on a political judgment : the belief that the public will be more willing to accept reform , less easily Harry-and-Louised , if those who already have health coverage from private insurers are allowed to keep it
But how can we have fundamental reform of what Mr. Obama calls a `` broken system '' if the current players stay in place
The answer is supposed to lie in a combination of regulation and competition
It 's a sign of the way the political winds are blowing that insurers are n't opposing new regulations
Indeed , the president of America 's Health Insurance Plans , the industry lobby known as AHIP , has explicitly accepted the need for `` much more aggressive regulation of insurance .
What 's still not settled , however , is whether regulation will be supplemented by competition , in the form of a public plan that Americans can buy into as an alternative to private insurance
Now nobody is proposing that Americans be forced to get their insurance from the government
The `` public option , '' if it materializes , will be just that an option Americans can choose
And the reason for providing this option was clearly laid out in Mr. Obama 's letter : It will give Americans `` a better range of choices , make the health care market more competitive , and keep the insurance companies honest .
Those last five words are crucial because history shows that the insurance companies will do nothing to reform themselves unless forced to do so
Consider the seemingly trivial matter of making it easier for doctors to deal with multiple insurance companies
Back in 1993 , the political strategist -LRB- and former Times columnist -RRB- William Kristol , in a now-famous memo , urged Republican members of Congress to oppose any significant health care reform
But even he acknowledged that some things needed fixing , calling for , among other things , `` a simplified , uniform insurance form .
Fast forward to the present
A few days ago , major players in the health industry laid out what they intend to do to slow the growth in health care costs
Topping the list of AHIP 's proposals was `` administrative simplification .
Providers , the lobby conceded , face `` administrative challenges '' because of the fact that each insurer has its own distinct telephone numbers , fax numbers , codes , claim forms and administrative procedures
`` Standardizing administrative transactions , '' AHIP asserted , `` will be a watershed event .
Think about it
The insurance industry 's idea of a cutting-edge , cost-saving reform is to do what William Kristol William Kristol
thought it should have done 15 years ago
How could the industry spend 15 years failing to make even the most obvious reforms
The answer is simple : Americans seeking health coverage had nowhere else to go
And the purpose of the public option is to make sure that the industry does n't waste another 15 years by giving Americans an alternative if private insurers fall down on the job
Be warned , however
The insurance industry will do everything it can to avoid being held accountable
At first the insurance lobby 's foot soldiers in Congress tried to shout down the public option with the old slogans : private enterprise good , government bad
At this point , however , they 're trying to kill the public option in more subtle ways
The most recent ruse is the proposal for a `` trigger '' the public option will only become available if private insurers fail to meet certain performance criteria
The idea , of course , is to choose those criteria to ensure that the trigger is never pulled
And here 's the thing
Without an effective public option , the Obama health care reform will be simply a national version of the health care reform in Massachusetts : a system that is a lot better than nothing but has done little to address the fundamental problem of a fragmented system , and as a result has done little to control rising health care costs
Right now the health insurers are promising to deliver major cost savings
But history shows that such promises ca n't be trusted
As President Obama said in his letter , we need a serious , real public option to keep the insurance companies honest
Do you remember what it was like back in the old days when we had a New Economy
In the 1990s , jobs were abundant , oil was cheap and information technology was about to change everything
Then the technology bubble popped
Many highly touted New Economy companies , it turned out , were better at promoting their images than at making money although some of them did pioneer new forms of accounting fraud
After that came the oil shock and the food shock , grim reminders that we 're still living in a material world
So much , then , for the digital revolution
Not so fast
The predictions of '90s technology gurus are coming true more slowly than enthusiasts expected but the future they envisioned is still on the march
In 1994 , one of those gurus , Esther Dyson , made a striking prediction : that the ease with which digital content can be copied and disseminated would eventually force businesses to sell the results of creative activity cheaply , or even give it away
Whatever the product software , books , music , movies the cost of creation would have to be recouped indirectly : businesses would have to `` distribute intellectual property free in order to sell services and relationships .
For example , she described how some software companies gave their product away but earned fees for installation and servicing
But her most compelling illustration of how you can make money by giving stuff away was that of the Grateful Dead , who encouraged people to tape live performances because `` enough of the people who copy and listen to Grateful Dead tapes end up paying for hats , T-shirts and performance tickets
In the new era , the ancillary market is the market .
Indeed , it turns out that the Dead were business pioneers
Rolling Stone recently published an article titled `` Rock 's New Economy : Making Money When CDs Do n't Sell .
Downloads are steadily undermining record sales but today 's rock bands , the magazine reports , are finding other sources of income
Even if record sales are modest , bands can convert airplay and YouTube views into financial success indirectly , making money through `` publishing , touring , merchandising and licensing .
What other creative activities will become mainly ways to promote side businesses
How about writing books
According to a report in The Times , the buzz at this year 's BookExpo America was all about electronic books
Now , e-books have been the coming , but somehow not yet arrived , thing for a very long time
-LRB- There 's an old Brazilian joke : `` Brazil is the country of the future and always will be .
E-books have been like that .
But we may finally have reached the point at which e-books are about to become a widely used alternative to paper and ink
That 's certainly my impression after a couple of months ' experience with the device feeding the buzz , the Amazon Kindle
Basically , the Kindle 's lightness and reflective display mean that it offers a reading experience almost comparable to that of reading a traditional book
This leaves the user free to appreciate the convenience factor : the Kindle can store the text of many books , and when you order a new book , it 's literally in your hands within a couple of minutes
It 's a good enough package that my guess is that digital readers will soon become common , perhaps even the usual way we read books
How will this affect the publishing business
Right now , publishers make as much from a Kindle download as they do from the sale of a physical book
But the experience of the music industry suggests that this wo n't last : once digital downloads of books become standard , it will be hard for publishers to keep charging traditional prices
Indeed , if e-books become the norm , the publishing industry as we know it may wither away
Books may end up serving mainly as promotional material for authors ' other activities , such as live readings with paid admission
Well , if it was good enough for Charles Dickens , I guess it 's good enough for me
Now , the strategy of giving intellectual property away so that people will buy your paraphernalia wo n't work equally well for everything
To take the obvious , painful example : news organizations , very much including this one , have spent years trying to turn large online readership into an adequately paying proposition , with limited success
But they 'll have to find a way
Bit by bit , everything that can be digitized will be digitized , making intellectual property ever easier to copy and ever harder to sell for more than a nominal price
And we 'll have to find business and economic models that take this reality into account
It wo n't all happen immediately
But in the long run , we are all the Grateful Dead
What would have happened if hanging chads and the Supreme Court had n't denied Al Gore the White House in 2000
Many things would clearly have been different over the next eight years
But one thing would probably have been the same : There would have been a huge housing bubble and a financial crisis when the bubble burst
And if Democrats had been in power when the bad news arrived , they would have taken the blame , even though things would surely have been as bad or worse under Republican rule
You now understand the essentials of the current political situation in Britain
For much of the past 30 years , politics and policy here and in America have moved in tandem
We had Reagan ; they had Thatcher
We had the Garn-St
Germain Act of 1982 , which dismantled New Deal-era banking regulation ; they had the Big Bang of 1986 , which deregulated London 's financial industry
Both nations had an explosion of household debt and saw their financial systems become increasingly unsound
In both countries , the conservatives who pushed through deregulation lost power in the 1990s
In each case , however , the new leaders were as infatuated with `` innovative '' finance as their predecessors were
Robert Rubin , in his years as the Treasury secretary , and Gordon Brown , in his years as the chancellor of the Exchequer , preached the same gospel
But where America 's conservative movement better organized and far more ruthless than its British counterpart managed to claw its way back to power at the beginning of this decade , in Britain , the Labor Party continued to rule right through the bubble years
Mr. Brown eventually became prime minister
And so the Bush bust in America is the Brown bust here
Do Mr. Brown and his party really deserve blame for the crisis here
Yes and no.
Mr. Brown bought fully into the dogma that the market knows best , that less regulation is more
In 2005 he called for `` trust in the responsible company , the engaged employee and the educated consumer '' and insisted that regulation should have `` not just a light touch but a limited touch .
It might as well have been Alan Greenspan speaking
There 's no question that this zeal for deregulation set Britain up for a fall
Consider the counterexample of Canada a mostly English-speaking country , every bit as much in the American cultural orbit as Britain , but one where Reagan\/Thatcher-type financial deregulation never took hold
Sure enough , Canadian banks have been a pillar of stability in the crisis
But here 's the thing
While Mr. Brown and his party may deserve to be punished , their political opponents do n't deserve to be rewarded
After all , would a Conservative government have been any less in the thrall of free-market fundamentalism , any more willing to rein in runaway finance , over the past decade
Of course not
And Mr. Brown 's response to the crisis a burst of activism to make up for his past passivity makes sense , whereas that of his opponents does not
The Brown government has moved aggressively to shore up troubled banks
This has potentially put taxpayers on the hook for large future bills , but the financial situation has stabilized
Mr. Brown has backed the Bank of England , which , like the Federal Reserve , has engaged in unconventional moves to free up credit
And he has shown himself willing to run large budget deficits now , even while scheduling substantial tax increases for the future
All of this seems to be working
Leading indicators have turned -LRB- slightly -RRB- positive , suggesting that Britain , whose competitiveness has benefited from the devaluation of the pound , will begin an economic recovery well before the rest of Europe
Meanwhile , David Cameron , the Conservative leader , has had little to offer other than to raise the red flag of fiscal panic and demand that the British government tighten its belt immediately
Now , many commentators have raised the alarm about Britain 's fiscal outlook , and one rating agency has warned that the country may lose its AAA status -LRB- although the others disagree -RRB-
But markets do n't seem unduly worried : the interest rate on long-term British debt is only slightly higher than that on German debt , not what you 'd expect from a country doomed to bankruptcy
Still , if an election were held today , Mr. Brown and his party would lose badly
They were in power when the bad stuff happened , and the buck or in this case , I guess , the quid stops at No. 10 Downing Street
It 's a sobering prospect
If I were a member of the Obama administration 's economic team a team whose top members were as enthusiastic about the wonders of modern finance as their British counterparts I 'd be looking across the Atlantic and muttering , `` There but for the disgrace of Bush v. Gore go I.
Fervent supporters of Barack Obama like to say that putting him in the White House would transform America
With all due respect to the candidate , that gets it backward
Mr. Obama is an impressive speaker who has run a brilliant campaign but if he wins in November , it will be because our country has already been transformed
Mr. Obama 's nomination would n't have been possible 20 years ago
It 's possible today only because racial division , which has driven U.S. politics rightward for more than four decades , has lost much of its sting
And the de-racialization of U.S. politics has implications that go far beyond the possibility that we 're about to elect an African-American president
Without racial division , the conservative message which has long dominated the political scene loses most of its effectiveness
Take , for example , that old standby of conservatives : denouncing Big Government
Last week John McCain 's economic spokesman claimed that Barack Obama is President Bush 's true fiscal heir , because he 's `` dedicated to the recent Bush tradition of spending money on everything .
Now , the truth is that the Bush administration 's big-spending impulses have been largely limited to defense contractors
But more to the point , the McCain campaign is deluding itself if it thinks this issue will resonate with the public
For Americans have never disliked Big Government in general
In fact , they love Social Security and Medicare , and strongly approve of Medicaid which means that the three big programs that dominate domestic spending have overwhelming public support
If Ronald Reagan and other politicians succeeded , for a time , in convincing voters that government spending was bad , it was by suggesting that bureaucrats were taking away workers ' hard-earned money and giving it to you-know-who : the `` strapping young buck '' using food stamps to buy T-bone steaks , the welfare queen driving her Cadillac
Take away the racial element , and Americans like government spending just fine
But why has racial division become so much less important in American politics
Part of the credit surely goes to Bill Clinton , who ended welfare as we knew it
I 'm not saying that the end of Aid to Families With Dependent Children was an unalloyed good thing ; it created a great deal of hardship
But the `` bums on welfare '' played a role in political discourse vastly disproportionate to the actual expense of A.F.D.C. , and welfare reform took that issue off the table
Another large factor has been the decline in urban violence
As the historian Rick Perlstein documents in his terrific new book `` Nixonland , '' America 's hard right turn really began in 1966 , when the Democrats suffered a severe setback in Congress and Ronald Reagan was elected governor of California
The cause of that right turn , as Mr. Perlstein shows , was white fear of urban disorder and the associated fear that fair housing laws would let dangerous blacks move into white neighborhoods
`` Law and order '' became the rallying cry of right-wing politicians , above all Richard Nixon , who rode that fear right into the White House
But during the Clinton years , for reasons nobody fully understands , the wave of urban violence receded , and with it the ability of politicians to exploit Americans ' fear
It 's true that 9\/11 gave the fear factor a second wind : Karl Rove accusing liberals of being soft on terrorism sounded just like Spiro Agnew accusing liberals of being soft on crime
But the G.O.P. 's credibility as America 's defender has leaked away into the sands of Iraq
Let me add one more hypothesis : although everyone makes fun of political correctness , I 'd argue that decades of pressure on public figures and the media have helped drive both overt and strongly implied racism out of our national discourse
For example , I do n't think a politician today could get away with running the infamous 1988 Willie Horton ad
Unfortunately , the campaign against misogyny has n't been equally successful
By the way , it was during the heyday of the baby boom generation that crude racism became unacceptable
Mr. Obama , who has been dismissive of the boomers ' `` psychodrama , '' might want to give the generation that brought about this change , fought for civil rights and protested the Vietnam War a bit more credit
Anyway , none of this guarantees an Obama victory in November
Racial division has lost much of its sting , but not all : you can be sure that we 'll be hearing a lot more about the Rev. Jeremiah Wright and all that
Moreover , despite Hillary Clinton 's gracious , eloquent concession speech , some of her supporters may yet refuse to support the Democratic nominee
But if Mr. Obama does win , it will symbolize the great change that has taken place in America
Racial polarization used to be a dominating force in our politics but we 're now a different , and better , country
Last week , Robert Rubin , the former Treasury secretary , and John Lipsky , a top official at the International Monetary Fund , both suggested that public funds might be needed to rescue the U.S. financial system
Mr. Lipsky insisted that he was n't talking about a bailout
But he was
It 's true that Henry Paulson , the current Treasury secretary , still says that any proposal to use taxpayers ' money to help resolve the crisis is a `` non-starter .
But that 's about as credible as all of his previous pronouncements on the financial situation
So here 's the question we really should be asking : When the feds do bail out the financial system , what will they do to ensure that they are n't also bailing out the people who got us into this mess
Let 's talk about why a bailout is inevitable
Between 2002 and 2007 , false beliefs in the private sector the belief that home prices only go up , that financial innovation had made risk go away , that a triple-A rating really meant that an investment was safe led to an epidemic of bad lending
Meanwhile , false beliefs in the political arena the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing led Washington to ignore the warning signs
By the way , Mr. Greenspan is still at it : accepting no blame , he continues to insist that `` market flexibility and open competition '' are the `` most reliable safeguards against cumulative economic failure .
The result of all that bad lending was an unholy financial mess that will cause trillions of dollars in losses
A large chunk of these losses will fall on financial institutions : commercial banks , investment banks , hedge funds and so on
Many people say that the government should let the chips fall where they may that those who made bad loans should simply be left to suffer the consequences
But it 's not going to happen
When push comes to shove , financial officials rightly are n't willing to run the risk that losses on bad loans will cripple the financial system and take the real economy down with it
Consider what happened last Friday , when the Federal Reserve rushed to the aid of Bear Stearns
Nobody expects an investment bank to be a charitable institution , but Bear has a particularly nasty reputation
As Gretchen Morgenson of The New York Times reminds us , Bear `` has often operated in the gray areas of Wall Street and with an aggressive , brass-knuckles approach .
Bear was a major promoter of the most questionable subprime lenders
It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis
And it 's a bad financial citizen : the last time the Fed tried to contain a financial crisis , after the collapse of Long-Term Capital Management in 1998 , Bear refused to participate in the rescue operation
Bear , in other words , deserved to be allowed to fail both on the merits and to teach Wall Street not to expect someone else to clean up its messes
But the Fed rode to Bear 's rescue anyway , fearing that the collapse of a major investment bank would cause panic in the markets and wreak havoc with the wider economy
Fed officials knew that they were doing a bad thing , but believed that the alternative would be even worse
As Bear goes , so will go the rest of the financial system
And if history is any guide , the coming taxpayer-financed bailout will end up costing a lot of money
The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P. , the equivalent of $ 450 billion today
Some estimates put the fiscal cost of Japan 's post-bubble cleanup at more than 20 percent of G.D.P. the equivalent of $ 3 trillion for the United States
If these numbers shock you , they should
But the big bailout is coming
The only question is how well it will be managed
As I said , the important thing is to bail out the system , not the people who got us into this mess
That means cleaning out the shareholders in failed institutions , making bondholders take a haircut , and canceling the stock options of executives who got rich playing heads I win , tails you lose
According to late reports on Sunday , JPMorgan Chase will buy Bear for a pittance
That 's an O.K. resolution for this case but not a model for the much bigger bailout to come
Looking ahead , we probably need something similar to the Resolution Trust Corporation , which took over bankrupt savings and loan institutions and sold off their assets to reimburse taxpayers
And we need it quickly : things are falling apart as you read this
One way or another , the fate of health care reform is going to be decided in the next few days
If House Democratic leaders find 216 votes , reform will almost immediately become the law of the land
If they do n't , reform may well be put off for many years possibly a decade or more
So this seems like a good time to revisit the reasons we need this reform , imperfect as it is
As it happens , Reuters published an investigative report this week that powerfully illustrates the vileness of our current system
The report concerns the insurer Fortis , now part of Assurant Health , which turns out to have had a systematic policy of revoking its clients ' policies when they got sick
In particular , according to the Reuters report , it targeted every single policyholder who contracted H.I.V. , looking for any excuse , no matter how flimsy , for cancellation
In the case that brought all this to light , Assurant Health used an obviously misdated handwritten note by a nurse , who wrote `` 2001 '' instead of `` 2002 , '' to claim that the infection was a pre-existing condition that the client had failed to declare , and revoked his policy
This was illegal , and the company must have known it : the South Carolina Supreme Court , after upholding a decision granting large damages to the wronged policyholder , concluded that the company had been systematically concealing its actions when withdrawing coverage , not just in this case , but across the board
But this is much more than a law enforcement issue
For one thing , it 's an example those who castigate President Obama for `` demonizing '' insurance companies should consider
The truth , widely documented , is that behavior like Assurant Health 's is widespread for a simple reason : it pays
A House committee estimated that Assurant made $ 150 million in profits between 2003 and 2007 by canceling coverage of people who thought they had insurance , a sum that dwarfs the fine the court imposed in this particular case
It 's not demonizing insurers to describe what they actually do
Beyond that , this is a story that could happen only in America
In every other advanced nation , insurance coverage is available to everyone regardless of medical history
Our system is unique in its cruelty
And one more thing : employment-based health insurance , which is already regulated in a way that mostly prevents this kind of abuse , is unraveling
Less than half of workers at small businesses were covered last year , down from 58 percent a decade ago
This means that in the absence of reform , an ever-growing number of Americans will be at the mercy of the likes of Assurant Health
So what 's the answer
Americans overwhelmingly favor guaranteeing coverage to those with pre-existing conditions but you ca n't do that without pursuing broad-based reform
To make insurance affordable , you have to keep currently healthy people in the risk pool , which means requiring that everyone or almost everyone buy coverage
You ca n't do that without financial aid to lower-income Americans so that they can pay the premiums
So you end up with a tripartite policy : elimination of medical discrimination , mandated coverage , and premium subsidies
Or to put it another way , you end up with something like the health care plan Mitt Romney introduced in Massachusetts in 2006 , and the very similar plan the House either will or wo n't pass in the next few days
Comprehensive reform is the only way forward
Can we afford this
Yes , says the Congressional Budget Office , which on Thursday concluded that the proposed legislation would reduce the deficit by $ 138 billion in its first decade and half of 1 percent of G.D.P. , amounting to around $ 1.2 trillion , in its second decade
But should n't we be focused on controlling costs rather than extending coverage
Actually , the proposed reform does more to control health care costs than any previous legislation , paying for expanded coverage by reducing the rate at which Medicare costs will grow , substantially improving Medicare 's long-run financing along the way
And this combination of broader coverage and cost control is no accident : It has long been clear to health-policy experts that these concerns go hand in hand
The United States is the only advanced nation without universal health care , and it also has by far the world 's highest health care costs
Can you imagine a better reform
If Harry Truman had managed to add health care to Social Security back in 1947 , we 'd have a better , cheaper system than the one whose fate now hangs in the balance
But an ideal plan is n't on the table
And what is on the table , ready to go , is legislation that is fiscally responsible , takes major steps toward dealing with rising health care costs , and would make us a better , fairer , more decent nation
All it will take to make this happen is for a handful of on-the-fence House members to do the right thing
Here 's hoping
So here 's the situation
We 've been through the second-worst financial crisis in the history of the world , and we 've barely begun to recover : 29 million Americans either ca n't find jobs or ca n't find full-time work
Yet all momentum for serious banking reform has been lost
The question now seems to be whether we 'll get a watered-down bill or no bill at all
And I hate to say this , but the second option is starting to look preferable
The problem , not too surprisingly , lies in the Senate , and mainly , though not entirely , with Republicans
The House has already passed a fairly strong reform bill , more or less along the lines proposed by the Obama administration , and the Senate could probably do the same if it operated on the principle of majority rule
But it does n't and when you combine near-universal Republican opposition to serious reform with the wavering of some Democrats , prospects look bleak
How did we get to this point
And should reform advocates accept the compromises that might yet produce some kind of bill
Many opponents of the House version of banking reform present their position as one of principle
House Republicans , offering their alternative proposal , claimed that they would end banking excesses by introducing `` market discipline '' basically , by promising not to rescue banks in the future
But that 's a fantasy
For one thing , governments always , when push comes to shove , end up rescuing key financial institutions in a crisis
And more broadly , relying on the magic of the market to keep banks safe has always been a path to disaster
Even Adam Smith knew that : he may have been the father of free-market economics , but he argued that bank regulation was as necessary as fire codes on urban buildings , and called for a ban on high-risk , high-interest lending , the 18th-century version of subprime
And the lesson has been confirmed again and again , from the Panic of 1873 to Iceland today
I suspect that even Republicans , in their hearts , understand the need for real reform
But their strategy of opposing anything the Obama administration proposes , coupled with the lure of financial-industry dollars back in December top Republican leaders huddled with bank lobbyists to coordinate their campaigns against reform has trumped all other considerations
That said , some Republicans might , just possibly , be persuaded to sign on to a much-weakened version of reform in particular , one that eliminates a key plank of the Obama administration 's proposals , the creation of a strong , independent agency protecting consumers
Should Democrats accept such a watered-down reform
There are times when even a highly imperfect reform is much better than nothing ; this is very much the case for health care
But financial reform is different
An imperfect health care bill can be revised in the light of experience , and if Democrats pass the current plan there will be steady pressure to make it better
A weak financial reform , by contrast , would n't be tested until the next big crisis
All it would do is create a false sense of security and a fig leaf for politicians opposed to any serious action then fail in the clinch
Better , then , to take a stand , and put the enemies of reform on the spot
And by all means let 's highlight the dispute over a proposed Consumer Financial Protection Agency
There 's no question that consumers need much better protection
The late Edward Gramlich a Federal Reserve official who tried in vain to get Alan Greenspan to act against predatory lending summarized the case perfectly back in 2007 : `` Why are the most risky loan products sold to the least sophisticated borrowers
The question answers itself the least sophisticated borrowers are probably duped into taking these products .
Is it important that this protection be provided by an independent agency
It must be , or lobbyists would n't be campaigning so hard to prevent that agency 's creation
And it 's not hard to see why
Some have argued that the job of protecting consumers can and should be done either by the Fed or as in one compromise that at this point seems unlikely by a unit within the Treasury Department
But remember , not that long ago Mr. Greenspan was Fed chairman and John Snow was Treasury secretary
Case closed
The only way consumers will be protected under future antiregulation administrations and believe me , given the power of the financial lobby , there will be such administrations is if there 's an agency whose whole reason for being is to police bank abuses
In summary , then , it 's time to draw a line in the sand
No reform , coupled with a campaign to name and shame the people responsible , is better than a cosmetic reform that just covers up failure to act
If Ben Bernanke manages to save the financial system from collapse , he will rightly be praised for his heroic efforts
But what we should be asking is : How did we get here
Why does the financial system need salvation
Why do mild-mannered economists have to become superheroes
The answer , at a fundamental level , is that we 're paying the price for willful amnesia
We chose to forget what happened in the 1930s and having refused to learn from history , we 're repeating it
Contrary to popular belief , the stock market crash of 1929 was n't the defining moment of the Great Depression
What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931
This banking crisis of the 1930s showed that unregulated , unsupervised financial markets can all too easily suffer catastrophic failure
As the decades passed , however , that lesson was forgotten and now we 're relearning it , the hard way
To grasp the problem , you need to understand what banks do
Banks exist because they help reconcile the conflicting desires of savers and borrowers
Savers want freedom access to their money on short notice
Borrowers want commitment : they do n't want to risk facing sudden demands for repayment
Normally , banks satisfy both desires : depositors have access to their funds whenever they want , yet most of the money placed in a bank 's care is used to make long-term loans
The reason this works is that withdrawals are usually more or less matched by new deposits , so that a bank only needs a modest cash reserve to make good on its promises
But sometimes often based on nothing more than a rumor banks face runs , in which many people try to withdraw their money at the same time
And a bank that faces a run by depositors , lacking the cash to meet their demands , may go bust even if the rumor was false
Worse yet , bank runs can be contagious
If depositors at one bank lose their money , depositors at other banks are likely to get nervous , too , setting off a chain reaction
And there can be wider economic effects : as the surviving banks try to raise cash by calling in loans , there can be a vicious circle in which bank runs cause a credit crunch , which leads to more business failures , which leads to more financial troubles at banks , and so on
That , in brief , is what happened in 1930-1931 , making the Great Depression the disaster it was
So Congress tried to make sure it would never happen again by creating a system of regulations and guarantees that provided a safety net for the financial system
And we all lived happily for a while but not for ever after
Wall Street chafed at regulations that limited risk , but also limited potential profits
And little by little it wriggled free partly by persuading politicians to relax the rules , but mainly by creating a `` shadow banking system '' that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe
For example , in the old system , savers had federally insured deposits in tightly regulated savings banks , and banks used that money to make home loans
Over time , however , this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages with nary a regulator in sight
As the years went by , the shadow banking system took over more and more of the banking business , because the unregulated players in this system seemed to offer better deals than conventional banks
Meanwhile , those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned
In fact , however , we were partying like it was 1929 and now it 's 1930
The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago
People are n't pulling cash out of banks to put it in their mattresses but they 're doing the modern equivalent , pulling their money out of the shadow banking system and putting it into Treasury bills
And the result , now as then , is a vicious circle of financial contraction
Mr. Bernanke and his colleagues at the Fed are doing all they can to end that vicious circle
We can only hope that they succeed
Otherwise , the next few years will be very unpleasant not another Great Depression , hopefully , but surely the worst slump we 've seen in decades
Even if Mr. Bernanke pulls it off , however , this is no way to run an economy
It 's time to relearn the lessons of the 1930s , and get the financial system back under control
The day before Sunday 's health care vote , President Obama gave an unscripted talk to House Democrats
Near the end , he spoke about why his party should pass reform : `` Every once in a while a moment comes where you have a chance to vindicate all those best hopes that you had about yourself , about this country , where you have a chance to make good on those promises that you made ... And this is the time to make true on that promise
We are not bound to win , but we are bound to be true
We are not bound to succeed , but we are bound to let whatever light we have shine .
And on the other side , here 's what Newt Gingrich , the Republican former speaker of the House a man celebrated by many in his party as an intellectual leader had to say : If Democrats pass health reform , `` They will have destroyed their party much as Lyndon Johnson shattered the Democratic Party for 40 years '' by passing civil rights legislation
I 'd argue that Mr. Gingrich is wrong about that : proposals to guarantee health insurance are often controversial before they go into effect Ronald Reagan famously argued that Medicare would mean the end of American freedom but always popular once enacted
But that 's not the point I want to make today
Instead , I want you to consider the contrast : on one side , the closing argument was an appeal to our better angels , urging politicians to do what is right , even if it hurts their careers ; on the other side , callous cynicism
Think about what it means to condemn health reform by comparing it to the Civil Rights Act
Who in modern America would say that L.B.J. did the wrong thing by pushing for racial equality
-LRB- Actually , we know who : the people at the Tea Party protest who hurled racial epithets at Democratic members of Congress on the eve of the vote .
And that cynicism has been the hallmark of the whole campaign against reform
Yes , a few conservative policy intellectuals , after making a show of thinking hard about the issues , claimed to be disturbed by reform 's fiscal implications -LRB- but were strangely unmoved by the clean bill of fiscal health from the Congressional Budget Office -RRB- or to want stronger action on costs -LRB- even though this reform does more to tackle health care costs than any previous legislation -RRB-
For the most part , however , opponents of reform did n't even pretend to engage with the reality either of the existing health care system or of the moderate , centrist plan very close in outline to the reform Mitt Romney introduced in Massachusetts that Democrats were proposing
Instead , the emotional core of opposition to reform was blatant fear-mongering , unconstrained either by the facts or by any sense of decency
It was n't just the death panel smear
It was racial hate-mongering , like a piece in Investor 's Business Daily declaring that health reform is `` affirmative action on steroids , deciding everything from who becomes a doctor to who gets treatment on the basis of skin color .
It was wild claims about abortion funding
It was the insistence that there is something tyrannical about giving young working Americans the assurance that health care will be available when they need it , an assurance that older Americans have enjoyed ever since Lyndon Johnson whom Mr. Gingrich considers a failed president pushed Medicare through over the howls of conservatives
And let 's be clear : the campaign of fear has n't been carried out by a radical fringe , unconnected to the Republican establishment
On the contrary , that establishment has been involved and approving all the way
Politicians like Sarah Palin who was , let us remember , the G.O.P. 's vice-presidential candidate eagerly spread the death panel lie , and supposedly reasonable , moderate politicians like Senator Chuck Grassley refused to say that it was untrue
On the eve of the big vote , Republican members of Congress warned that `` freedom dies a little bit today '' and accused Democrats of `` totalitarian tactics , '' which I believe means the process known as `` voting .
Without question , the campaign of fear was effective : health reform went from being highly popular to wide disapproval , although the numbers have been improving lately
But the question was , would it actually be enough to block reform
And the answer is no.
The Democrats have done it
The House has passed the Senate version of health reform , and an improved version will be achieved through reconciliation
This is , of course , a political victory for President Obama , and a triumph for Nancy Pelosi , the House speaker
But it is also a victory for America 's soul
In the end , a vicious , unprincipled fear offensive failed to block reform
This time , fear struck out
Editors ' Note : March 23 , 2010 The Paul Krugman column on Monday , about the health care bill , quoted Newt Gingrich as saying that `` Lyndon Johnson shattered the Democratic Party for 40 years '' by passing civil rights legislation
The quotation originally appeared in The Washington Post , which reported after the column went to press that Mr. Gingrich said it referred to Johnson 's Great Society policies , not to the 1964 Civil Rights Act
Over the weekend The Times and other newspapers reported leaked details about the Obama administration 's bank rescue plan , which is to be officially released this week
If the reports are correct , Tim Geithner , the Treasury secretary , has persuaded President Obama to recycle Bush administration policy specifically , the `` cash for trash '' plan proposed , then abandoned , six months ago by then-Treasury Secretary Henry Paulson
This is more than disappointing
In fact , it fills me with a sense of despair
After all , we 've just been through the firestorm over the A.I.G. bonuses , during which administration officials claimed that they knew nothing , could n't do anything , and anyway it was someone else 's fault
Meanwhile , the administration has failed to quell the public 's doubts about what banks are doing with taxpayer money
And now Mr. Obama has apparently settled on a financial plan that , in essence , assumes that banks are fundamentally sound and that bankers know what they 're doing
It 's as if the president were determined to confirm the growing perception that he and his economic team are out of touch , that their economic vision is clouded by excessively close ties to Wall Street
And by the time Mr. Obama realizes that he needs to change course , his political capital may be gone
Let 's talk for a moment about the economics of the situation
Right now , our economy is being dragged down by our dysfunctional financial system , which has been crippled by huge losses on mortgage-backed securities and other assets
As economic historians can tell you , this is an old story , not that different from dozens of similar crises over the centuries
And there 's a time-honored procedure for dealing with the aftermath of widespread financial failure
It goes like this : the government secures confidence in the system by guaranteeing many -LRB- though not necessarily all -RRB- bank debts
At the same time , it takes temporary control of truly insolvent banks , in order to clean up their books
That 's what Sweden did in the early 1990s
It 's also what we ourselves did after the savings and loan debacle of the Reagan years
And there 's no reason we ca n't do the same thing now
But the Obama administration , like the Bush administration , apparently wants an easier way out
The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks ' books are really worth much , much more than anyone is currently willing to pay for them
In fact , their true value is so high that if they were properly priced , banks would n't be in trouble
And so the plan is to use taxpayer funds to drive the prices of bad assets up to `` fair '' levels
Mr. Paulson proposed having the government buy the assets directly
Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors , who then use the money to buy the stuff
The idea , says Mr. Obama 's top economic adviser , is to use `` the expertise of the market '' to set the value of toxic assets
But the Geithner scheme would offer a one-way bet : if asset values go up , the investors profit , but if they go down , the investors can walk away from their debt
So this is n't really about letting markets work
It 's just an indirect , disguised way to subsidize purchases of bad assets
The likely cost to taxpayers aside , there 's something strange going on here
By my count , this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan , each time adding a new set of bells and whistles and claiming that they 're doing something completely different
This is starting to look obsessive
But the real problem with this plan is that it wo n't work
Yes , troubled assets may be somewhat undervalued
But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble , and the related belief that unprecedented levels of household debt were no problem
They lost that bet
And no amount of financial hocus-pocus for that is what the Geithner plan amounts to will change that fact
You might say , why not try the plan and see what happens
One answer is that time is wasting : every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost
Even more important , however , is the way Mr. Obama is squandering his credibility
If this plan fails as it almost surely will it 's unlikely that he 'll be able to persuade Congress to come up with more funds to do what he should have done in the first place
All is not lost : the public wants Mr. Obama to succeed , which means that he can still rescue his bank rescue plan
But time is running out
We 're now in the midst of an epic financial crisis , which ought to be at the center of the election debate
But it is n't
Now , I do n't expect presidential campaigns to have all the answers to our current crisis even financial experts are scrambling to keep up with events
But I do think we 're entitled to more answers , and in particular a clearer commitment to financial reform , than we 're getting so far
In truth , I do n't expect much from John McCain , who has both admitted not knowing much about economics and denied having ever said that
Anyway , lately he 's been busy demonstrating that he does n't know much about the Middle East , either
Yet the McCain campaign 's silence on the financial crisis has disappointed even my low expectations
And when Mr. McCain 's economic advisers do speak up about the economy 's problems , they do n't inspire confidence
For example , last week one McCain economic adviser Kevin Hassett , the co-author of `` Dow 36,000 '' insisted that everything would have been fine if state and local governments had n't tried to limit urban sprawl
On the Democratic side , it 's somewhat disappointing that Barack Obama , whose campaign has understandably made a point of contrasting his early opposition to the Iraq war with Hillary Clinton 's initial support , has tried to score a twofer by suggesting that the war , in addition to all its other costs , is responsible for our economic troubles
The war is indeed a grotesque waste of resources , which will place huge long-run burdens on the American public
But it 's just wrong to blame the war for our current economic mess : in the short run , wartime spending actually stimulates the economy
Remember , the lowest unemployment rate America has experienced over the last half-century came at the height of the Vietnam War
Hillary Clinton has not , as far as I can tell , made any comparably problematic economic claims
But she , like Mr. Obama , has been disappointingly quiet about the key issue : the need to reform our out-of-control financial system
Let me explain
America came out of the Great Depression with a pretty effective financial safety net , based on a fundamental quid pro quo : the government stood ready to rescue banks if they got in trouble , but only on the condition that those banks accept regulation of the risks they were allowed to take
Over time , however , many of the roles traditionally filled by regulated banks were taken over by unregulated institutions the `` shadow banking system , '' which relied on complex financial arrangements to bypass those safety regulations
Now , the shadow banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s
And the government is rushing in to help , with hundreds of billions from the Federal Reserve , and hundreds of billions more from government-sponsored institutions like Fannie Mae , Freddie Mac and the Federal Home Loan Banks
Given the risks to the economy if the financial system melts down , this rescue mission is justified
But you do n't have to be an economic radical , or even a vocal reformer like Representative Barney Frank , the chairman of the House Financial Services Committee , to see that what 's happening now is the quid without the quo
Last week Robert Rubin , the former Treasury secretary , declared that Mr. Frank is right about the need for expanded regulation
Mr. Rubin put it clearly : If Wall Street companies can count on being rescued like banks , then they need to be regulated like banks
But will that logic prevail politically
Not if Mr. McCain makes it to the White House
His chief economic adviser is former Senator Phil Gramm , a fervent advocate of financial deregulation
In fact , I 'd argue that aside from Alan Greenspan , nobody did as much as Mr. Gramm to make this crisis possible
Both Democrats , by contrast , are running more or less populist campaigns
But at least so far , neither Democrat has made a clear commitment to financial reform
Is that simply an omission
Or is it an ominous omen
Recent history offers reason to worry
In retrospect , it 's clear that the Clinton administration went along too easily with moves to deregulate the financial industry
And it 's hard to avoid the suspicion that big contributions from Wall Street helped grease the rails
Last year , there was no question at all about the way Wall Street 's financial contributions to the new Democratic majority in Congress helped preserve , at least for now , the tax loophole that lets hedge fund managers pay a lower tax rate than their secretaries
Now , the securities and investment industry is pouring money into both Mr. Obama 's and Mrs. Clinton 's coffers
And these donors surely believe that they 're buying something in return
Let 's hope they 're wrong
I admit it : I had fun watching right-wingers go wild as health reform finally became law
But a few days later , it does n't seem quite as entertaining and not just because of the wave of vandalism and threats aimed at Democratic lawmakers
For if you care about America 's future , you ca n't be happy as extremists take full control of one of our two great political parties
To be sure , it was enjoyable watching Representative Devin Nunes , a Republican of California , warn that by passing health reform , Democrats `` will finally lay the cornerstone of their socialist utopia on the backs of the American people .
Gosh , that sounds uncomfortable
And it 's been a hoot watching Mitt Romney squirm as he tries to distance himself from a plan that , as he knows full well , is nearly identical to the reform he himself pushed through as governor of Massachusetts
His best shot was declaring that enacting reform was an `` unconscionable abuse of power , '' a `` historic usurpation of the legislative process '' presumably because the legislative process is n't supposed to include things like `` votes '' in which the majority prevails
A side observation : one Republican talking point has been that Democrats had no right to pass a bill facing overwhelming public disapproval
As it happens , the Constitution says nothing about opinion polls trumping the right and duty of elected officials to make decisions based on what they perceive as the merits
But in any case , the message from the polls is much more ambiguous than opponents of reform claim : While many Americans disapprove of Obamacare , a significant number do so because they feel that it does n't go far enough
And a Gallup poll taken after health reform 's enactment showed the public , by a modest but significant margin , seeming pleased that it passed
But back to the main theme
What has been really striking has been the eliminationist rhetoric of the G.O.P. , coming not from some radical fringe but from the party 's leaders
John Boehner , the House minority leader , declared that the passage of health reform was `` Armageddon .
The Republican National Committee put out a fund-raising appeal that included a picture of Nancy Pelosi , the speaker of the House , surrounded by flames , while the committee 's chairman declared that it was time to put Ms. Pelosi on `` the firing line .
And Sarah Palin put out a map literally putting Democratic lawmakers in the cross hairs of a rifle sight
All of this goes far beyond politics as usual
Democrats had a lot of harsh things to say about former President George W. Bush but you 'll search in vain for anything comparably menacing , anything that even hinted at an appeal to violence , from members of Congress , let alone senior party officials
No , to find anything like what we 're seeing now you have to go back to the last time a Democrat was president
Like President Obama , Bill Clinton faced a G.O.P. that denied his legitimacy Dick Armey , the second-ranking House Republican -LRB- and now a Tea Party leader -RRB- referred to him as `` your president .
Threats were common : President Clinton , declared Senator Jesse Helms of North Carolina , `` better watch out if he comes down here
He 'd better have a bodyguard .
-LRB- Helms later expressed regrets over the remark but only after a media firestorm .
And once they controlled Congress , Republicans tried to govern as if they held the White House , too , eventually shutting down the federal government in an attempt to bully Mr. Clinton into submission
Mr. Obama seems to have sincerely believed that he would face a different reception
And he made a real try at bipartisanship , nearly losing his chance at health reform by frittering away months in a vain attempt to get a few Republicans on board
At this point , however , it 's clear that any Democratic president will face total opposition from a Republican Party that is completely dominated by right-wing extremists
For today 's G.O.P. is , fully and finally , the party of Ronald Reagan not Reagan the pragmatic politician , who could and did strike deals with Democrats , but Reagan the antigovernment fanatic , who warned that Medicare would destroy American freedom
It 's a party that sees modest efforts to improve Americans ' economic and health security not merely as unwise , but as monstrous
It 's a party in which paranoid fantasies about the other side Obama is a socialist , Democrats have totalitarian ambitions are mainstream
And , as a result , it 's a party that fundamentally does n't accept anyone else 's right to govern
In the short run , Republican extremism may be good for Democrats , to the extent that it prompts a voter backlash
But in the long run , it 's a very bad thing for America
We need to have two reasonable , rational parties in this country
And right now we do n't
On Monday , Lawrence Summers , the head of the National Economic Council , responded to criticisms of the Obama administration 's plan to subsidize private purchases of toxic assets
`` I do n't know of any economist , '' he declared , `` who does n't believe that better functioning capital markets in which assets can be traded are a good idea .
Leave aside for a moment the question of whether a market in which buyers have to be bribed to participate can really be described as `` better functioning .
Even so , Mr. Summers needs to get out more
Quite a few economists have reconsidered their favorable opinion of capital markets and asset trading in the light of the current crisis
But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique
They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic
The market mystique did n't always rule financial policy
America emerged from the Great Depression with a tightly regulated banking system , which made finance a staid , even boring business
Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two ; they used the money thus attracted to make loans , and that was that
And the financial system was n't just boring
It was also , by today 's standards , small
Even during the `` go-go years , '' the bull market of the 1960s , finance and insurance together accounted for less than 4 percent of G.D.P.
The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average , which until 1982 contained not a single financial company
It all sounds primitive by today 's standards
Yet that boring , primitive financial system serviced an economy that doubled living standards over the course of a generation
After 1980 , of course , a very different financial system emerged
In the deregulation-minded Reagan era , old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale
The new system was much bigger than the old regime : On the eve of the current crisis , finance and insurance accounted for 8 percent of G.D.P. , more than twice their share in the 1960s
By early last year , the Dow contained five financial companies giants like A.I.G. , Citigroup and Bank of America
And finance became anything but boring
It attracted many of our sharpest minds and made a select few immensely rich
Underlying the glamorous new world of finance was the process of securitization
Loans no longer stayed with the lender
Instead , they were sold on to others , who sliced , diced and pur ed individual debts to synthesize new assets
Subprime mortgages , credit card debts , car loans all went into the financial system 's juicer
Out the other end , supposedly , came sweet-tasting AAA investments
And financial wizards were lavishly rewarded for overseeing the process
But the wizards were frauds , whether they knew it or not , and their magic turned out to be no more than a collection of cheap stage tricks
Above all , the key promise of securitization that it would make the financial system more robust by spreading risk more widely turned out to be a lie
Banks used securitization to increase their risk , not reduce it , and in the process they made the economy more , not less , vulnerable to financial disruption
Sooner or later , things were bound to go wrong , and eventually they did
Bear Stearns failed ; Lehman failed ; but most of all , securitization failed
Which brings us back to the Obama administration 's approach to the financial crisis
Much discussion of the toxic-asset plan has focused on the details and the arithmetic , and rightly so
Beyond that , however , what 's striking is the vision expressed both in the content of the financial plan and in statements by administration officials
In essence , the administration seems to believe that once investors calm down , securitization and the business of finance can resume where it left off a year or two ago
To be fair , officials are calling for more regulation
Indeed , on Thursday Tim Geithner , the Treasury secretary , laid out plans for enhanced regulation that would have been considered radical not long ago
But the underlying vision remains that of a financial system more or less the same as it was two years ago , albeit somewhat tamed by new rules
As you can guess , I do n't share that vision
I do n't think this is just a financial panic ; I believe that it represents the failure of a whole model of banking , of an overgrown financial sector that did more harm than good
I do n't think the Obama administration can bring securitization back to life , and I do n't believe it should try
Yet those of us who looked at his policy proposals big tax cuts for the rich and Social Security privatization had a very different impression
And we were right
The moral is that it 's important to take a hard look at what candidates say about policy
It 's true that past promises are no guarantee of future performance
But policy proposals offer a window into candidates ' political souls a much better window , if you ask me , than a bunch of supposedly revealing anecdotes and out-of-context quotes
Which brings me to the latest big debate : how should we respond to the mortgage crisis
In the last few days John McCain , Hillary Clinton and Barack Obama have all weighed in
And their proposals arguably say a lot about the kind of president each would be
Mr. McCain is often referred to as a `` maverick '' and a `` moderate , '' assessments based mainly on his engaging manner
But his speech on the economy was that of an orthodox , hard-line right-winger
It 's true that the speech was more about what Mr. McCain would n't do than about what he would
His main action proposal , as far as I can tell , was a call for a national summit of accountants
The whole tone of the speech , however , indicated that Mr. McCain has purged himself of any maverick tendencies he may once have had
Many news reports have pointed out that Mr. McCain more or less came out against aid for troubled homeowners : government assistance `` should be based solely on preventing systemic risk , '' which means that big investment banks qualify but ordinary citizens do n't
But I was even more struck by Mr. McCain 's declaration that `` our financial market approach should include encouraging increased capital in financial institutions by removing regulatory , accounting and tax impediments to raising capital .
These days , even free-market enthusiasts are talking about increased regulation of securities firms now that the Fed has shown that it will rush to their rescue if they get into trouble
But Mr. McCain is selling the same old snake oil , claiming that deregulation and tax cuts cure all ills
Hillary Clinton 's speech could not have been more different
True , Mrs. Clinton 's suggestion that she might convene a high-level commission , including Alan Greenspan who bears a lot of responsibility for this crisis had echoes of the excessively comfortable relationship her husband 's administration developed with the investment industry
But the substance of her policy proposals on mortgages , like that of her health care plan , suggests a strong progressive sensibility
Maybe the most notable contrast between Mr. McCain and Mrs. Clinton involves the problem of restructuring mortgages
Mr. McCain called for voluntary action on the part of lenders that is , he proposed doing nothing
Mrs. Clinton wants a modern version of the Home Owners ' Loan Corporation , the New Deal institution that acquired the mortgages of people whose homes were worth less than their debts , then reduced payments to a level the homeowners could afford
Finally , Barack Obama 's speech on the economy on Thursday followed the cautious pattern of his earlier statements on economic issues
I was pleased that Mr. Obama came out strongly for broader financial regulation , which might help avert future crises
But his proposals for aid to the victims of the current crisis , though significant , are less sweeping than Mrs. Clinton 's : he wants to nudge private lenders into restructuring mortgages rather than having the government simply step in and get the job done
Mr. Obama also continues to make permanent tax cuts middle-class tax cuts , to be sure a centerpiece of his economic plan
It 's not clear how he would pay both for these tax cuts and for initiatives like health care reform , so his tax-cut promises raise questions about how determined he really is to pursue a strongly progressive agenda
All in all , the candidates ' positions on the mortgage crisis tell the same tale as their positions on health care : a tale that is seriously at odds with the way they 're often portrayed
Mr. McCain , we 're told , is a straight-talking maverick
But on domestic policy , he offers neither straight talk nor originality ; instead , he panders shamelessly to right-wing ideologues
Mrs. Clinton , we 're assured by sources right and left , tortures puppies and eats babies
But her policy proposals continue to be surprisingly bold and progressive
Finally , Mr. Obama is widely portrayed , not least by himself , as a transformational figure who will usher in a new era
But his actual policy proposals , though liberal , tend to be cautious and relatively orthodox
Do these policy comparisons really tell us what each candidate would be like as president
Not necessarily but they 're the best guide we have
Health reform is the law of the land
Next up : financial reform
But will it happen
The White House is optimistic , because it believes that Republicans wo n't want to be cast as allies of Wall Street
I 'm not so sure
The key question is how many senators believe that they can get away with claiming that war is peace , slavery is freedom , and regulating big banks is doing those big banks a favor
Some background : we used to have a workable system for avoiding financial crises , resting on a combination of government guarantees and regulation
On one side , bank deposits were insured , preventing a recurrence of the immense bank runs that were a central cause of the Great Depression
On the other side , banks were tightly regulated , so that they did n't take advantage of government guarantees by running excessive risks
From 1980 or so onward , however , that system gradually broke down , partly because of bank deregulation , but mainly because of the rise of `` shadow banking '' : institutions and practices like financing long-term investments with overnight borrowing that recreated the risks of old-fashioned banking but were n't covered either by guarantees or by regulation
The result , by 2007 , was a financial system as vulnerable to severe crisis as the system of 1930
And the crisis came
Now what
We have already , in effect , recreated New Deal-type guarantees : as the financial system plunged into crisis , the government stepped in to rescue troubled financial companies , so as to avoid a complete collapse
And you should bear in mind that the biggest bailouts took place under a conservative Republican administration , which claimed to believe deeply in free markets
There 's every reason to believe that this will be the rule from now on : when push comes to shove , no matter who is in power , the financial sector will be bailed out
In effect , debts of shadow banks , like deposits at conventional banks , now have a government guarantee
The only question now is whether the financial industry will pay a price for this privilege , whether Wall Street will be obliged to behave responsibly in return for government backing
And who could be against that
Well , how about John Boehner , the House minority leader
Recently Mr. Boehner gave a talk to bankers in which he encouraged them to balk efforts by Congress to impose stricter regulation
`` Do n't let those little punk staffers take advantage of you , and stand up for yourselves , '' he urged where by `` taking advantage '' he meant imposing some conditions on the industry in return for government backing
Barney Frank , the chairman of the House Financial Services Committee , promptly had `` Little Punk Staffer '' buttons made up and distributed to Congressional aides
But Mr. Boehner is n't the problem : Mr. Frank has already shepherded fairly strong financial reform through the House
Instead , the question is what will happen in the Senate
In the Senate , the legislation on the table was crafted by Senator Chris Dodd of Connecticut
It 's significantly weaker than the Frank bill , and needs to be made stronger , a topic I 'll discuss in future columns
But no bill will become law if Senate Republicans stand in the way of reform
But wo n't opponents of reform fear being cast as allies of the bad guys -LRB- which they are -RRB-
Maybe not
Back in January , Frank Luntz , the G.O.P. strategist , circulated a memo on how to oppose financial reform
His key idea was that Republicans should claim that up is down that reform legislation is a `` big bank bailout bill , '' rather than a set of restrictions on the banks
Sure enough , a few days ago Senator Richard Shelby of Alabama , in a letter attacking the Dodd bill , claimed that an essential part of reform tougher oversight of large , systemically important financial companies is actually a bailout , because `` The market will view these firms as being ` too big to fail ' and implicitly backed by the government .
Um , senator , the market already views those firms as having implicit government backing , because they do : whatever people like Mr. Shelby may say now , in any future crisis those firms will be rescued , whichever party is in power
The only question is whether we 're going to regulate bankers so that they do n't abuse the privilege of government backing
And it 's that regulation not future bailouts that reform opponents are trying to block
So it 's the punks versus the plutocrats those who want to rein in runaway banks , and bankers who want the freedom to put the economy at risk , freedom enhanced by the knowledge that taxpayers will bail them out in a crisis
Whatever they say , the fact is that people like Mr. Shelby are on the side of the plutocrats ; the American people should be on the side of the punks , who are trying to protect their interests
Remember the good old days , when we used to talk about the `` subprime crisis '' and some even thought that this crisis could be `` contained ''
Oh , the nostalgia
Today we know that subprime lending was only a small fraction of the problem
Even bad home loans in general were only part of what went wrong
We 're living in a world of troubled borrowers , ranging from shopping mall developers to European `` miracle '' economies
And new kinds of debt trouble just keep emerging
How did this global debt crisis happen
Why is it so widespread
The answer , I 'd suggest , can be found in a speech Ben Bernanke , the Federal Reserve chairman , gave four years ago
At the time , Mr. Bernanke was trying to be reassuring
But what he said then nonetheless foreshadowed the bust to come
The speech , titled `` The Global Saving Glut and the U.S. Current Account Deficit , '' offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century
The causes , argued Mr. Bernanke , lay not in America but in Asia
In the mid-1990s , he pointed out , the emerging economies of Asia had been major importers of capital , borrowing abroad to finance their development
But after the Asian financial crisis of 1997-98 -LRB- which seemed like a big deal at the time but looks trivial compared with what 's happening now -RRB- , these countries began protecting themselves by amassing huge war chests of foreign assets , in effect exporting capital to the rest of the world
The result was a world awash in cheap money , looking for somewhere to go
Most of that money went to the United States hence our giant trade deficit , because a trade deficit is the flip side of capital inflows
But as Mr. Bernanke correctly pointed out , money surged into other nations as well
In particular , a number of smaller European economies experienced capital inflows that , while much smaller in dollar terms than the flows into the United States , were much larger compared with the size of their economies
Still , much of the global saving glut did end up in America
Mr. Bernanke cited `` the depth and sophistication of the country 's financial markets -LRB- which , among other things , have allowed households easy access to housing wealth -RRB- .
Depth , yes
But sophistication
Well , you could say that American bankers , empowered by a quarter-century of deregulatory zeal , led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors
And wide-open , loosely regulated financial systems characterized many of the other recipients of large capital inflows
This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today
`` Reforms have made Iceland a Nordic tiger , '' declared a paper from the Cato Institute
`` How Ireland Became the Celtic Tiger '' was the title of one Heritage Foundation article ; `` The Estonian Economic Miracle '' was the title of another
All three nations are in deep crisis now
For a while , the inrush of capital created the illusion of wealth in these countries , just as it did for American homeowners : asset prices were rising , currencies were strong , and everything looked fine
But bubbles always burst sooner or later , and yesterday 's miracle economies have become today 's basket cases , nations whose assets have evaporated but whose debts remain all too real
And these debts are an especially heavy burden because most of the loans were denominated in other countries ' currencies
Nor is the damage confined to the original borrowers
In America , the housing bubble mainly took place along the coasts , but when the bubble burst , demand for manufactured goods , especially cars , collapsed and that has taken a terrible toll on the industrial heartland
Similarly , Europe 's bubbles were mainly around the continent 's periphery , yet industrial production in Germany which never had a financial bubble but is Europe 's manufacturing core is falling rapidly , thanks to a plunge in exports
If you want to know where the global crisis came from , then , think of it this way : we 're looking at the revenge of the glut
And the saving glut is still out there
In fact , it 's bigger than ever , now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom , which provided an outlet for all those excess savings , has turned into a worldwide bust
One way to look at the international situation right now is that we 're suffering from a global paradox of thrift : around the world , desired saving exceeds the amount businesses are willing to invest
And the result is a global slump that leaves everyone worse off
So that 's how we got into this mess
And we 're still looking for the way out
Ten years ago the cover of Time magazine featured Robert Rubin , then Treasury secretary , Alan Greenspan , then chairman of the Federal Reserve , and Lawrence Summers , then deputy Treasury secretary
Time dubbed the three `` the committee to save the world , '' crediting them with leading the global financial system through a crisis that seemed terrifying at the time , although it was a small blip compared with what we 're going through now
All the men on that cover were Americans , but nobody considered that odd
After all , in 1999 the United States was the unquestioned leader of the global crisis response
That leadership role was only partly based on American wealth ; it also , to an important degree , reflected America 's stature as a role model
The United States , everyone thought , was the country that knew how to do finance right
How times have changed
Never mind the fact that two members of the committee have since succumbed to the magazine cover curse , the plunge in reputation that so often follows lionization in the media
-LRB- Mr. Summers , now the head of the National Economic Council , is still going strong .
Far more important is the extent to which our claims of financial soundness claims often invoked as we lectured other countries on the need to change their ways have proved hollow
Indeed , these days America is looking like the Bernie Madoff of economies : for many years it was held in respect , even awe , but it turns out to have been a fraud all along
It 's painful now to read a lecture that Mr. Summers gave in early 2000 , as the economic crisis of the 1990s was winding down
Discussing the causes of that crisis , Mr. Summers pointed to things that the crisis countries lacked and that , by implication , the United States had
These things included `` well-capitalized and supervised banks '' and reliable , transparent corporate accounting
Oh well
One of the analysts Mr. Summers cited in that lecture , by the way , was the economist Simon Johnson
In an article in the current issue of The Atlantic , Mr. Johnson , who served as the chief economist at the I.M.F. and is now a professor at M.I.T. , declares that America 's current difficulties are `` shockingly reminiscent '' of crises in places like Russia and Argentina including the key role played by crony capitalists
In America as in the third world , he writes , `` elite business interests financiers , in the case of the U.S. played a central role in creating the crisis , making ever-larger gambles , with the implicit backing of the government , until the inevitable collapse
More alarming , they are now using their influence to prevent precisely the sorts of reforms that are needed , and fast , to pull the economy out of its nosedive .
It 's no wonder , then , that an article in yesterday 's Times about the response President Obama will receive in Europe was titled `` English-Speaking Capitalism on Trial .
Now , in fairness we have to say that the United States was far from being the only nation in which banks ran wild
Many European leaders are still in denial about the continent 's economic and financial troubles , which arguably run as deep as our own although their nations ' much stronger social safety nets mean that we 're likely to experience far more human suffering
Still , it 's a fact that the crisis has cost America much of its credibility , and with it much of its ability to lead
And that 's a very bad thing
Like many other economists , I 've been revisiting the Great Depression , looking for lessons that might help us avoid a repeat performance
And one thing that stands out from the history of the early 1930s is the extent to which the world 's response to crisis was crippled by the inability of the world 's major economies to cooperate
The details of our current crisis are very different , but the need for cooperation is no less
President Obama got it exactly right last week when he declared : `` All of us are going to have to take steps in order to lift the economy
We do n't want a situation in which some countries are making extraordinary efforts and other countries are n't .
Yet that is exactly the situation we 're in
I do n't believe that even America 's economic efforts are adequate , but they 're far more than most other wealthy countries have been willing to undertake
And by rights this week 's G-20 summit ought to be an occasion for Mr. Obama to chide and chivy European leaders , in particular , into pulling their weight
But these days foreign leaders are in no mood to be lectured by American officials , even when as in this case the Americans are right
The financial crisis has had many costs
And one of those costs is the damage to America 's reputation , an asset we 've lost just when we , and the world , need it most
Anyone who has worked in a large organization or , for that matter , reads the comic strip `` Dilbert '' is familiar with the `` org chart '' strategy
To hide their lack of any actual ideas about what to do , managers sometimes make a big show of rearranging the boxes and lines that say who reports to whom
You now understand the principle behind the Bush administration 's new proposal for financial reform , which will be formally announced today : it 's all about creating the appearance of responding to the current crisis , without actually doing anything substantive
The financial events of the last seven months , and especially the past few weeks , have convinced all but a few diehards that the U.S. financial system needs major reform
Otherwise , we 'll lurch from crisis to crisis and the crises will get bigger and bigger
The rescue of Bear Stearns , in particular , was a paradigm-changing event
Traditional , deposit-taking banks have been regulated since the 1930s , because the experience of the Great Depression showed how bank failures can threaten the whole economy
Supposedly , however , `` non-depository '' institutions like Bear did n't have to be regulated , because `` market discipline '' would ensure that they were run responsibly
When push came to shove , however , the Federal Reserve did n't dare let market discipline run its course
Instead , it rushed to Bear 's rescue , risking billions of taxpayer dollars , because it feared that the collapse of a major financial institution would endanger the financial system as a whole
And if financial players like Bear are going to receive the kind of rescue previously limited to deposit-taking banks , the implication seems obvious : they should be regulated like banks , too
The Bush administration , however , has spent the last seven years trying to do away with government oversight of the financial industry
In fact , the new plan was originally conceived of as `` promoting a competitive financial services sector leading the world and supporting continued economic innovation .
That 's banker-speak for getting rid of regulations that annoy big financial operators
To reverse course now , and seek expanded regulation , the administration would have to back down on its free-market ideology and it would also have to face up to the fact that it was wrong
And this administration never , ever , admits that it made a mistake
Thus , in a draft of a speech to be delivered on Monday , Henry Paulson , the Treasury secretary , declares , `` I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil .
And sure enough , according to the executive summary of the new administration plan , regulation will be limited to institutions that receive explicit federal guarantees that is , institutions that are already regulated , and have not been the source of today 's problems
As for the rest , it blithely declares that `` market discipline is the most effective tool to limit systemic risk .
The administration , then , has learned nothing from the current crisis
Yet it needs , as a political matter , to pretend to be doing something
So the Treasury has , with great fanfare , announced you know what 's coming its support for a rearrangement of the boxes on the org chart
OCC , OTS , and CFTC are out ; PFRA and CBRA are in
Will rearranging these boxes make any difference
I 've been disappointed to see some news outlets report as fact the administration 's cover story the claim that lack of coordination among regulatory agencies was an important factor in our current problems
The truth is that that 's not at all what happened
The various regulators actually did quite well at acting in a coordinated fashion
Unfortunately , they coordinated in the wrong direction
For example , there was a 2003 photo-op in which officials from multiple agencies used pruning shears and chainsaws to chop up stacks of banking regulations
The occasion symbolized the shared determination of Bush appointees to suspend adult supervision just as the financial industry was starting to run wild
Oh , and the Bush administration actively blocked state governments when they tried to protect families against predatory lending
So , will the administration 's plan succeed
I 'm not asking whether it will succeed in preventing future financial crises that 's not its purpose
The question , instead , is whether it will succeed in confusing the issue sufficiently to stand in the way of real reform
Let 's hope not
As I said , America 's financial crises have been getting bigger
A decade ago , the market disruption that followed the collapse of Long-Term Capital Management was considered a major , scary event ; but compared with the current earthquake , the L.T.C.M. crisis was a minor tremor
If we do n't reform the system this time , the next crisis could well be even bigger
And I , for one , really do n't want to live through a replay of the 1930s
After their victory in the 2006 Congressional elections , it seemed a given that Democrats would try to make this year 's presidential campaign another referendum on Republican policies
After all , the public appears fed up not just with President Bush , but with his party
For example , a recent poll by the Pew Research Center shows Democrats are preferred on every issue except terrorism
They even have a 10-point advantage on `` morality .
Add to this the fact that perceptions about the economy are worsening week by week , and one might have expected the central theme of the Democratic campaign to be `` throw the bums out .
But a funny thing happened on the way to the 2008 election
Unless Hillary Clinton wins big on Tuesday , Barack Obama will be the Democratic nominee
And he 's not at all the kind of candidate one might have expected to emerge out of the backlash against Republican governance
Now , nobody would mistake Mr. Obama for a Republican although contrary to claims by both supporters and opponents , his voting record places him , with Senator Clinton , more or less in the center of the Democratic Party , rather than in its progressive wing
But Mr. Obama , instead of emphasizing the harm done by the other party 's rule , likes to blame both sides for our sorry political state
And in his speeches he promises not a rejection of Republicanism but an era of postpartisan unity
That along with his adoption of conservative talking points on the crucial issue of health care is why Mr. Obama 's rise has caused such division among progressive activists , the very people one might have expected to be unified and energized by the prospect of finally ending the long era of Republican political dominance
Some progressives are appalled by the direction their party seems to have taken : they wanted another F.D.R. , yet feel that they 're getting an oratorically upgraded version of Michael Bloomberg instead
Others , however , insist that Mr. Obama 's message of hope and his personal charisma will yield an overwhelming electoral victory , and that he will implement a dramatically progressive agenda
The trouble is that faith in Mr. Obama 's transformational ability rests on surprisingly little evidence
Mr. Obama 's ability to attract wildly enthusiastic crowds to rallies is a good omen for the general election ; so is his ability to raise large sums
But neither necessarily points to a landslide victory
Polling numbers are n't much help : for now , at least , you can find polls telling you anything you want to hear , from the CBS News\/New York Times poll giving Mr. Obama a 12-point national advantage over John McCain to the Mason-Dixon poll showing Mr. McCain winning Florida by 10 points
What we do know is that Mr. Obama has never faced a serious Republican opponent and that he has not yet faced the hostile media treatment doled out to every Democratic presidential candidate since 1988
Yes , I know that both the Obama campaign and many reporters deny that he has received more favorable treatment than Hillary Clinton
But they 're kidding , right
Dana Milbank , the Washington Post national political reporter , told the truth back in December : `` The press will savage her no matter what ... they really have the knives out for her , there 's no question about it ... Obama gets significantly better coverage .
If Mr. Obama secures the nomination , the honeymoon will be over as he faces an opponent whom much of the press loves as much as it hates Mrs. Clinton
If Mrs. Clinton can do nothing right , Mr. McCain can do nothing wrong even when he panders outrageously , he 's forgiven because he looks uncomfortable doing it
Bob Somerby of the media-criticism site dailyhowler.com predicts that Mr. Obama will be `` Dukakised '' : `` treated as an alien , unsettling presence .
That sounds all too plausible
If Mr. Obama does make it to the White House , will he actually deliver the transformational politics he promises
Like the faith that he can win an overwhelming electoral victory , the faith that he can overcome bitter conservative opposition to progressive legislation rests on very little evidence one productive year in the Illinois State Senate , after the Democrats swept the state , and not much else
And some Illinois legislators apparently feel that even there Mr. Obama got a bit more glory than he deserved
`` No one wants to carry the ball 99 yards all the way to the one-yard line , and then give it to the halfback who gets all the credit , '' one state senator complained to a local journalist
All in all , the Democrats are in a place few expected a year ago
The 2008 campaign , it seems , will be waged on the basis of personality , not political philosophy
If the magic works , all will be forgiven
But if it does n't , the recriminations could tear the party apart
How to Kill a Recovery The economic news has been better lately
New claims for unemployment insurance are down ; business and consumer surveys suggest solid growth
We 're still near the bottom of a very deep hole , but at least we 're climbing
It 's too bad that so many people , mainly on the political right , want to send us sliding right back down again
Before we get to that , let 's talk about why economic recovery has been so long in coming
Some economists expected a rapid bounce-back once we were past the acute phase of the financial crisis - what I think of as the oh-God-we 're - all-gonna-die period - which lasted roughly from September 2008 to March 2009
But that was never in the cards
The bubble economy of the Bush years left many Americans with too much debt ; once the bubble burst , consumers were forced to cut back , and it was inevitably going to take them time to repair their finances
And business investment was bound to be depressed , too
Why add to capacity when consumer demand is weak and you are n't using the factories and office buildings you have
The only way we could have avoided a prolonged slump would have been for government spending to take up the slack
But that did n't happen : growth in total government spending actually slowed after the recession hit , as an underpowered federal stimulus was swamped by cuts at the state and local level
So we 've gone through years of high unemployment and inadequate growth
Despite the pain , however , American families have gradually improved their financial position
And in the past few months there have been signs of an emerging virtuous circle
As families have repaired their finances , they have increased their spending ; as consumer demand has started to revive , businesses have become more willing to invest ; and all this has led to an expanding economy , which further improves families ' financial situation
But it 's still a fragile process , especially given the effects of rising oil and food prices
These price rises have little to do with U.S. policy ; they 're mainly because of growing demand from China and other emerging markets , on one side , and disruption of supply from political turmoil and terrible weather on the other
But they 're a hit to purchasing power at an especially awkward time
And things will be much worse if the Federal Reserve and other central banks mistakenly respond to higher headline inflation by raising interest rates
The clear and present danger to recovery , however , comes from politics - specifically , the demand from House Republicans that the government immediately slash spending on infant nutrition , disease control , clean water and more
Quite aside from their negative long-run consequences , these cuts would lead , directly and indirectly , to the elimination of hundreds of thousands of jobs - and this could short-circuit the virtuous circle of rising incomes and improving finances
Of course , Republicans believe , or at least pretend to believe , that the direct job-destroying effects of their proposals would be more than offset by a rise in business confidence
As I like to put it , they believe that the Confidence Fairy will make everything all right
But there 's no reason for the rest of us to share that belief
For one thing , it 's hard to see how such an obviously irresponsible plan - since when does starving the I.R.S. for funds help reduce the deficit
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Beyond that , we have a lot of evidence from other countries about the prospects for `` expansionary austerity '' - and that evidence is all negative
Last October , a comprehensive study by the International Monetary Fund concluded that `` the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data .
And do you remember the lavish praise heaped on Britain 's conservative government , which announced harsh austerity measures after it took office last May
How 's that going
Well , business confidence did not , in fact , rise when the plan was announced ; it plunged , and has yet to recover
And recent surveys suggest that confidence has fallen even further among both businesses and consumers , indicating , as one report put it , that the private sector is `` unprepared to fill the hole left by public sector cuts .
Which brings us back to the U.S. budget debate
Over the next few weeks , House Republicans will try to blackmail the Obama administration into accepting their proposed spending cuts , using the threat of a government shutdown
They 'll claim that those cuts would be good for America in both the short term and the long term
But the truth is exactly the reverse : Republicans have managed to come up with spending cuts that would do double duty , both undermining America 's future and threatening to abort a nascent economic recovery
So the Bunning blockade is over
For days , Senator Jim Bunning of Kentucky exploited Senate rules to block a one-month extension of unemployment benefits
In the end , he gave in , although not soon enough to prevent an interruption of payments to around 100,000 workers
But while the blockade is over , its lessons remain
Some of those lessons involve the spectacular dysfunctionality of the Senate
What I want to focus on right now , however , is the incredible gap that has opened up between the parties
Today , Democrats and Republicans live in different universes , both intellectually and morally
Take the question of helping the unemployed in the middle of a deep slump
What Democrats believe is what textbook economics says : that when the economy is deeply depressed , extending unemployment benefits not only helps those in need , it also reduces unemployment
That 's because the economy 's problem right now is lack of sufficient demand , and cash-strapped unemployed workers are likely to spend their benefits
In fact , the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus , as measured by jobs created per dollar of outlay
But that 's not how Republicans see it
Here 's what Senator Jon Kyl of Arizona , the second-ranking Republican in the Senate , had to say when defending Mr. Bunning 's position -LRB- although not joining his blockade -RRB- : unemployment relief `` does n't create new jobs
In fact , if anything , continuing to pay people unemployment compensation is a disincentive for them to seek new work .
In Mr. Kyl 's view , then , what we really need to worry about right now with more than five unemployed workers for every job opening , and long-term unemployment at its highest level since the Great Depression is whether we 're reducing the incentive of the unemployed to find jobs
To me , that 's a bizarre point of view but then , I do n't live in Mr. Kyl 's universe
And the difference between the two universes is n't just intellectual , it 's also moral
Bill Clinton famously told a suffering constituent , `` I feel your pain .
But the thing is , he did and does while many other politicians clearly do n't
Or perhaps it would be fairer to say that the parties feel the pain of different people
During the debate over unemployment benefits , Senator Jeff Merkley , a Democrat of Oregon , made a plea for action on behalf of those in need
In response , Mr. Bunning blurted out an expletive
That was undignified but not that different , in substance , from the position of leading Republicans
Consider , in particular , the position that Mr. Kyl has taken on a proposed bill that would extend unemployment benefits and health insurance subsidies for the jobless for the rest of the year
Republicans will block that bill , said Mr. Kyl , unless they get a `` path forward fairly soon '' on the estate tax
Now , the House has already passed a bill that , by exempting the assets of couples up to $ 7 million , would leave 99.75 percent of estates tax-free
But that does n't seem to be enough for Mr. Kyl ; he 's willing to hold up desperately needed aid to the unemployed on behalf of the remaining 0.25 percent
That 's a very clear statement of priorities
So , as I said , the parties now live in different universes , both intellectually and morally
We can ask how that happened ; there , too , the parties live in different worlds
Republicans would say that it 's because Democrats have moved sharply left : a Republican National Committee fund-raising plan acquired by Politico suggests motivating donors by promising to `` save the country from trending toward socialism .
I 'd say that it 's because Republicans have moved hard to the right , furiously rejecting ideas they used to support
Indeed , the Obama health care plan strongly resembles past G.O.P. plans
But again , I do n't live in their universe
More important , however , what are the implications of this total divergence in views
The answer , of course , is that bipartisanship is now a foolish dream
How can the parties agree on policy when they have utterly different visions of how the economy works , when one party feels for the unemployed , while the other weeps over affluent victims of the `` death tax ''
Which brings us to the central political issue right now : health care reform
If Congress enacts reform in the next few weeks and the odds are growing that it will it will do so without any Republican votes
Some people will decry this , insisting that President Obama should have tried harder to gain bipartisan support
But that is n't going to happen , on health care or anything else , for years to come
Someday , somehow , we as a nation will once again find ourselves living on the same planet
But for now , we are n't
And that 's just the way it is
Last month , in his big speech to Congress , President Obama argued for bold steps to fix America 's dysfunctional banks
`` While the cost of action will be great , '' he declared , `` I can assure you that the cost of inaction will be far greater , for it could result in an economy that sputters along for not months or years , but perhaps a decade .
Many analysts agree
But among people I talk to there 's a growing sense of frustration , even panic , over Mr. Obama 's failure to match his words with deeds
The reality is that when it comes to dealing with the banks , the Obama administration is dithering
Policy is stuck in a holding pattern
Here 's how the pattern works : first , administration officials , usually speaking off the record , float a plan for rescuing the banks in the press
This trial balloon is quickly shot down by informed commentators
Then , a few weeks later , the administration floats a new plan
This plan is , however , just a thinly disguised version of the previous plan , a fact quickly realized by all concerned
And the cycle starts again
Why do officials keep offering plans that nobody else finds credible
Because somehow , top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets , often referred to these days as `` toxic waste , '' are really worth much more than anyone is actually willing to pay for them and that if these assets were properly priced , all our troubles would go away
Thus , in a recent interview Tim Geithner , the Treasury secretary , tried to make a distinction between the `` basic inherent economic value '' of troubled assets and the `` artificially depressed value '' that those assets command right now
In recent transactions , even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar , but Mr. Geithner seems to think they 're worth much , much more
And the government 's job , he declared , is to `` provide the financing to help get those markets working , '' pushing the price of toxic waste up to where it ought to be
What 's more , officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions
Earlier this week , Ben Bernanke , the Federal Reserve chairman , was asked about the problem of `` zombies '' financial institutions that are effectively bankrupt but are being kept alive by government aid
`` I do n't know of any large zombie institutions in the U.S. financial system , '' he declared , and went on to specifically deny that A.I.G. A.I.G.
is a zombie
This is the same A.I.G. that , unable to honor its promises to pay off other financial institutions when bonds default , has already received $ 150 billion in aid and just got a commitment for $ 30 billion more
The truth is that the Bernanke-Geithner plan the plan the administration keeps floating , in slightly different versions is n't going to fly
Take the plan 's latest incarnation : a proposal to make low-interest loans to private investors willing to buy up troubled assets
This would certainly drive up the price of toxic waste because it would offer a heads-you-win , tails-we-lose proposition
As described , the plan would let investors profit if asset prices went up but just walk away if prices fell substantially
But would it be enough to make the banking system healthy
Think of it this way : by using taxpayer funds to subsidize the prices of toxic waste , the administration would shower benefits on everyone who made the mistake of buying the stuff
Some of those benefits would trickle down to where they 're needed , shoring up the balance sheets of key financial institutions
But most of the benefit would go to people who do n't need or deserve to be rescued
And this means that the government would have to lay out trillions of dollars to bring the financial system back to health , which would , in turn , both ensure a fierce public outcry and add to already serious concerns about the deficit
-LRB- Yes , even strong advocates of fiscal stimulus like yours truly worry about red ink .
Realistically , it 's just not going to happen
So why has this zombie idea it keeps being killed , but it keeps coming back taken such a powerful grip
The answer , I fear , is that officials still are n't willing to face the facts
They do n't want to face up to the dire state of major financial institutions because it 's very hard to rescue an essentially insolvent bank without , at least temporarily , taking it over
And temporary nationalization is still , apparently , considered unthinkable
But this refusal to face the facts means , in practice , an absence of action
And I share the president 's fears : inaction could result in an economy that sputters along , not for months or years , but for a decade or more
Degrees and Dollars It is a truth universally acknowledged that education is the key to economic success
Everyone knows that the jobs of the future will require ever higher levels of skill
That 's why , in an appearance Friday with former Florida Gov. Jeb Bush , President Obama declared that `` If we want more good news on the jobs front then we 've got to make more investments in education .
The day after the Obama-Bush event , The Times published an article about the growing use of software to perform legal research
Computers , it turns out , can quickly analyze millions of documents , cheaply performing a task that used to require armies of lawyers and paralegals
In this case , then , technological progress is actually reducing the demand for highly educated workers
And legal research is n't an isolated example
As the article points out , software has also been replacing engineers in such tasks as chip design
More broadly , the idea that modern technology eliminates only menial jobs , that well-educated workers are clear winners , may dominate popular discussion , but it 's actually decades out of date
The fact is that since 1990 or so the U.S. job market has been characterized not by a general rise in the demand for skill , but by `` hollowing out '' : both high-wage and low-wage employment have grown rapidly , but medium-wage jobs - the kinds of jobs we count on to support a strong middle class - have lagged behind
And the hole in the middle has been getting wider : many of the high-wage occupations that grew rapidly in the 1990s have seen much slower growth recently , even as growth in low-wage employment has accelerated
Why is this happening
The belief that education is becoming ever more important rests on the plausible-sounding notion that advances in technology increase job opportunities for those who work with information - loosely speaking , that computers help those who work with their minds , while hurting those who work with their hands
Some years ago , however , the economists David Autor , Frank Levy and Richard Murnane argued that this was the wrong way to think about it
Computers , they pointed out , excel at routine tasks , `` cognitive and manual tasks that can be accomplished by following explicit rules .
Therefore , any routine task - a category that includes many white-collar , nonmanual jobs - is in the firing line
Conversely , jobs that ca n't be carried out by following explicit rules - a category that includes many kinds of manual labor , from truck drivers to janitors - will tend to grow even in the face of technological progress
And here 's the thing : Most of the manual labor still being done in our economy seems to be of the kind that 's hard to automate
Notably , with production workers in manufacturing down to about 6 percent of U.S. employment , there are n't many assembly-line jobs left to lose
Meanwhile , quite a lot of white-collar work currently carried out by well-educated , relatively well-paid workers may soon be computerized
Roombas are cute , but robot janitors are a long way off ; computerized legal research and computer-aided medical diagnosis are already here
And then there 's globalization
Once , only manufacturing workers needed to worry about competition from overseas , but the combination of computers and telecommunications has made it possible to provide many services at long range
And research by my Princeton colleagues Alan Blinder and Alan Krueger suggests that high-wage jobs performed by highly educated workers are , if anything , more `` offshorable '' than jobs done by low-paid , less-educated workers
If they 're right , growing international trade in services will further hollow out the U.S. job market
So what does all this say about policy
Yes , we need to fix American education
In particular , the inequalities Americans face at the starting line - bright children from poor families are less likely to finish college than much less able children of the affluent - are n't just an outrage ; they represent a huge waste of the nation 's human potential
But there are things education ca n't do
In particular , the notion that putting more kids through college can restore the middle-class society we used to have is wishful thinking
It 's no longer true that having a college degree guarantees that you 'll get a good job , and it 's becoming less true with each passing decade
So if we want a society of broadly shared prosperity , education is n't the answer - we 'll have to go about building that society directly
We need to restore the bargaining power that labor has lost over the last 30 years , so that ordinary workers as well as superstars have the power to bargain for good wages
We need to guarantee the essentials , above all health care , to every citizen
What we ca n't do is get where we need to go just by giving workers college degrees , which may be no more than tickets to jobs that do n't exist or do n't pay middle-class wages
Democrats won the 2006 election largely thanks to public disgust with the Iraq war
But polls and Hillary Clinton 's big victory in Ohio suggest that if the Democrats want to win this year , they have to focus on economic anxiety
Some people reject that idea
They believe that this election should be another referendum on the war , and , perhaps even more important , about the way America was misled into that war
That belief is one reason many progressives fervently support Barack Obama , an early war opponent , even though his domestic platform is somewhat to the right of Mrs. Clinton 's
As an early war opponent myself , I understand their feelings
But should and ought do n't win elections
And polls show that the economy has overtaken Iraq as the public 's biggest concern
True , the news from Iraq will probably turn worse again
Meanwhile , a hefty majority of voters continue to say that the war was a mistake , and people are as angry as ever about the $ 10 billion a month wasted on the neocons ' folly
Yet for the time being , public optimism about Iraq is rising : 53 percent of the public believes that the United States will definitely or probably succeed in achieving its goals
So anger about the war is n't likely to be decisive in the election
The state of the economy , on the other hand , could well give Democrats a huge advantage especially , to be blunt about it , with white working-class voters who supported President Bush in 2004
Even at its best , the Bush economy left most voters unimpressed : only once , in January 2007 , did a slight majority of those questioned by the USA Today\/Gallup poll describe the economy as `` excellent '' or `` good , '' rather than `` only fair '' or `` poor .
A year later , only 19 percent of voters had a good word for the economy
This collapse in economic confidence has occurred even though the full economic effects of the implosion of the housing market and the freezing of the credit markets have yet to be felt
As more things fall apart , perceptions will only get worse
All of this should work to the Democrats ' advantage
They can contrast the Clinton boom with the Bush bust ; they can make the case that Republican economic ideology , with its fixation on privatization and deregulation , helped get us into this mess
And John McCain can be ridiculed as a man who has declared on a number of occasions that he does n't know much about economics only to insist , straight-talker that he is , that he never said any such thing
But first , of course , the Democrats have to settle on a nominee
And the shift in electoral focus from Iraq to economic anxiety clearly plays to Mrs. Clinton 's strengths
According to exit polls , Mr. Obama narrowly edged out Mrs. Clinton among Ohio voters who consider Iraq the most important issue but these voters cast only 19 percent of the ballots in the Democratic primary
Meanwhile , Mrs. Clinton led by 12 points among the much larger group of voters citing the economy as the most important issue and by 16 points among those who cited health care
Mrs. Clinton 's winning margin was twice as large among those who were worried about their own financial situation as among those who were n't
Why has Mr. Obama stumbled when it comes to economic issues
Well , on health care which is closely tied to overall concerns about financial security there is a clear , substantive difference between the candidates , with the Clinton plan being significantly stronger
More broadly , I suspect that the Obama mystique his carefully created image as a transformational , even transcendent figure has created a backlash among those unconvinced that he 's interested in the nuts-and-bolts work of fixing things
Ohio voters were more likely to say that Mr. Obama inspires them but more likely to say that Mrs. Clinton has a clear plan for the country 's problems
And Mr. Obama 's attempt to win over workers by portraying himself as a fierce critic of Nafta looked , and was , deeply insincere an appearance particularly costly for a candidate who tries to seem above politics as usual
Thanks to Tuesday 's results , the nomination fight will go on to Pennsylvania in April , and probably beyond and rightly so
It 's now clear that Mrs. Clinton , like Mr. Obama , has strong grass-roots support that can not be simply brushed aside without alienating voters that the party will badly need in November
So the Democratic National Committee had better get moving on plans to do Michigan and Florida over , to give the eventual nominee the legitimacy he or she needs
And , as the Democrats ponder their choices , they might want to consider which candidate can most convincingly ask : `` Are you better off now than you were eight years ago ?
Everyone has a theory about the financial crisis
These theories range from the absurd to the plausible from claims that liberal Democrats somehow forced banks to lend to the undeserving poor -LRB- even though Republicans controlled Congress -RRB- to the belief that exotic financial instruments fostered confusion and fraud
But what do we really know
Well , in a way the sheer scale of the crisis the way it affected much , though not all , of the world is helpful , for research if nothing else
We can look at countries that avoided the worst , like Canada , and ask what they did right such as limiting leverage , protecting consumers and , above all , avoiding getting caught up in an ideology that denies any need for regulation
We can also look at countries whose financial institutions and policies seemed very different from those in the United States , yet which cracked up just as badly , and try to discern common causes
So let 's talk about Ireland
As a new research paper by the Irish economists Gregory Connor , Thomas Flavin and Brian O'Kelly points out , `` Almost all the apparent causal factors of the U.S. crisis are missing in the Irish case , '' and vice versa
Yet the shape of Ireland 's crisis was very similar : a huge real estate bubble prices rose more in Dublin than in Los Angeles or Miami followed by a severe banking bust that was contained only via an expensive bailout
Ireland had none of the American right 's favorite villains : there was no Community Reinvestment Act , no Fannie Mae or Freddie Mac
More surprising , perhaps , was the unimportance of exotic finance : Ireland 's bust was n't a tale of collateralized debt obligations and credit default swaps ; it was an old-fashioned , plain-vanilla case of excess , in which banks made big loans to questionable borrowers , and taxpayers ended up holding the bag
So what did we have in common
The authors of the new study suggest four '' ` deep ' causal factors .
First , there was irrational exuberance : in both countries buyers and lenders convinced themselves that real estate prices , although sky-high by historical standards , would continue to rise
Second , there was a huge inflow of cheap money
In America 's case , much of the cheap money came from China ; in Ireland 's case , it came mainly from the rest of the euro zone , where Germany became a gigantic capital exporter
Third , key players had an incentive to take big risks , because it was heads they win , tails someone else loses
In Ireland this moral hazard was largely personal : `` Rogue-bank heads retired with their large fortunes intact .
There was a lot of this in the United States , too : as Harvard 's Lucian Bebchuk and others have pointed out , top executives at failed U.S. financial companies received billions in `` performance related '' pay before their firms went belly-up
But the most striking similarity between Ireland and America was `` regulatory imprudence '' : the people charged with keeping banks safe did n't do their jobs
In Ireland , regulators looked the other way in part because the country was trying to attract foreign business , in part because of cronyism : bankers and property developers had close ties to the ruling party
There was a lot of that here too , but the bigger issue was ideology
Actually , the authors of the Irish paper get this wrong , stressing the way U.S. politicians celebrated the ideal of homeownership ; yes , they made speeches along those lines , but this did n't have much effect on lenders ' incentives
What really mattered was free-market fundamentalism
This is what led Ronald Reagan to declare that deregulation would solve the problems of thrift institutions the actual result was huge losses , followed by a gigantic taxpayer bailout and Alan Greenspan to insist that the proliferation of derivatives had actually strengthened the financial system
It was largely thanks to this ideology that regulators ignored the mounting risks
So what can we learn from the way Ireland had a U.S.-type financial crisis with very different institutions
Mainly , that we have to focus as much on the regulators as on the regulations
By all means , let 's limit both leverage and the use of securitization which were part of what Canada did right
But such measures wo n't matter unless they 're enforced by people who see it as their duty to say no to powerful bankers
That 's why we need an independent agency protecting financial consumers again , something Canada did right rather than leaving the job to agencies that have other priorities
And beyond that , we need a sea change in attitudes , a recognition that letting bankers do what they want is a recipe for disaster
If that does n't happen , we will have failed to learn from recent history and we 'll be doomed to repeat it
President Obama 's plan to stimulate the economy was `` massive , '' `` giant , '' `` enormous .
So the American people were told , especially by TV news , during the run-up to the stimulus vote
Watching the news , you might have thought that the only question was whether the plan was too big , too ambitious
Yet many economists , myself included , actually argued that the plan was too small and too cautious
The latest data confirm those worries and suggest that the Obama administration 's economic policies are already falling behind the curve
To see how bad the numbers are , consider this : The administration 's budget proposals , released less than two weeks ago , assumed an average unemployment rate of 8.1 percent for the whole of this year
In reality , unemployment hit that level in February and it 's rising fast
Employment has already fallen more in this recession than in the 1981-82 slump , considered the worst since the Great Depression
As a result , Mr. Obama 's promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming , to say the least
It 's a credible promise his economists used solidly mainstream estimates of the impacts of tax and spending policies
But 3.5 million jobs almost two years from now is n't enough in the face of an economy that has already lost 4.4 million jobs , and is losing 600,000 more each month
There are now three big questions about economic policy
First , does the administration realize that it is n't doing enough
Second , is it prepared to do more
Third , will Congress go along with stronger policies
On the first two questions , I found Mr. Obama 's latest interview with The Times anything but reassuring
`` Our belief and expectation is that we will get all the pillars in place for recovery this year , '' the president declared a belief and expectation that is n't backed by any data or model I 'm aware of
To be sure , leaders are supposed to sound calm and in control
But in the face of the dismal data , this remark sounded out of touch
And there was no hint in the interview of readiness to do more
A real fix for the troubles of the banking system might help make up for the inadequate size of the stimulus plan , so it was good to hear that Mr. Obama spends at least an hour each day with his economic advisors , `` talking through how we are approaching the financial markets .
But he went on to dismiss calls for decisive action as coming from `` blogs '' -LRB- actually , they 're coming from many other places , including at least one president of a Federal Reserve bank -RRB- , and suggested that critics want to `` nationalize all the banks '' -LRB- something nobody is proposing -RRB-
As I read it , this dismissal together with the continuing failure to announce any broad plans for bank restructuring means that the White House has decided to muddle through on the financial front , relying on economic recovery to rescue the banks rather than the other way around
And with the stimulus plan too small to deliver an economic recovery ... well , you get the picture
Sooner or later the administration will realize that more must be done
But when it comes back for more money , will Congress go along
Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis , except cut taxes which they always want to do regardless of circumstances
If Mr. Obama comes back for a second round of stimulus , they 'll respond not by being helpful , but by claiming that his policies have failed
The broader public , by contrast , favors strong action
According to a recent Newsweek poll , a majority of voters supports the stimulus , and , more surprisingly , a plurality believes that additional spending will be necessary
But will that support still be there , say , six months from now
Also , an overwhelming majority believes that the government is spending too much to help large financial institutions
This suggests that the administration 's money-for-nothing financial policy will eventually deplete its political capital
So here 's the picture that scares me : It 's September 2009 , the unemployment rate has passed 9 percent , and despite the early round of stimulus spending it 's still headed up
Mr. Obama finally concedes that a bigger stimulus is needed
But he ca n't get his new plan through Congress because approval for his economic policies has plummeted , partly because his policies are seen to have failed , partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts
And as a result , the recession rages on , unchecked
O.K. , that 's a warning , not a prediction
But economic policy is falling behind the curve , and there 's a real , growing danger that it will never catch up
OBAMA , BREAKING ` FROM A TROUBLED PAST , ' SEEKS BUDGET TO RESHAPE U.S. PRIORITIES -LRB- February 27 , 2009 -RRB- Related Searches United States Economy Get E-Mail Alerts Unemployment Get E-Mail Alerts American Recovery and Reinvestment Act -LRB- 2009 -RRB- Get E-Mail Alerts Obama , Barack Get E-Mail
`` Obama 's Katrina '' : that was the line from some pundits and news sources , as they tried to blame the current administration for the gulf oil spill
It was nonsense , of course
An Associated Press review of the Obama administration 's actions and statements as the disaster unfolded found `` little resemblance '' to the shambolic response to Katrina - and there has been nothing like those awful days when everyone in the world except the Bush inner circle seemed aware of the human catastrophe in New Orleans
Yet there is a common thread running through Katrina and the gulf spill - namely , the collapse in government competence and effectiveness that took place during the Bush years
The full story of the Deepwater Horizon blowout is still emerging
But it 's already obvious both that BP failed to take adequate precautions , and that federal regulators made no effort to ensure that such precautions were taken
For years , the Minerals Management Service , the arm of the Interior Department that oversees drilling in the gulf , minimized the environmental risks of drilling
It failed to require a backup shutdown system that is standard in much of the rest of the world , even though its own staff declared such a system necessary
It exempted many offshore drillers from the requirement that they file plans to deal with major oil spills
And it specifically allowed BP to drill Deepwater Horizon without a detailed environmental analysis
Surely , however , none of this - except , possibly , that last exemption , granted early in the Obama administration - surprises anyone who followed the history of the Interior Department during the Bush years
For the Bush administration was , to a large degree , run by and for the extractive industries - and I 'm not just talking about Dick Cheney 's energy task force
Crucially , management of Interior was turned over to lobbyists , most notably J. Steven Griles , a coal-industry lobbyist who became deputy secretary and effectively ran the department
-LRB- In 2007 Mr. Griles pleaded guilty to lying to Congress about his ties to Jack Abramoff .
Given this history , it 's not surprising that the Minerals Management Service became subservient to the oil industry - although what actually happened is almost too lurid to believe
According to reports by Interior 's inspector general , abuses at the agency went beyond undue influence : there was `` a culture of substance abuse and promiscuity '' - cocaine , sexual relationships with industry representatives , and more
Protecting the environment was presumably the last thing on these government employees ' minds
Now , President Obama is n't completely innocent of blame in the current spill
As I said , BP received an environmental waiver for Deepwater Horizon after Mr. Obama took office
It 's true that he 'd only been in the White House for two and half months , and the Senate would n't confirm the new head of the Minerals Management Service until four months later
But the fact that the administration had n't yet had time to put its stamp on the agency should have led to extra caution about giving the go-ahead to projects with possible environmental risks
And it 's worth noting that environmentalists were bitterly disappointed when Mr. Obama chose Ken Salazar as secretary of the interior
They feared that he would be too friendly to mineral and agricultural interests , that his appointment meant that there would n't be a sharp break with Bush-era policies - and in this one instance at least , they seem to have been right
In any case , now is the time to make that break - and I do n't just mean by cleaning house at the Minerals Management Service
What really needs to change is our whole attitude toward government
For the troubles at Interior were n't unique : they were part of a broader pattern that includes the failure of banking regulation and the transformation of the Federal Emergency Management Agency , a much-admired organization during the Clinton years , into a cruel joke
And the common theme in all these stories is the degradation of effective government by antigovernment ideology
Mr. Obama understands this : he gave an especially eloquent defense of government at the University of Michigan 's commencement , declaring among other things that `` government is what ensures that mines adhere to safety standards and that oil spills are cleaned up by the companies that caused them .
Yet antigovernment ideology remains all too prevalent , despite the havoc it has wrought
In fact , it has been making a comeback with the rise of the Tea Party movement
If there 's any silver lining to the disaster in the gulf , it is that it may serve as a wake-up call , a reminder that we need politicians who believe in good government , because there are some jobs only the government can do
Harry and Louise were the fictional couple who appeared in advertisements run by the insurance industry in 1993 , fretting about what would happen if `` government bureaucrats '' started making health care decisions
The ads helped kill the Clinton health care plan , and have stood , ever since , as a symbol of the ability of powerful special interests to block health care reform
But on Saturday , excited administration officials called me to say that this time the medical-industrial complex -LRB- their term , not mine -RRB- is offering to be helpful
Six major industry players including America 's Health Insurance Plans -LRB- AHIP -RRB- , a descendant of the lobbying group that spawned Harry and Louise have sent a letter to President Obama sketching out a plan to control health care costs
What 's more , the letter implicitly endorses much of what administration officials have been saying about health economics
Are there reasons to be suspicious about this gift
You bet and I 'll get to that in a bit
But first things first : on the face of it , this is tremendously good news
The signatories of the letter say that they 're developing proposals to help the administration achieve its goal of shaving 1.5 percentage points off the growth rate of health care spending
That may not sound like much , but it 's actually huge : achieving that goal would save $ 2 trillion over the next decade
How are costs to be contained
There are few details , but the industry has clearly been reading Peter Orszag , the budget director
In his previous job , as the director of the Congressional Budget Office , Mr. Orszag argued that America spends far too much on some types of health care with little or no medical benefit , even as it spends too little on other types of care , like prevention and treatment of chronic conditions
Putting these together , he concluded that `` substantial opportunities exist to reduce costs without harming health over all .
Sure enough , the health industry letter talks of `` reducing over-use and under-use of health care by aligning quality and efficiency incentives .
It also picks up a related favorite Orszag theme , calling for `` adherence to evidence-based best practices and therapies .
All in all , it 's just what the doctor , er , budget director ordered
Before we start celebrating , however , we have to ask the obvious question
Is this gift a Trojan horse
After all , several of the organizations that sent that letter have in the past been major villains when it comes to health care policy
I 've already mentioned AHIP
There 's also the Pharmaceutical Research and Manufacturers of America -LRB- PhRMA -RRB- , the lobbying group that helped push through the Medicare Modernization Act of 2003 a bill that both prevented Medicare from bargaining over drug prices and locked in huge overpayments to private insurers
Indeed , one of the new letter 's signatories is former Representative Billy Tauzin , who shepherded that bill through Congress then immediately left public office to become PhRMA 's lavishly paid president
The point is that there 's every reason to be cynical about these players ' motives
Remember that what the rest of us call health care costs , they call income
What 's presumably going on here is that key interest groups have realized that health care reform is going to happen no matter what they do , and that aligning themselves with the Party of No will just deny them a seat at the table
-LRB- Republicans , after all , still denounce research into which medical procedures are effective and which are not as a dastardly plot to deprive Americans of their freedom to choose .
I would strongly urge the Obama administration to hang tough in the bargaining ahead
In particular , AHIP will surely try to use the good will created by its stance on cost control to kill an important part of health reform : giving Americans the choice of buying into a public insurance plan as an alternative to private insurers
The administration should not give in on this point
But let me not be too negative
The fact that the medical-industrial complex is trying to shape health care reform rather than block it is a tremendously good omen
It looks as if America may finally get what every other advanced country already has : a system that guarantees essential health care to all its citizens
And serious cost control would change everything , not just for health care , but for America 's fiscal future
As Mr. Orszag has emphasized , rising health care costs are the main reason long-run budget projections look so grim
Slow the rate at which those costs rise , and the future will look far brighter
I still wo n't count my health care chickens until they 're hatched
But this is some of the best policy news I 've heard in a long time
`` The Oil Bubble : Set to Burst ?
That was the headline of an October 2004 article in National Review , which argued that oil prices , then $ 50 a barrel , would soon collapse
Ten months later , oil was selling for $ 70 a barrel
`` It 's a huge bubble , '' declared Steve Forbes , the publisher , who warned that the coming crash in oil prices would make the popping of the technology bubble `` look like a picnic .
All through oil 's five-year price surge , which has taken it from $ 25 a barrel to last week 's close above $ 125 , there have been many voices declaring that it 's all a bubble , unsupported by the fundamentals of supply and demand
So here are two questions : Are speculators mainly , or even largely , responsible for high oil prices
And if they are n't , why have so many commentators insisted , year after year , that there 's an oil bubble
Now , speculators do sometimes push commodity prices far above the level justified by fundamentals
But when that happens , there are telltale signs that just are n't there in today 's oil market
Imagine what would happen if the oil market were humming along , with supply and demand balanced at a price of $ 25 a barrel , and a bunch of speculators came in and drove the price up to $ 100
Even if this were purely a financial play on the part of the speculators , it would have major consequences in the material world
Faced with higher prices , drivers would cut back on their driving ; homeowners would turn down their thermostats ; owners of marginal oil wells would put them back into production
As a result , the initial balance between supply and demand would be broken , replaced with a situation in which supply exceeded demand
This excess supply would , in turn , drive prices back down again unless someone were willing to buy up the excess and take it off the market
The only way speculation can have a persistent effect on oil prices , then , is if it leads to physical hoarding an increase in private inventories of black gunk
This actually happened in the late 1970s , when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling
But it has n't happened this time : all through the period of the alleged bubble , inventories have remained at more or less normal levels
This tells us that the rise in oil prices is n't the result of runaway speculation ; it 's the result of fundamental factors , mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China
The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth
Saying that high-priced oil is n't a bubble does n't mean that oil prices will never decline
I would n't be shocked if a pullback in demand , driven by delayed effects of high prices , sends the price of crude back below $ 100 for a while
But it does mean that speculators are n't at the heart of the story
Why , then , do we keep hearing assertions that they are
Part of the answer may be the undoubted fact that many people are now investing in oil futures which feeds suspicion that speculators are running the show , even though there 's no good evidence that prices have gotten out of line
But there 's also a political component
Traditionally , denunciations of speculators come from the left of the political spectrum
In the case of oil prices , however , the most vociferous proponents of the view that it 's all the speculators ' fault have been conservatives people whom you would n't normally expect to see warning about the nefarious activities of investment banks and hedge funds
The explanation of this seeming paradox is that wishful thinking has trumped pro-market ideology
After all , a realistic view of what 's happened over the past few years suggests that we 're heading into an era of increasingly scarce , costly oil
The consequences of that scarcity probably wo n't be apocalyptic : France consumes only half as much oil per capita as America , yet the last time I looked , Paris was n't a howling wasteland
But the odds are that we 're looking at a future in which energy conservation becomes increasingly important , in which many people may even gasp take public transit to work
I do n't find that vision particularly abhorrent , but a lot of people , especially on the right , do
And so they want to believe that if only Goldman Sachs would stop having such a negative attitude , we 'd quickly return to the good old days of abundant oil
Again , I would n't be shocked if oil prices dip in the near future although I also take seriously Goldman 's recent warning that the price could go to $ 200
But let 's drop all the talk about an oil bubble
It 's an ill wind that blows nobody good , and the crisis in Greece is making some people - people who opposed health care reform and are itching for an excuse to dismantle Social Security - very , very happy
Everywhere you look there are editorials and commentaries , some posing as objective reporting , asserting that Greece today will be America tomorrow unless we abandon all that nonsense about taking care of those in need
The truth , however , is that America is n't Greece - and , in any case , the message from Greece is n't what these people would have you believe
So , how do America and Greece compare
Both nations have lately been running large budget deficits , roughly comparable as a percentage of G.D.P. Markets , however , treat them very differently : The interest rate on Greek government bonds is more than twice the rate on U.S. bonds , because investors see a high risk that Greece will eventually default on its debt , while seeing virtually no risk that America will do the same
One answer is that we have a much lower level of debt - the amount we already owe , as opposed to new borrowing - relative to G.D.P. True , our debt should have been even lower
We 'd be better positioned to deal with the current emergency if so much money had n't been squandered on tax cuts for the rich and an unfunded war
But we still entered the crisis in much better shape than the Greeks
Even more important , however , is the fact that we have a clear path to economic recovery , while Greece does n't
The U.S. economy has been growing since last summer , thanks to fiscal stimulus and expansionary policies by the Federal Reserve
I wish that growth were faster ; still , it 's finally producing job gains - and it 's also showing up in revenues
Right now we 're on track to match Congressional Budget Office projections of a substantial rise in tax receipts
Put those projections together with the Obama administration 's policies , and they imply a sharp fall in the budget deficit over the next few years
Greece , on the other hand , is caught in a trap
During the good years , when capital was flooding in , Greek costs and prices got far out of line with the rest of Europe
If Greece still had its own currency , it could restore competitiveness through devaluation
But since it does n't , and since leaving the euro is still considered unthinkable , Greece faces years of grinding deflation and low or zero economic growth
So the only way to reduce deficits is through savage budget cuts , and investors are skeptical about whether those cuts will actually happen
It 's worth noting , by the way , that Britain - which is in worse fiscal shape than we are , but which , unlike Greece , has n't adopted the euro - remains able to borrow at fairly low interest rates
Having your own currency , it seems , makes a big difference
In short , we 're not Greece
We may currently be running deficits of comparable size , but our economic position - and , as a result , our fiscal outlook - is vastly better
That said , we do have a long-run budget problem
But what 's the root of that problem
`` We demand more than we 're willing to pay for , '' is the usual line
Yet that line is deeply misleading
First of all , who is this `` we '' of whom people speak
Bear in mind that the drive to cut taxes largely benefited a small minority of Americans : 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population
And bear in mind , also , that taxes have lagged behind spending partly thanks to a deliberate political strategy , that of `` starve the beast '' : conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary
Meanwhile , when you look under the hood of those troubling long-run budget projections , you discover that they 're not driven by some generalized problem of overspending
Instead , they largely reflect just one thing : the assumption that health care costs will rise in the future as they have in the past
This tells us that the key to our fiscal future is improving the efficiency of our health care system - which is , you may recall , something the Obama administration has been trying to do , even as many of the same people now warning about the evils of deficits cried `` Death panels !
So here 's the reality : America 's fiscal outlook over the next few years is n't bad
We do have a serious long-run budget problem , which will have to be resolved with a combination of health care reform and other measures , probably including a moderate rise in taxes
But we should ignore those who pretend to be concerned with fiscal responsibility , but whose real goal is to dismantle the welfare state - and are trying to use crises elsewhere to frighten us into giving them what they want
These should be hopeful times for environmentalists
Junk science no longer rules in Washington
President Obama has spoken forcefully about the need to take action on climate change ; the people I talk to are increasingly optimistic that Congress will soon establish a cap-and-trade system that limits emissions of greenhouse gases , with the limits growing steadily tighter over time
And once America acts , we can expect much of the world to follow our lead
But that still leaves the problem of China , where I have been for most of the last week
Like every visitor to China , I was awed by the scale of the country 's development
Even the annoying aspects much of my time was spent viewing the Great Wall of Traffic are byproducts of the nation 's economic success
But China can not continue along its current path because the planet ca n't handle the strain
The scientific consensus on prospects for global warming has become much more pessimistic over the last few years
Indeed , the latest projections from reputable climate scientists border on the apocalyptic
Because the rate at which greenhouse gas emissions are rising is matching or exceeding the worst-case scenarios
And the growth of emissions from China already the world 's largest producer of carbon dioxide is one main reason for this new pessimism
China 's emissions , which come largely from its coal-burning electricity plants , doubled between 1996 and 2006
That was a much faster pace of growth than in the previous decade
And the trend seems set to continue : In January , China announced that it plans to continue its reliance on coal as its main energy source and that to feed its economic growth it will increase coal production 30 percent by 2015
That 's a decision that , all by itself , will swamp any emission reductions elsewhere
So what is to be done about the China problem
Nothing , say the Chinese
Each time I raised the issue during my visit , I was met with outraged declarations that it was unfair to expect China to limit its use of fossil fuels
After all , they declared , the West faced no similar constraints during its development ; while China may be the world 's largest source of carbon-dioxide emissions , its per-capita emissions are still far below American levels ; and anyway , the great bulk of the global warming that has already happened is due not to China but to the past carbon emissions of today 's wealthy nations
And they 're right
It is unfair to expect China to live within constraints that we did n't have to face when our own economy was on its way up
But that unfairness does n't change the fact that letting China match the West 's past profligacy would doom the Earth as we know it
Historical injustice aside , the Chinese also insisted that they should not be held responsible for the greenhouse gases they emit when producing goods for foreign consumers
But they refused to accept the logical implication of this view that the burden should fall on those foreign consumers instead , that shoppers who buy Chinese products should pay a `` carbon tariff '' that reflects the emissions associated with those goods ' production
That , said the Chinese , would violate the principles of free trade
Sorry , but the climate-change consequences of Chinese production have to be taken into account somewhere
And anyway , the problem with China is not so much what it produces as how it produces it
Remember , China now emits more carbon dioxide than the United States , even though its G.D.P. is only about half as large -LRB- and the United States , in turn , is an emissions hog compared with Europe or Japan -RRB-
The good news is that the very inefficiency of China 's energy use offers huge scope for improvement
Given the right policies , China could continue to grow rapidly without increasing its carbon emissions
But first it has to realize that policy changes are necessary
There are hints , in statements emanating from China , that the country 's policy makers are starting to realize that their current position is unsustainable
But I suspect that they do n't realize how quickly the whole game is about to change
As the United States and other advanced countries finally move to confront climate change , they will also be morally empowered to confront those nations that refuse to act
Sooner than most people think , countries that refuse to limit their greenhouse gas emissions will face sanctions , probably in the form of taxes on their exports
They will complain bitterly that this is protectionism , but so what
Globalization does n't do much good if the globe itself becomes unlivable
It 's time to save the planet
And like it or not , China will have to do its part
Utah Republicans have denied Robert Bennett , a very conservative three-term senator , a place on the ballot , because he 's not conservative enough
In Maine , party activists have pushed through a platform calling for , among other things , abolishing both the Federal Reserve and the Department of Education
And it 's becoming ever more apparent that real power within the G.O.P. rests with the ranting talk-show hosts
News organizations have taken notice : suddenly , the takeover of the Republican Party by right-wing extremists has become a story -LRB- although many reporters seem determined to pretend that something equivalent is happening to the Democrats
It is n't .
But why is this happening
And in particular , why is it happening now
The right 's answer , of course , is that it 's about outrage over President Obama 's `` socialist '' policies - like his health care plan , which is , um , more or less identical to the plan Mitt Romney enacted in Massachusetts
Many on the left argue , instead , that it 's about race , the shock of having a black man in the White House - and there 's surely something to that
But I 'd like to offer two alternative hypotheses : First , Republican extremism was there all along - what 's changed is the willingness of the news media to acknowledge it
Second , to the extent that the power of the party 's extremists really is on the rise , it 's the economy , stupid
On the first point : when I read reports by journalists who are shocked , shocked at the craziness of Maine 's Republicans , I wonder where they 've been these past eight or so electoral cycles
For the truth is that the hard right has dominated the G.O.P. for many years
Indeed , the new Maine platform is if anything a bit milder than the Texas Republican platform of 2000 , which called not just for eliminating the Federal Reserve but also for returning to the gold standard , for killing not just the Department of Education but also the Environmental Protection Agency , and more
Somehow , though , the radicalism of Texas Republicans was n't a story in 2000 , an election year in which George W. Bush of Texas , soon to become president , was widely portrayed as a moderate
Or consider those talk-show hosts
Rush Limbaugh has n't changed : his recent suggestion that environmentalist terrorists might have caused the ecological disaster in the gulf is no worse than his repeated insinuations that Hillary Clinton might have been a party to murder
What 's changed is his respectability : news organizations are no longer as eager to downplay Mr. Limbaugh 's extremism as they were in 2002 , when The Washington Post 's media critic insisted that the radio host 's critics were the ones who had `` lost a couple of screws , '' that he was a sensible `` mainstream conservative '' who talks `` mainly about policy .
So why has the reporting shifted
Maybe it was just deference to power : as long as America was widely perceived as being on the way to a permanent Republican majority , few were willing to call right-wing extremism by its proper name
Maybe it took a Democrat in the White House to give some observers the courage to say the obvious
To be fair , however , it 's not all a matter of perception
Right-wing extremism may be the same as it ever was , but it clearly has more adherents now than it did a couple of years ago
It may have a lot to do with a troubled economy
True , that 's not how it was supposed to work
When the economy plunged into crisis , many observers - myself included - expected a political shift to the left
After all , the crisis made nonsense of the right 's markets-know-best , regulation-is-always-bad dogma
In retrospect , however , this was na ve : voters tend to react with their guts , not in response to analytical arguments - and in bad times , the gut reaction of many voters is to move right
That 's the message of a recent paper by the economists Markus Br ckner and Hans Peter Gr ner , who find a striking correlation between economic performance and political extremism in advanced nations : in both America and Europe , periods of low economic growth tend to be associated with a rising vote for right-wing and nationalist political parties
The rise of the Tea Party , in other words , was exactly what we should have expected in the wake of the economic crisis
So where does our political system go from here
Over the near term , a lot will depend on economic recovery
If the economy continues to add jobs , we can expect some of the air to go out of the Tea Party movement
But do n't expect extremists to lose their grip on the G.O.P. anytime soon
What we 're seeing in places like Utah and Maine is n't really a change in the party 's character : it has been dominated by extremists for a long time
The only thing that 's different now is that the rest of the country has finally noticed
In a way , it was easy to take stands during the Bush years : the Bushies and their allies in Congress were so determined to move the nation in the wrong direction that one could , with a clear conscience , oppose all the administration 's initiatives
Now , however , a somewhat uneasy coalition of progressives and centrists rules Washington , and staking out a position has become much trickier
Policy tends to move things in a desirable direction , yet to fall short of what you 'd hoped to see
And the question becomes how many compromises , how much watering down , one is willing to accept
There will be a lot of soul-searching later this year for advocates of health care reform
-LRB- For me the make-or-break issue is whether the legislation includes a public plan .
But right now it 's the environmental community that has to decide how much it 's willing to bend
If we 're going to get real action on climate change any time soon , it will be via some version of legislation proposed by Representatives Henry Waxman and Edward Markey
Their bill would limit greenhouse gases by requiring polluters to receive or buy emission permits , with the number of available permits the `` cap '' in `` cap and trade '' gradually falling over time
It goes without saying that the usual suspects on the right have denounced Waxman-Markey : global warming is n't real , emission limits will destroy the economy , yada yada
But the bill also faces opposition from some environmentalists , who are balking at the compromises the sponsors made to gain political support
So is Waxman-Markey whose language was released last week good enough
Well , Al Gore has praised the bill , and plans to organize a grass-roots campaign on its behalf
A number of environmental organizations , ranging from the League of Conservation Voters to the Environmental Defense Fund , have also come out in strong support
But Greenpeace has declared that it `` can not support this bill in its current state .
And some influential environmental figures most notably James Hansen , the NASA scientist who first drew the public 's attention to global warming oppose the whole idea of cap and trade , arguing for a carbon tax instead
I 'm with Mr. Gore
The legislation now on the table is n't the bill we 'd ideally want , but it 's the bill we can get and it 's vastly better than no bill at all
One objection the claim that carbon taxes are better than cap and trade is , in my view , just wrong
In principle , emission taxes and tradable emission permits are equally effective at limiting pollution
In practice , cap and trade has some major advantages , especially for achieving effective international cooperation
Not to put too fine a point on it , think about how hard it would be to verify whether China was really implementing a promise to tax carbon emissions , as opposed to letting factory owners with the right connections off the hook
By contrast , it would be fairly easy to determine whether China was holding its total emissions below agreed-upon levels
The more serious objection to Waxman-Markey is that it sets up a system under which many polluters would n't have to pay for the right to emit greenhouse gases they 'd get their permits free
In particular , in the first years of the program 's operation more than a third of the allocation of emission permits would be handed over at no charge to the power industry
Now , these handouts would n't undermine the policy 's effectiveness
Even when polluters get free permits , they still have an incentive to reduce their emissions , so that they can sell their excess permits to someone else
That 's not just theory : allowances for sulfur dioxide emissions are allocated to electric utilities free of charge , yet the cap-and-trade system for SO2 has been highly successful at controlling acid rain
But handing out emission permits does , in effect , transfer wealth from taxpayers to industry
So if you had your heart set on a clean program , without major political payoffs , Waxman-Markey is a disappointment
Still , the bill represents major action to limit climate change
As the Center for American Progress has pointed out , by 2020 the legislation would have the same effect on global warming as taking 500 million cars off the road
And by all accounts , this bill has a real chance of becoming law in the near future
So opponents of the proposed legislation have to ask themselves whether they 're making the perfect the enemy of the good
I think they are
After all the years of denial , after all the years of inaction , we finally have a chance to do something major about climate change
Waxman-Markey is imperfect , it 's disappointing in some respects , but it 's action we can take now
And the planet wo n't wait
But we 're living in a world in which oil prices keep setting records , in which the idea that global oil production will soon peak is rapidly moving from fringe belief to mainstream assumption
And Europeans who have achieved a high standard of living in spite of very high energy prices gas in Germany costs more than $ 8 a gallon have a lot to teach us about how to deal with that world
If Europe 's example is any guide , here are the two secrets of coping with expensive oil : own fuel-efficient cars , and do n't drive them too much
Notice that I said that cars should be fuel-efficient not that people should do without cars altogether
In Germany , as in the United States , the vast majority of families own cars -LRB- although German households are less likely than their U.S. counterparts to be multiple-car owners -RRB-
But the average German car uses about a quarter less gas per mile than the average American car
By and large , the Germans do n't drive itsy-bitsy toy cars , but they do drive modest-sized passenger vehicles rather than S.U.V. 's and pickup trucks
In the near future I expect we 'll see Americans moving down the same path
We 've already done it once : over the course of the 1970s and 1980s , the average mileage of U.S. passenger vehicles rose about 50 percent , as Americans switched to smaller , lighter cars
This improvement stalled with the rise of S.U.V. 's during the cheap-gas 1990s
But now that gas costs more than ever before , even after adjusting for inflation , we can expect to see mileage rise again
Admittedly , the next few years will be rough for families who bought big vehicles when gas was cheap , and now find themselves the owners of white elephants with little trade-in value
But raising fuel efficiency is something we can and will do
Can we also drive less
Yes but getting there will be a lot harder
There have been many news stories in recent weeks about Americans who are changing their behavior in response to expensive gasoline they 're trying to shop locally , they 're canceling vacations that involve a lot of driving , and they 're switching to public transit
But none of it amounts to much
For example , some major public transit systems are excited about ridership gains of 5 or 10 percent
But fewer than 5 percent of Americans take public transit to work , so this surge of riders takes only a relative handful of drivers off the road
Any serious reduction in American driving will require more than this it will mean changing how and where many of us live
To see what I 'm talking about , consider where I am at the moment : in a pleasant , middle-class neighborhood consisting mainly of four - or five-story apartment buildings , with easy access to public transit and plenty of local shopping
It 's the kind of neighborhood in which people do n't have to drive a lot , but it 's also a kind of neighborhood that barely exists in America , even in big metropolitan areas
Greater Atlanta has roughly the same population as Greater Berlin but Berlin is a city of trains , buses and bikes , while Atlanta is a city of cars , cars and cars
And in the face of rising oil prices , which have left many Americans stranded in suburbia utterly dependent on their cars , yet having a hard time affording gas it 's starting to look as if Berlin had the better idea
Changing the geography of American metropolitan areas will be hard
For one thing , houses last a lot longer than cars
Long after today 's S.U.V. 's have become antique collectors ' items , millions of people will still be living in subdivisions built when gas was $ 1.50 or less a gallon
Infrastructure is another problem
Public transit , in particular , faces a chicken-and-egg problem : it 's hard to justify transit systems unless there 's sufficient population density , yet it 's hard to persuade people to live in denser neighborhoods unless they come with the advantage of transit access
And there are , as always in America , the issues of race and class
Despite the gentrification that has taken place in some inner cities , and the plunge in national crime rates to levels not seen in decades , it will be hard to shake the longstanding American association of higher-density living with poverty and personal danger
Still , if we 're heading for a prolonged era of scarce , expensive oil , Americans will face increasingly strong incentives to start living like Europeans maybe not today , and maybe not tomorrow , but soon , and for the rest of our lives
The 2008 election ended the reign of junk science in our nation 's capital , and the chances of meaningful action on climate change , probably through a cap-and-trade system on emissions , have risen sharply
But the opponents of action claim that limiting emissions would have devastating effects on the U.S. economy
So it 's important to understand that just as denials that climate change is happening are junk science , predictions of economic disaster if we try to do anything about climate change are junk economics
Yes , limiting emissions would have its costs
As a card-carrying economist , I cringe when `` green economy '' enthusiasts insist that protecting the environment would be all gain , no pain
But the best available estimates suggest that the costs of an emissions-limitation program would be modest , as long as it 's implemented gradually
And committing ourselves now might actually help the economy recover from its current slump
Let 's talk first about those costs
A cap-and-trade system would raise the price of anything that , directly or indirectly , leads to the burning of fossil fuels
Electricity , in particular , would become more expensive , since so much generation takes place in coal-fired plants
Electric utilities could reduce their need to purchase permits by limiting their emissions of carbon dioxide and the whole point of cap-and-trade is , of course , to give them an incentive to do just that
But the steps they would take to limit emissions , such as shifting to other energy sources or capturing and sequestering much of the carbon dioxide they emit , would without question raise their costs
If emission permits were auctioned off as they should be the revenue thus raised could be used to give consumers rebates or reduce other taxes , partially offsetting the higher prices
But the offset would n't be complete
Consumers would end up poorer than they would have been without a climate-change policy
But how much poorer
Not much , say careful researchers , like those at the Environmental Protection Agency or the Emissions Prediction and Policy Analysis Group at the Massachusetts Institute of Technology
Even with stringent limits , says the M.I.T. group , Americans would consume only 2 percent less in 2050 than they would have in the absence of emission limits
That would still leave room for a large rise in the standard of living , shaving only one-twentieth of a percentage point off the average annual growth rate
To be sure , there are many who insist that the costs would be much higher
Strange to say , however , such assertions nearly always come from people who claim to believe that free-market economies are wonderfully flexible and innovative , that they can easily transcend any constraints imposed by the world 's limited resources of crude oil , arable land or fresh water
So why do n't they think the economy can cope with limits on greenhouse gas emissions
Under cap-and-trade , emission rights would just be another scarce resource , no different in economic terms from the supply of arable land
Needless to say , people like Newt Gingrich , who says that cap-and-trade would `` punish the American people , '' are n't thinking that way
They 're just thinking `` capitalism good , government bad .
But if you really believe in the magic of the marketplace , you should also believe that the economy can handle emission limits just fine
So we can afford a strong climate change policy
And committing ourselves to such a policy might actually help us in our current economic predicament
Right now , the biggest problem facing our economy is plunging business investment
Businesses see no reason to invest , since they 're awash in excess capacity , thanks to the housing bust and weak consumer demand
But suppose that Congress were to mandate gradually tightening emission limits , starting two or three years from now
This would have no immediate effect on prices
It would , however , create major incentives for new investment investment in low-emission power plants , in energy-efficient factories and more
To put it another way , a commitment to greenhouse gas reduction would , in the short-to-medium run , have the same economic effects as a major technological innovation : It would give businesses a reason to invest in new equipment and facilities even in the face of excess capacity
And given the current state of the economy , that 's just what the doctor ordered
This short-run economic boost is n't the main reason to move on climate-change policy
The important thing is that the planet is in danger , and the longer we wait the worse it gets
But it is an extra reason to move quickly
So can we afford to save the planet
Yes , we can
And now would be a very good time to get started
For the past few months , much commentary on the economy - some of it posing as reporting - has had one central theme : policy makers are doing too much
Governments need to stop spending , we 're told
Greece is held up as a cautionary tale , and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits
Meanwhile , there are continual warnings that inflation is just around the corner , and that the Fed needs to pull back from its efforts to support the economy and get started on its `` exit strategy , '' tightening credit by selling off assets and raising interest rates
And what about near-record unemployment , with long-term unemployment worse than at any time since the 1930s
What about the fact that the employment gains of the past few months , although welcome , have , so far , brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis
Hey , worrying about the unemployed is just so 2009
But the truth is that policy makers are n't doing too much ; they 're doing too little
Recent data do n't suggest that America is heading for a Greece-style collapse of investor confidence
Instead , they suggest that we may be heading for a Japan-style lost decade , trapped in a prolonged era of high unemployment and slow growth
Let 's talk first about those interest rates
On several occasions over the past year , we 've been told , after some modest rise in rates , that the bond vigilantes had arrived , that America had better slash its deficit right away or else
Each time , rates soon slid back down
Most recently , in March , there was much ado about the interest rate on U.S. 10-year bonds , which had risen from 3.6 percent to almost 4 percent
`` Debt fears send rates up '' was the headline at The Wall Street Journal , although there was n't actually any evidence that debt fears were responsible
Since then , however , rates have retraced that rise and then some
As of Thursday , the 10-year rate was below 3.3 percent
I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances
What they actually reflect , however , is a surge of pessimism about the prospects for economic recovery , pessimism that has sent investors fleeing out of anything that looks risky - hence , the plunge in the stock market - into the perceived safety of U.S. government debt
What 's behind this new pessimism
It partly reflects the troubles in Europe , which have less to do with government debt than you 've heard ; the real problem is that by creating the euro , Europe 's leaders imposed a single currency on economies that were n't ready for such a move
But there are also warning signs at home , most recently Wednesday 's report on consumer prices , which showed a key measure of inflation falling below 1 percent , bringing it to a 44-year low
This is n't really surprising : you expect inflation to fall in the face of mass unemployment and excess capacity
But it is nonetheless really bad news
Low inflation , or worse yet deflation , tends to perpetuate an economic slump , because it encourages people to hoard cash rather than spend , which keeps the economy depressed , which leads to more deflation
That vicious circle is n't hypothetical : just ask the Japanese , who entered a deflationary trap in the 1990s and , despite occasional episodes of growth , still ca n't get out
And it could happen here
So what we should really be asking right now is n't whether we 're about to turn into Greece
We should , instead , be asking what we 're doing to avoid turning Japanese
And the answer is , nothing
It 's not that nobody understands the risk
I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy
But in practice it 's all they can do to contain the tightening impulses of their colleagues , who -LRB- like central bankers in the 1930s -RRB- remain desperately afraid of inflation despite the absence of any evidence of rising prices
I also suspect that Obama administration economists would very much like to see another stimulus plan
But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks
In short , fear of imaginary threats has prevented any effective response to the real danger facing our economy
Will the worst happen
Not necessarily
Maybe the economic measures already taken will end up doing the trick , jump-starting a self-sustaining recovery
Certainly , that 's what we 're all hoping
But hope is not a plan
That did n't take long
Less than two weeks have passed since much of the medical-industrial complex made a big show of working with President Obama on health care reform and the double-crossing is already well under way
Indeed , it 's now clear that even as they met with the president , pretending to be cooperative , insurers were gearing up to play the same destructive role they did the last time health reform was on the agenda
So here 's the question : Will Mr. Obama gloss over the reality of what 's happening , and try to preserve the appearance of cooperation
Or will he honor his own pledge , made back during the campaign , to go on the offensive against special interests if they stand in the way of reform
The story so far : on May 11 the White House called a news conference to announce that major players in health care , including the American Hospital Association and the lobbying group America 's Health Insurance Plans , had come together to support a national effort to control health care costs
The fact sheet on the meeting , one has to say , was classic Obama in its message of post-partisanship and , um , hope
`` For too long , politics and point-scoring have prevented our country from tackling this growing crisis , '' it said , adding , `` The American people are eager to put the old Washington ways behind them .
But just three days later the hospital association insisted that it had not , in fact , promised what the president said it had promised that it had made no commitment to the administration 's goal of reducing the rate at which health care costs are rising by 1.5 percentage points a year
And the head of the insurance lobby said that the idea was merely to `` ramp up '' savings , whatever that means
Meanwhile , the insurance industry is busily lobbying Congress to block one crucial element of health care reform , the public option that is , offering Americans the right to buy insurance directly from the government as well as from private insurance companies
And at least some insurers are gearing up for a major smear campaign
On Monday , just a week after the White House photo-op , The Washington Post reported that Blue Cross Blue Shield of North Carolina was preparing to run a series of ads attacking the public option
The planning for this ad campaign must have begun quite some time ago
The Post has the storyboards for the ads , and they read just like the infamous Harry and Louise ads that helped kill health care reform in 1993
Troubled Americans are shown being denied their choice of doctor , or forced to wait months for appointments , by faceless government bureaucrats
It 's a scary image that might make some sense if private health insurance which these days comes primarily via HMOs offered all of us free choice of doctors , with no wait for medical procedures
But my health plan is n't like that
Is yours
`` We can do a lot better than a government-run health care system , '' says a voice-over in one of the ads
To which the obvious response is , if that 's true , why do n't you
Why deny Americans the chance to reject government insurance if it 's really that bad
For none of the reform proposals currently on the table would force people into a government-run insurance plan
At most they would offer Americans the choice of buying into such a plan
And the goal of the insurers is to deny Americans that choice
They fear that many people would prefer a government plan to dealing with private insurance companies that , in the real world as opposed to the world of their ads , are more bureaucratic than any government agency , routinely deny clients their choice of doctor , and often refuse to pay for care
Which brings us back to Mr. Obama
Back during the Democratic primary campaign , Mr. Obama argued that the Clintons had failed in their 1993 attempt to reform health care because they had been insufficiently inclusive
He promised instead to gather all the stakeholders , including the insurance companies , around a `` big table .
And that May 11 event was , of course , intended precisely to show this big-table strategy in action
But what if interest groups showed up at the big table , then blocked reform
Back then , Mr. Obama assured voters that he would get tough : `` If those insurance companies and drug companies start trying to run ads with Harry and Louise , I 'll run my own ads as president
I 'll get on television and say ` Harry and Louise are lying . '
The question now is whether he really meant it
The medical-industrial complex has called the president 's bluff
It polished its image by showing up at the big table and promising cooperation , then promptly went back to doing all it can to block real change
The insurers and the drug companies are , in effect , betting that Mr. Obama will be afraid to call them out on their duplicity
It 's up to Mr. Obama to prove them wrong
So here 's how it is : They 're as mad as hell , and they 're not going to take this anymore
Am I talking about the Tea Partiers
No , I 'm talking about the corporations
Much reporting on opposition to the Obama administration portrays it as a sort of populist uprising
Yet the antics of the socialism-and-death-panels crowd are only part of the story of anti-Obamaism , and arguably the less important part
If you really want to know what 's going on , watch the corporations
How can you do that
Follow the money - donations by corporate political action committees
Look , for example , at the campaign contributions of commercial banks - traditionally Republican-leaning , but only mildly so
So far this year , according to The Washington Post , 63 percent of spending by banks ' corporate PACs has gone to Republicans , up from 53 percent last year
Securities and investment firms , traditionally Democratic-leaning , are now giving more money to Republicans
And oil and gas companies , always Republican-leaning , have gone all out , bestowing 76 percent of their largess on the G.O.P. These are extraordinary numbers given the normal tendency of corporate money to flow to the party in power
Corporate America , however , really , truly hates the current administration
Wall Street , for example , is in `` a state of bitter , seething , hysterical fury '' toward the president , writes John Heilemann of New York magazine
What 's going on
One answer is taxes - not so much on corporations themselves as on the people who run them
The Obama administration plans to raise tax rates on upper brackets back to Clinton-era levels
Furthermore , health reform will in part be paid for with surtaxes on high-income individuals
All this will amount to a significant financial hit to C.E.O. 's , investment bankers and other masters of the universe
Now , do n't cry for these people : they 'll still be doing extremely well , and by and large they 'll be paying little more as a percentage of their income than they did in the 1990s
Yet the fact that the tax increases they 're facing are reasonable does n't stop them from being very , very angry
Nor are taxes the whole story
Many Obama supporters have been disappointed by what they see as the administration 's mildness on regulatory issues - its embrace of limited financial reform that does n't break up the biggest banks , its support for offshore drilling , and so on
Yet corporate interests are balking at even modest changes from the permissiveness of the Bush era
From the outside , this rage against regulation seems bizarre
I mean , what did they expect
The financial industry , in particular , ran wild under deregulation , eventually bringing on a crisis that has left 15 million Americans unemployed , and required large-scale taxpayer-financed bailouts to avoid an even worse outcome
Did Wall Street expect to emerge from all that without facing some new restrictions
Apparently it did
So what President Obama and his party now face is n't just , or even mainly , an opposition grounded in right-wing populism
For grass-roots anger is being channeled and exploited by corporate interests , which will be the big winners if the G.O.P. does well in November
If this sounds familiar , it should : it 's the same formula the right has been using for a generation
Use identity politics to whip up the base ; then , when the election is over , give priority to the concerns of your corporate donors
Run as the candidate of `` real Americans , '' not those soft-on-terror East coast liberals ; then , once you 've won , declare that you have a mandate to privatize Social Security
It comes as no surprise to learn that American Crossroads , a new organization whose goal is to deploy large amounts of corporate cash on behalf of Republican candidates , is the brainchild of none other than Karl Rove
But wo n't the grass-roots rebel at being used
Do n't count on it
Last week Rand Paul , the Tea Party darling who is now the Republican nominee for senator from Kentucky , declared that the president 's criticism of BP over the disastrous oil spill in the gulf is `` un-American , '' that `` sometimes accidents happen .
The mood on the right may be populist , but it 's a kind of populism that 's remarkably sympathetic to big corporations
So where does that leave the president and his party
Mr. Obama wanted to transcend partisanship
Instead , however , he finds himself very much in the position Franklin Roosevelt described in a famous 1936 speech , struggling with `` the old enemies of peace - business and financial monopoly , speculation , reckless banking , class antagonism , sectionalism , war profiteering .
And that 's not necessarily a bad thing
Roosevelt turned corporate opposition into a badge of honor : `` I welcome their hatred , '' he declared
It 's time for President Obama to find his inner F.D.R. , and do the same
California , it has long been claimed , is where the future happens first
But is that still true
If it is , God help America
The recession has hit the Golden State hard
The housing bubble was bigger there than almost anywhere else , and the bust has been bigger too
California 's unemployment rate , at 11 percent , is the fifth-highest in the nation
And the state 's revenues have suffered accordingly
What 's really alarming about California , however , is the political system 's inability to rise to the occasion
Despite the economic slump , despite irresponsible policies that have doubled the state 's debt burden since Arnold Schwarzenegger became governor , California has immense human and financial resources
It should not be in fiscal crisis ; it should not be on the verge of cutting essential public services and denying health coverage to almost a million children
But it is and you have to wonder if California 's political paralysis foreshadows the future of the nation as a whole
The seeds of California 's current crisis were planted more than 30 years ago , when voters overwhelmingly passed Proposition 13 , a ballot measure that placed the state 's budget in a straitjacket
Property tax rates were capped , and homeowners were shielded from increases in their tax assessments even as the value of their homes rose
The result was a tax system that is both inequitable and unstable
It 's inequitable because older homeowners often pay far less property tax than their younger neighbors
It 's unstable because limits on property taxation have forced California to rely more heavily than other states on income taxes , which fall steeply during recessions
Even more important , however , Proposition 13 made it extremely hard to raise taxes , even in emergencies : no state tax rate may be increased without a two-thirds majority in both houses of the State Legislature
And this provision has interacted disastrously with state political trends
For California , where the Republicans began their transformation from the party of Eisenhower to the party of Reagan , is also the place where they began their next transformation , into the party of Rush Limbaugh
As the political tide has turned against California Republicans , the party 's remaining members have become ever more extreme , ever less interested in the actual business of governing
And while the party 's growing extremism condemns it to seemingly permanent minority status Mr. Schwarzenegger was and is sui generis the Republican rump retains enough seats in the Legislature to block any responsible action in the face of the fiscal crisis
Will the same thing happen to the nation as a whole
Last week Bill Gross of Pimco , the giant bond fund , warned that the U.S. government may lose its AAA debt rating in a few years , thanks to the trillions it 's spending to rescue the economy and the banks
Is that a real possibility
Well , in a rational world Mr. Gross 's warning would make no sense
America 's projected deficits may sound large , yet it would take only a modest tax increase to cover the expected rise in interest payments and right now American taxes are well below those in most other wealthy countries
The fiscal consequences of the current crisis , in other words , should be manageable
But that presumes that we 'll be able , as a political matter , to act responsibly
The example of California shows that this is by no means guaranteed
And the political problems that have plagued California for years are now increasingly apparent at a national level
To be blunt : recent events suggest that the Republican Party has been driven mad by lack of power
The few remaining moderates have been defeated , have fled , or are being driven out
What 's left is a party whose national committee has just passed a resolution solemnly declaring that Democrats are `` dedicated to restructuring American society along socialist ideals , '' and released a video comparing Speaker of the House Nancy Pelosi to Pussy Galore
And that party still has 40 senators
So will America follow California into ungovernability
Well , California has some special weaknesses that are n't shared by the federal government
In particular , tax increases at the federal level do n't require a two-thirds majority , and can in some cases bypass the filibuster
So acting responsibly should be easier in Washington than in Sacramento
But the California precedent still has me rattled
Who would have thought that America 's largest state , a state whose economy is larger than that of all but a few nations , could so easily become a banana republic
On the other hand , the problems that plague California politics apply at the national level too
It is , in a way , almost appropriate that the final days of the struggle for the Democratic nomination have been marked by yet another fake Clinton scandal the latest in a long line that goes all the way back to Whitewater
This one , in case you missed it , involved an interview Hillary Clinton gave the editorial board of South Dakota 's Argus Leader , in which she tried to make a case for her continuing campaign by pointing out that nomination fights have often gone on into the summer
As one of her illustrations , she mentioned that Bobby Kennedy was assassinated in June
It was n't the best example to use , but it 's absurd to suggest , as some Obama supporters immediately did , that Mrs. Clinton was making some kind of dark hint about Barack Obama 's future
But then , it was equally absurd to portray Mrs. Clinton 's assertion that it took L.B.J. 's political skills to turn Martin Luther King 's vision into legislation as an example of politicizing race
Yet the claim that Mrs. Clinton was playing the race card , which was promoted by some Obama supporters as well as in a memo by a member of Mr. Obama 's staff , achieved wide currency
Why does all this matter
Not for the nomination : Mr. Obama will be the Democratic nominee
But he has a problem : many grass-roots Clinton supporters feel that she has received unfair , even grotesque treatment
And the lingering bitterness from the primary campaign could cost Mr. Obama the White House
To the extent that the general election is about the issues , Mr. Obama should have no trouble winning over former Clinton supporters , especially the white working-class voters he lost in the primaries
His health care plan is seriously deficient , but he will nonetheless be running on a far more worker-friendly platform than his opponent
Indeed , John McCain has shed whatever maverick tendencies he may once have had , and become almost a caricature conservative an advocate of lower taxes for the rich and corporations , a privatizer and shredder of the safety net
But elections always involve emotions as well as issues , and there are some ominous signs in the polling data
In Florida , in particular , the rolling estimate produced by the professionals at Pollster.com shows Mr. McCain running substantially ahead of Mr. Obama , even as he runs significantly behind Mrs. Clinton
Ohio also looks problematic , and Pennsylvania looks closer than it should
It 's true that head-to-head polls five months before the general election have a poor track record
But they certainly give reason to worry
The point is that Mr. Obama may need those disgruntled Clinton supporters , lest he manage to lose in what ought to be a banner Democratic year
So what should Mr. Obama and his supporters do
Most immediately , they should realize that the continuing demonization of Mrs. Clinton serves nobody except Mr. McCain
One more trumped-up scandal wo n't persuade the millions of voters who stuck with Mrs. Clinton despite incessant attacks on her character that she really was evil all along
But it might incline a few more of them to stay home in November
Nor should Obama supporters dismiss Mrs. Clinton 's strength as a purely Appalachian phenomenon , with the implication that Clinton voters are just a bunch of hicks
So what comes next
Mrs. Clinton needs to do her part : she needs to be careful not to act as a spoiler during what 's left of the primary , she needs to bow out gracefully if , as seems almost certain , Mr. Obama receives the nod , and she needs to campaign strongly for the nominee once the convention is over
She has said she 'll do that , and there 's no reason to believe that she does n't mean it
But mainly it 's up to Mr. Obama to deliver the unity he has always promised starting with his own party
One thing to do would be to make a gesture of respect for Democrats who voted in good faith by recognizing Florida 's primary votes which at this point would n't change the outcome of the nomination fight
The only reason I can see for Obama supporters to oppose seating Florida is that it might let Mrs. Clinton claim that she received a majority of the popular vote
But which is more important denying Mrs. Clinton bragging rights , or possibly forfeiting the general election
What about offering Mrs. Clinton the vice presidency
If I were Mr. Obama , I 'd do it
Adding Mrs. Clinton to the ticket or at least making the offer might help heal the wounds of an ugly primary fight
Here 's the point : the nightmare Mr. Obama and his supporters should fear is that in an election year in which everything favors the Democrats , he will nonetheless manage to lose
He needs to do everything he can to make sure that does n't happen
Suddenly it seems as if everyone is talking about inflation
Stern opinion pieces warn that hyperinflation is just around the corner
And markets may be heeding these warnings : Interest rates on long-term government bonds are up , with fear of future inflation one possible reason for the interest-rate spike
But does the big inflation scare make any sense
Basically , no with one caveat I 'll get to later
And I suspect that the scare is at least partly about politics rather than economics
First things first
It 's important to realize that there 's no hint of inflationary pressures in the economy right now
Consumer prices are lower now than they were a year ago , and wage increases have stalled in the face of high unemployment
Deflation , not inflation , is the clear and present danger
So if prices are n't rising , why the inflation worries
Some claim that the Federal Reserve is printing lots of money , which must be inflationary , while others claim that budget deficits will eventually force the U.S. government to inflate away its debt
The first story is just wrong
The second could be right , but is n't
Now , it 's true that the Fed has taken unprecedented actions lately
More specifically , it has been buying lots of debt both from the government and from the private sector , and paying for these purchases by crediting banks with extra reserves
And in ordinary times , this would be highly inflationary : banks , flush with reserves , would increase loans , which would drive up demand , which would push up prices
But these are n't ordinary times
Banks are n't lending out their extra reserves
They 're just sitting on them in effect , they 're sending the money right back to the Fed
So the Fed is n't really printing money after all
Still , do n't such actions have to be inflationary sooner or later
The Bank of Japan , faced with economic difficulties not too different from those we face today , purchased debt on a huge scale between 1997 and 2003
What happened to consumer prices
They fell
All in all , much of the current inflation discussion calls to mind what happened during the early years of the Great Depression when many influential people were warning about inflation even as prices plunged
As the British economist Ralph Hawtrey wrote , `` Fantastic fears of inflation were expressed
That was to cry , Fire , Fire in Noah 's Flood .
And he went on , `` It is after depression and unemployment have subsided that inflation becomes dangerous .
Is there a risk that we 'll have inflation after the economy recovers
That 's the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt that is , drive up prices so that the real value of the debt is reduced
Such things have happened in the past
For example , France ultimately inflated away much of the debt it incurred while fighting World War I. But more modern examples are lacking
Over the past two decades , Belgium , Canada and , of course , Japan have all gone through episodes when debt exceeded 100 percent of G.D.P. And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P.
In none of these cases did governments resort to inflation to resolve their problems
So is there any reason to think that inflation is coming
Some economists have argued for moderate inflation as a deliberate policy , as a way to encourage lending and reduce private debt burdens
I 'm sympathetic to these arguments and made a similar case for Japan in the 1990s
But the case for inflation never made headway with Japanese policy makers then , and there 's no sign it 's getting traction with U.S. policy makers now
All of this raises the question : If inflation is n't a real risk , why all the claims that it is
Well , as you may have noticed , economists sometimes disagree
And big disagreements are especially likely in weird times like the present , when many of the normal rules no longer apply
But it 's hard to escape the sense that the current inflation fear-mongering is partly political , coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy
And their goal seems to be to bully the Obama administration into abandoning those rescue efforts
Needless to say , the president should not let himself be bullied
The economy is still in deep trouble and needs continuing help
Yes , we have a long-run budget problem , and we need to start laying the groundwork for a long-run solution
But when it comes to inflation , the only thing we have to fear is inflation fear itself
During Barack Obama 's Sunday appearance on Fox News , the interviewer asked him for an example of `` a hot-button issue where you would be willing to buck the Democratic Party line '' and say that Republicans have the better idea
Mr. Obama 's answer was puzzling because he gave credit where it is n't due and thereby undermined what could be a very effective Democratic line of argument
In particular , Mr. Obama attributed to Republicans the idea that regulation can be flexible rather than a matter of `` top-down command and control , '' and in particular for the idea of controlling pollution with a system of tradable emission permits rather than rigid regulations
Well , that 's not at all what actually happened and the tale of what really did happen has a lot of relevance to current events
It 's true that the first President Bush established a market-based system for controlling sulfur dioxide emissions , which has been highly successful at controlling acid rain
But by then the idea of markets in emission permits had long been accepted by economists of all political stripes
And it had also been accepted by leading Democrats
The Environmental Protection Agency began letting cities meet air-quality standards using emissions-trading systems during the Carter administration which also led the way on deregulation of airlines and trucking
Furthermore , the sulfur dioxide scheme actually marked a sharp change in policy from the Reagan administration , which committed to the belief that government is always the problem , never the solution spent eight years opposing any effort to control acid rain
Rather than admit that pollution is a problem the government has to solve even as the consequences of acid rain became ever more alarming , not to mention as America 's failure to act provoked a near-crisis in relations with Canada , which was suffering the effects of U.S.-generated sulfur dioxide the Reaganites insisted that there was no problem at all
They denied the evidence , questioned the science , called for more research and did nothing
Sound familiar
And that , surely , is the line the Democrats should be pushing in this election : Republicans have become the party of denial
If a problem ca n't be solved with deregulation and tax cuts , they pretend it does n't exist
Climate change is the obvious contemporary parallel with acid rain
But if the Democrats really want to pin the denialist label on John McCain , health care is the place to focus
The health care situation , in case you have n't noticed , is going from bad to worse
Many smaller companies stopped offering benefits between 2000 and 2005
In the past , health coverage has tended to improve when the economy recovers from recession but the `` Bush boom '' brought at best a temporary stabilization
And now that the economy is weakening again , another plunge is in progress : last week UnitedHealth warned investors that its business is suffering because fewer employers are offering coverage to their workers
The Democrats have been offering real plans in response ; they 're not perfect , but they are serious
The G.O.P. , by contrast and this goes as much for Mr. McCain as for the Bush administration has n't even tried to address concerns about coverage
Instead , it has all been about costs , which Republicans insist -LRB- wrongly -RRB- can be dramatically reduced by a policy of , you guessed it , deregulation and tax cuts
Until a few days ago , the only answer the McCain campaign offered to those worried about lack of coverage was the vague , implausible assertion that the magic of the marketplace would make health care cheap enough for everyone to afford
Now Mr. McCain has admitted that maybe a government program is needed for those who ca n't get private insurance
This appears to be a response to criticism from Elizabeth Edwards , who has been pointing out that deregulated insurers would deny coverage to anyone with , say , a history of cancer a category that includes both her and Mr. McCain himself
But the way Mrs. Edwards has rattled the McCain campaign is evidence of just how vulnerable he is on the issue
The point is that the health care issue could be Exhibit A for a Democratic campaign based on the argument that they are the party of pragmatic solutions , while modern Republicans wo n't even acknowledge problems that do n't fit into their rigid ideological framework
But are Democrats ready to make that case
To be clear , both Democratic candidates have been saying things they should n't ; Hillary Clinton should n't have endorsed the bad idea of a gas tax holiday
But I think Mr. Obama is doing much more harm to the Democratic cause by echoing Republican attack lines on such issues as insurance mandates and Social Security
And now he 's demonstrating his post-partisanship by giving Republicans credit for good ideas they never had
What 's the greatest threat to our still-fragile economic recovery
Dangers abound , of course
But what I currently find most ominous is the spread of a destructive idea : the view that now , less than a year into a weak recovery from the worst slump since World War II , is the time for policy makers to stop helping the jobless and start inflicting pain
When the financial crisis first struck , most of the world 's policy makers responded appropriately , cutting interest rates and allowing deficits to rise
And by doing the right thing , by applying the lessons learned from the 1930s , they managed to limit the damage : It was terrible , but it was n't a second Great Depression
Now , however , demands that governments switch from supporting their economies to punishing them have been proliferating in op-eds , speeches and reports from international organizations
Indeed , the idea that what depressed economies really need is even more suffering seems to be the new conventional wisdom , which John Kenneth Galbraith famously defined as `` the ideas which are esteemed at any time for their acceptability .
The extent to which inflicting economic pain has become the accepted thing was driven home to me by the latest report on the economic outlook from the Organization for Economic Cooperation and Development , an influential Paris-based think tank supported by the governments of the world 's advanced economies
The O.E.C.D. is a deeply cautious organization ; what it says at any given time virtually defines that moment 's conventional wisdom
And what the O.E.C.D. is saying right now is that policy makers should stop promoting economic recovery and instead begin raising interest rates and slashing spending
What 's particularly remarkable about this recommendation is that it seems disconnected not only from the real needs of the world economy , but from the organization 's own economic projections
Thus , the O.E.C.D. declares that interest rates in the United States and other nations should rise sharply over the next year and a half , so as to head off inflation
Yet inflation is low and declining , and the O.E.C.D. 's own forecasts show no hint of an inflationary threat
So why raise rates
The answer , as best I can make it out , is that the organization believes that we must worry about the chance that markets might start expecting inflation , even though they should n't and currently do n't : We must guard against `` the possibility that longer-term inflation expectations could become unanchored in the O.E.C.D. economies , contrary to what is assumed in the central projection .
A similar argument is used to justify fiscal austerity
Both textbook economics and experience say that slashing spending when you 're still suffering from high unemployment is a really bad idea - not only does it deepen the slump , but it does little to improve the budget outlook , because much of what governments save by spending less they lose as a weaker economy depresses tax receipts
And the O.E.C.D. predicts that high unemployment will persist for years
Nonetheless , the organization demands both that governments cancel any further plans for economic stimulus and that they begin `` fiscal consolidation '' next year
Why do this
Again , to give markets something they should n't want and currently do n't
Right now , investors do n't seem at all worried about the solvency of the U.S. government ; the interest rates on federal bonds are near historic lows
And even if markets were worried about U.S. fiscal prospects , spending cuts in the face of a depressed economy would do little to improve those prospects
But cut we must , says the O.E.C.D. , because inadequate consolidation efforts `` would risk adverse reactions in financial markets .
The best summary I 've seen of all this comes from Martin Wolf of The Financial Times , who describes the new conventional wisdom as being that `` giving the markets what we think they may want in future - even though they show little sign of insisting on it now - should be the ruling idea in policy .
Put that way , it sounds crazy
And it is
Yet it 's a view that 's spreading
And it 's already having ugly consequences
Last week conservative members of the House , invoking the new deficit fears , scaled back a bill extending aid to the long-term unemployed - and the Senate left town without acting on even the inadequate measures that remained
As a result , many American families are about to lose unemployment benefits , health insurance , or both - and as these families are forced to slash spending , they will endanger the jobs of many more
And that 's just the beginning
More and more , conventional wisdom says that the responsible thing is to make the unemployed suffer
And while the benefits from inflicting pain are an illusion , the pain itself will be all too real
It took futuristic technology to achieve one of the worst ecological disasters on record
Without such technology , after all , BP could n't have drilled the Deepwater Horizon well in the first place
Yet for those who remember their environmental history , the catastrophe in the gulf has a strangely old-fashioned feel , reminiscent of the events that led to the first Earth Day , four decades ago
And maybe , just maybe , the disaster will help reverse environmentalism 's long political slide a slide largely caused by our very success in alleviating highly visible pollution
If so , there may be a small silver lining to a very dark cloud
Environmentalism began as a response to pollution that everyone could see
The spill in the gulf recalls the 1969 blowout that coated the beaches of Santa Barbara in oil
But 1969 was also the year the Cuyahoga River , which flows through Cleveland , caught fire
Meanwhile , Lake Erie was widely declared `` dead , '' its waters contaminated by algal blooms
And major U.S. cities especially , but by no means only , Los Angeles were often cloaked in thick , acrid smog
It was n't that hard , under the circumstances , to mobilize political support for action
The Environmental Protection Agency was founded , the Clean Water Act was enacted , and America began making headway against its most visible environmental problems
Air quality improved : smog alerts in Los Angeles , which used to have more than 100 a year , have become rare
Rivers stopped burning , and some became swimmable again
And Lake Erie has come back to life , in part thanks to a ban on laundry detergents containing phosphates
Yet there was a downside to this success story
For one thing , as visible pollution has diminished , so has public concern over environmental issues
According to a recent Gallup survey , `` Americans are now less worried about a series of environmental problems than at any time in the past 20 years .
This decline in concern would be fine if visible pollution were all that mattered but it is n't , of course
In particular , greenhouse gases pose a greater threat than smog or burning rivers ever did
But it 's hard to get the public focused on a form of pollution that 's invisible , and whose effects unfold over decades rather than days
Nor was a loss of public interest the only negative consequence of the decline in visible pollution
As the photogenic crises of the 1960s and 1970s faded from memory , conservatives began pushing back against environmental regulation
Much of the pushback took the form of demands that environmental restrictions be weakened
But there was also an attempt to construct a narrative in which advocates of strong environmental protection were either extremists `` eco-Nazis , '' according to Rush Limbaugh or effete liberal snobs trying to impose their aesthetic preferences on ordinary Americans
-LRB- I 'm sorry to say that the long effort to block construction of a wind farm off Cape Cod which may finally be over thanks to the Obama administration played right into that caricature .
And let 's admit it : by and large , the anti-environmentalists have been winning the argument , at least as far as public opinion is concerned
Then came the gulf disaster
Suddenly , environmental destruction was photogenic again
For the most part , anti-environmentalists have been silent about the catastrophe
True , Mr. Limbaugh arguably the Republican Party 's de facto leader promptly suggested that environmentalists might have blown up the rig to head off further offshore drilling
But that remark probably reflected desperation : Mr. Limbaugh knows that his narrative has just taken a big hit
For the gulf blowout is a pointed reminder that the environment wo n't take care of itself , that unless carefully watched and regulated , modern technology and industry can all too easily inflict horrific damage on the planet
Will America take heed
It depends a lot on leadership
In particular , President Obama needs to seize the moment ; he needs to take on the `` Drill , baby , drill '' crowd , telling America that courting irreversible environmental disaster for the sake of a few barrels of oil , an amount that will hardly affect our dependence on imports , is a terrible bargain
It 's true that Mr. Obama is n't as well positioned to make this a teachable moment as he should be : just a month ago he announced a plan to open much of the Atlantic coast to oil exploration , a move that shocked many of his supporters and makes it hard for him to claim the moral high ground now
But he needs to get beyond that
The catastrophe in the gulf offers an opportunity , a chance to recapture some of the spirit of the original Earth Day
And if that happens , some good may yet come of this ecological nightmare
Some of the wage cuts , like the givebacks by Chrysler workers , are the price of federal aid
Others , like the tentative agreement on a salary cut here at The Times , are the result of discussions between employers and their union employees
Still others reflect the brute fact of a weak labor market : workers do n't dare protest when their wages are cut , because they do n't think they can find other jobs
Whatever the specifics , however , falling wages are a symptom of a sick economy
And they 're a symptom that can make the economy even sicker
First things first : anecdotes about falling wages are proliferating , but how broad is the phenomenon
The answer is , very
It 's true that many workers are still getting pay increases
But there are enough pay cuts out there that , according to the Bureau of Labor Statistics , the average cost of employing workers in the private sector rose only two-tenths of a percent in the first quarter of this year the lowest increase on record
Since the job market is still getting worse , it would n't be at all surprising if overall wages started falling later this year
But why is that a bad thing
After all , many workers are accepting pay cuts in order to save jobs
What 's wrong with that
The answer lies in one of those paradoxes that plague our economy right now
We 're suffering from the paradox of thrift : saving is a virtue , but when everyone tries to sharply increase saving at the same time , the effect is a depressed economy
We 're suffering from the paradox of deleveraging : reducing debt and cleaning up balance sheets is good , but when everyone tries to sell off assets and pay down debt at the same time , the result is a financial crisis
And soon we may be facing the paradox of wages : workers at any one company can help save their jobs by accepting lower wages , but when employers across the economy cut wages at the same time , the result is higher unemployment
Here 's how the paradox works
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 do n'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
Things get even worse if businesses and consumers expect wages to fall further in the future
John Maynard Keynes put it clearly , more than 70 years ago : `` The effect of an expectation that wages are going to sag by , say , 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period .
And a rise in the effective interest rate is the last thing this economy needs
Concern about falling wages is n't just theory
Japan where private-sector wages fell an average of more than 1 percent a year from 1997 to 2003 is an object lesson in how wage deflation can contribute to economic stagnation
So what should we conclude from the growing evidence of sagging wages in America
Mainly that stabilizing the economy is n't enough : we need a real recovery
There has been a lot of talk lately about green shoots and all that , and there are indeed indications that the economic plunge that began last fall may be leveling off
The National Bureau of Economic Research might even declare the recession over later this year
But the unemployment rate is almost certainly still rising
And all signs point to a terrible job market for many months if not years to come which is a recipe for continuing wage cuts , which will in turn keep the economy weak
To break that vicious circle , we basically need more : more stimulus , more decisive action on the banks , more job creation
Credit where credit is due : President Obama and his economic advisers seem to have steered the economy away from the abyss
But the risk that America will turn into Japan that we 'll face years of deflation and stagnation seems , if anything , to be rising
Cross your fingers , knock on wood : it 's possible , though by no means certain , that the worst of the financial crisis is over
That 's the good news
The bad news is that as markets stabilize , chances for fundamental financial reform may be slipping away
As a result , the next crisis will probably be worse than this one
Let 's look at the story so far
After the financial crisis that ushered in the Great Depression , New Deal reformers regulated the banking system , with the goal of protecting the economy from future crises
The new system worked well for half a century
Eventually , however , Wall Street did an end run around regulation , using complex financial arrangements to put most of the business of banking outside the regulators ' reach
Washington could have revised the rules to cover this new `` shadow banking system '' but that would have run counter to the market-worshiping ideology of the times
Instead , key officials , from Alan Greenspan on down , sang the praises of financial innovation and pooh-poohed warnings about the growing risks
And then the crisis came
Last August , as investors began to realize the scope of the mortgage mess , confidence in the financial system collapsed
I believe we 've been lucky to have Ben Bernanke as Federal Reserve chairman during these trying times
He may lack Mr. Greenspan 's talent for impersonating the Wizard of Oz , but he 's an economist who has thought long and hard about both the Great Depression and Japan 's lost decade in the 1990s , and he understands what 's at stake
Mr. Bernanke recognized , more quickly than others might have , that we were in a situation bearing a family resemblance to the great banking crisis of 1930-31
His first priority , overriding every other concern , had to be preventing a cascade of financial failures that would cripple the economy
The Fed 's efforts these past nine months remind me of the old TV series `` MacGyver , '' whose ingenious hero would always get out of difficult situations by assembling clever devices out of household objects and duct tape
Because the institutions in trouble were n't called banks , the Fed 's usual tools for dealing with financial trouble , designed for a system centered on traditional banks , were largely useless
So the Fed has cobbled together makeshift arrangements to save the day
There was the TAF and the TSLF -LRB- do n't ask -RRB- , there were credit lines to investment banks , and the whole thing culminated in March 's unprecedented , barely legal Bear Stearns rescue a rescue not of Bear itself , but of its `` counterparties , '' those who were on the other side of its financial bets
It 's still far from certain whether all this improvisation has resolved the crisis
But it was the right thing to do , and for the moment things seem to be calming down
So two cheers for Mr. Bernanke
Unfortunately , his very success if he has succeeded poses another problem : it gives the financial industry a chance to block reform
We now know that things that are n't called banks can nonetheless generate banking crises , and that the Fed needs to carry out bank-type rescues on their behalf
It follows that hedge funds , special investment vehicles and so on need bank-type regulation
In particular , they need to be required to have adequate capital
But while our out-of-control financial system has been bad for the country , it has been very good for wheeler-dealers , who collect huge fees when things seem to be going well , then get to walk away unscathed indeed , often with large severance packages when things go wrong
They do n't want regulations that would stabilize the economy but cramp their style
And now that the financial clouds have lifted a bit , the pushback against sensible regulation is in full swing
Even the Fed 's very modest proposal to curb abusive mortgage lending with new standards is under fire , and there are worrying signs that the Fed may back down
Maybe a Democratic sweep in November can revive the cause of financial reform , but right now it looks as if we 'll soon return to business as usual
The parallel that worries me is what happened a decade ago , after the hedge fund Long-Term Capital Management failed , temporarily causing the whole financial system to freeze up
Through luck and skill , that crisis was contained but rather than serving as a warning , the episode nurtured the false belief that the Fed had all the tools it needed to deal with financial shocks
So nothing was done to remedy the vulnerabilities the L.T.C.M. crisis revealed the same vulnerabilities that are at the heart of today 's much bigger crisis
And if we do n't fix the system now , there 's every reason to believe that the next crisis will be bigger still and that the Fed wo n't have enough duct tape to hold things together
So , is Greece the next Lehman
It is n't either big enough or interconnected enough to cause global financial markets to freeze up the way they did in 2008
Whatever caused that brief 1,000-point swoon in the Dow , it was n't justified by actual events in Europe
Nor should you take seriously analysts claiming that we 're seeing the start of a run on all government debt
U.S. borrowing costs actually plunged on Thursday to their lowest level in months
And while worriers warned that Britain could be the next Greece , British rates also fell slightly
That 's the good news
The bad news is that Greece 's problems are deeper than Europe 's leaders are willing to acknowledge , even now and they 're shared , to a lesser degree , by other European countries
Many observers now expect the Greek tragedy to end in default ; I 'm increasingly convinced that they 're too optimistic , that default will be accompanied or followed by departure from the euro
In some ways , this is a chronicle of a crisis foretold
I remember quipping , back when the Maastricht Treaty setting Europe on the path to the euro was signed , that they chose the wrong Dutch city for the ceremony
It should have taken place in Arnhem , the site of World War II 's infamous `` bridge too far , '' where an overly ambitious Allied battle plan ended in disaster
The problem , as obvious in prospect as it is now , is that Europe lacks some of the key attributes of a successful currency area
Above all , it lacks a central government
Consider the often-made comparison between Greece and the state of California
Both are in deep fiscal trouble , both have a history of fiscal irresponsibility
And the political deadlock in California is , if anything , worse after all , despite the demonstrations , Greece 's Parliament has , in fact , approved harsh austerity measures
But California 's fiscal woes just do n't matter as much , even to its own residents , as those of Greece
Because much of the money spent in California comes from Washington , not Sacramento
State funding may be slashed , but Medicare reimbursements , Social Security checks , and payments to defense contractors will keep on coming
What this means , among other things , is that California 's budget woes wo n't keep the state from sharing in a broader U.S. economic recovery
Greece 's budget cuts , on the other hand , will have a strong depressing effect on an already depressed economy
So is a debt restructuring a polite term for partial default the answer
It would n't help nearly as much as many people imagine , because interest payments only account for part of Greece 's budget deficit
Even if it completely stopped servicing its debt , the Greek government would n't free up enough money to avoid savage budget cuts
The only thing that could seriously reduce Greek pain would be an economic recovery , which would both generate higher revenues , reducing the need for spending cuts , and create jobs
If Greece had its own currency , it could try to engineer such a recovery by devaluing that currency , increasing its export competitiveness
But Greece is on the euro
So how does this end
Logically , I see three ways Greece could stay on the euro
First , Greek workers could redeem themselves through suffering , accepting large wage cuts that make Greece competitive enough to add jobs again
Second , the European Central Bank could engage in much more expansionary policy , among other things buying lots of government debt , and accepting indeed welcoming the resulting inflation ; this would make adjustment in Greece and other troubled euro-zone nations much easier
Or third , Berlin could become to Athens what Washington is to Sacramento that is , fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable
The trouble , of course , is that none of these alternatives seem politically plausible
What remains seems unthinkable : Greece leaving the euro
But when you 've ruled out everything else , that 's what 's left
If it happens , it will play something like Argentina in 2001 , which had a supposedly permanent , unbreakable peg to the dollar
Ending that peg was considered unthinkable for the same reasons leaving the euro seems impossible : even suggesting the possibility would risk crippling bank runs
But the bank runs happened anyway , and the Argentine government imposed emergency restrictions on withdrawals
This left the door open for devaluation , and Argentina eventually walked through that door
If something like that happens in Greece , it will send shock waves through Europe , possibly triggering crises in other countries
But unless European leaders are able and willing to act far more boldly than anything we 've seen so far , that 's where this is heading
In the end , the actual release of the much-hyped bank stress tests on Thursday came as an anticlimax
Everyone knew more or less what the results would say : some big players need to raise more capital , but over all , the kids , I mean the banks , are all right
Even before the results were announced , Tim Geithner , the Treasury secretary , told us they would be `` reassuring .
But whether you actually should feel reassured depends on who you are : a banker , or someone trying to make a living in another profession
I wo n't weigh in on the debate over the quality of the stress tests themselves , except to repeat what many observers have noted : the regulators did n't have the resources to make a really careful assessment of the banks ' assets , and in any case they allowed the banks to bargain over what the results would say
A rigorous audit it was n't
But focusing on the process can distract from the larger picture
What we 're really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis , hoping that the banks can earn their way back to health
It 's a strategy that might work
After all , right now the banks are lending at high interest rates , while paying virtually no interest on their -LRB- government-insured -RRB- deposits
Given enough time , the banks could be flush again
But it 's important to see the strategy for what it is and to understand the risks
Remember , it was the markets , not the government , that in effect declared the banks undercapitalized
And while market indicators of distrust in banks , like the interest rates on bank bonds and the prices of bank credit-default swaps , have fallen somewhat in recent weeks , they 're still at levels that would have been considered inconceivable before the crisis
As a result , the odds are that the financial system wo n't function normally until the crucial players get much stronger financially than they are now
Yet the Obama administration has decided not to do anything dramatic to recapitalize the banks
Can the economy recover even with weak banks
Banks wo n't be expanding credit any time soon , but government-backed lenders have stepped in to fill the gap
The Federal Reserve has expanded its credit by $ 1.2 trillion over the past year ; Fannie Mae and Freddie Mac have become the principal sources of mortgage finance
So maybe we can let the economy fix the banks instead of the other way around
But there are many things that 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 ca n'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 is n't any of these things
It 's my sense that the prospects for fundamental financial reform are fading
Does anyone remember the case of H. Rodgin Cohen , a prominent New York lawyer whom The Times has described as a `` Wall Street minence grise ''
He briefly made the news in March when he reportedly withdrew his name after being considered a top pick for deputy Treasury secretary
Well , earlier this week , Mr. Cohen told an audience that the future of Wall Street wo n't be very different from its recent past , declaring , `` I am far from convinced there was something inherently wrong with the system .
Hey , that little thing about causing the worst global slump since the Great Depression
Never mind
Those are frightening words
They suggest that while the Federal Reserve and the Obama administration continue to insist that they 're committed to tighter financial regulation and greater oversight , Wall Street insiders are taking the mildness of bank policy so far as a sign that they 'll soon be able to go back to playing the same games as before
So as I said , while bankers may find the results of the stress tests `` reassuring , '' the rest of us should be very , very afraid
The fight for the Democratic nomination seems to be winding down
It 's not completely over , but the odds now overwhelmingly favor Barack Obama
Assuming that Mr. Obama is the nominee , he 'll lead a party that , judging by the usual indicators , should be poised for an easy victory perhaps even a landslide
Yet Democrats are worried
Are those worries justified
Before I try to answer that question , let 's talk about those indicators
Political scientists , by and large , believe that what happens on the campaign trail , while it gives talking heads something to talk about , is more or less irrelevant to what happens on Election Day
Instead , they place their faith in statistical analyses that identify three main determinants of presidential voting
First , votes are affected by the state of the economy mainly economic performance in the year or so preceding the election
Second , the approval rating of the current president strongly affects his party 's ability to hold power
Third , the electorate seems to suffer from an eight-year itch : parties rarely manage to hold the White House for more than two terms in a row
This year , all of these factors strongly favor the Democrats
Indeed , the Democratic Party has n't enjoyed this favorable a political environment since 1964
Robert Erikson , a political scientist at Columbia , tells me : `` It would be difficult to find any serious indicator that does not point to a Democratic victory in 2008 .
What about polls that still seem to give John McCain a good chance of winning
Pay no attention , say the experts : general election polls this early tell you almost nothing about what will happen in November
Remember 1992 : as late as June , Gallup put Ross Perot in first place , Bill Clinton in third
There 's just one thing that should give Democrats pause but it 's a big one : the fight for the nomination has divided the party along class and race lines in a way that I believe is unprecedented , at least in modern times
Ironically , much of Mr. Obama 's initial appeal was the hope that he could transcend these divisions
At first , voting patterns seemed consistent with this hope
In February , for example , he received the support of half of Virginia 's white voters as well as that of a huge majority of African-Americans
But this week , Mr. Obama , while continuing to win huge African-American majorities , lost North Carolina whites by 23 points , Indiana whites by 22 points
Mr. Obama 's white support continues to be concentrated among the highly educated ; there was little in Tuesday 's results to suggest that his problems with working-class whites have significantly diminished
Discussions of how and why Mr. Obama 's support narrowed over time have a Rashomon-like quality : different observers see very different truths
But at this point it does n't matter whose fault it was
What does matter is that Mr. Obama appears to have won the nomination with a deep but narrow base consisting of African-Americans and highly educated whites
And now he needs to bring Democrats who opposed him back into the fold
It 's possible that this will happen automatically that bad feelings from the nomination fight will fade away of their own accord
In recent decades , Democrats have had little trouble unifying after hard-fought primary campaigns
But this time the division seems to go deeper than ordinary political rivalry
The closest parallel I can think of is the bitter intraparty struggles of the 1920s , which pitted urban , often Catholic Democrats against Protestant farmers
So what can be done to heal the party 's current divisions
More tirades from Obama supporters against Mrs. Clinton are not the answer they will only further alienate her grass-roots supporters , many of whom feel that she received a raw deal
Nor is it helpful to insult the groups that supported Mrs. Clinton , either by suggesting that racism was their only motivation or by minimizing their importance
After the Pennsylvania primary , David Axelrod , Mr. Obama 's campaign manager , airily dismissed concerns about working-class whites , saying that they have `` gone to the Republican nominee for many elections .
On Tuesday night , Donna Brazile , the Democratic strategist , declared that `` we do n't have to just rely on white blue-collar voters and Hispanics .
That sort of thing has to stop
One thing the Democrats definitely need to do is give delegates from Florida and Michigan representatives of citizens who voted in good faith , and whose support the party may well need this November seats at the convention
And to the extent that campaigning matters , Mr. Obama should center his campaign on economic issues that matter to working-class families , whatever their race
The point is that Mr. Obama has an extraordinary opportunity in this year 's election
He should do everything possible to avoid squandering it
Suddenly , everything old is New Deal again
Reagan is out ; F.D.R. is in
Still , how much guidance does the Roosevelt era really offer for today 's world
The answer is , a lot
But Barack Obama should learn from F.D.R. 's failures as well as from his achievements : the truth is that the New Deal was n't as successful in the short run as it was in the long run
And the reason for F.D.R. 's limited short-run success , which almost undid his whole program , was the fact that his economic policies were too cautious
About the New Deal 's long-run achievements : the institutions F.D.R. built have proved both durable and essential
Indeed , those institutions remain the bedrock of our nation 's economic stability
Imagine how much worse the financial crisis would be if the New Deal had n't insured most bank deposits
Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security
Can Mr. Obama achieve something comparable
Rahm Emanuel , Mr. Obama 's new chief of staff , has declared that `` you do n't ever want a crisis to go to waste .
Progressives hope that the Obama administration , like the New Deal , will respond to the current economic and financial crisis by creating institutions , especially a universal health care system , that will change the shape of American society for generations to come
But the new administration should try not to emulate a less successful aspect of the New Deal : its inadequate response to the Great Depression itself
Now , there 's a whole intellectual industry , mainly operating out of right-wing think tanks , devoted to propagating the idea that F.D.R. actually made the Depression worse
So it 's important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts
The New Deal brought real relief to most Americans
That said , F.D.R. did not , in fact , manage to engineer a full economic recovery during his first two terms
This failure is often cited as evidence against Keynesian economics , which says that increased public spending can get a stalled economy moving
But the definitive study of fiscal policy in the '30s , by the M.I.T. economist E. Cary Brown , reached a very different conclusion : fiscal stimulus was unsuccessful `` not because it does not work , but because it was not tried .
This may seem hard to believe
The New Deal famously placed millions of Americans on the public payroll via the Works Progress Administration and the Civilian Conservation Corps
To this day we drive on W.P.A.-built roads and send our children to W.P.A.-built schools
Did n't all these public works amount to a major fiscal stimulus
Well , it was n't as major as you might think
The effects of federal public works spending were largely offset by other factors , notably a large tax increase , enacted by Herbert Hoover , whose full effects were n't felt until his successor took office
Also , expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level
And F.D.R. was n't just reluctant to pursue an all-out fiscal expansion he was eager to return to conservative budget principles
That eagerness almost destroyed his legacy
After winning a smashing election victory in 1936 , the Roosevelt administration cut spending and raised taxes , precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections
What saved the economy , and the New Deal , was the enormous public works project known as World War II , which finally provided a fiscal stimulus adequate to the economy 's needs
This history offers important lessons for the incoming administration
The political lesson is that economic missteps can quickly undermine an electoral mandate
Democrats won big last week but they won even bigger in 1936 , only to see their gains evaporate after the recession of 1937-38
Americans do n't expect instant economic results from the incoming administration , but they do expect results , and Democrats ' euphoria will be short-lived if they do n't deliver an economic recovery
The economic lesson is the importance of doing enough
F.D.R. thought he was being prudent by reining in his spending plans ; in reality , he was taking big risks with the economy and with his legacy
My advice to the Obama people is to figure out how much help they think the economy needs , then add 50 percent
It 's much better , in a depressed economy , to err on the side of too much stimulus than on the side of too little
In short , Mr. Obama 's chances of leading a new New Deal depend largely on whether his short-run economic plans are sufficiently bold
Progressives can only hope that he has the necessary audacity
The Hijacked Commission Count me among those who always believed that President Obama made a big mistake when he created the National Commission on Fiscal Responsibility and Reform - a supposedly bipartisan panel charged with coming up with solutions to the nation 's long-run fiscal problems
It seemed obvious , as soon as the commission 's membership was announced , that `` bipartisanship '' would mean what it so often does in Washington : a compromise between the center-right and the hard-right
My misgivings increased as we got a better feel for the views of the commission 's co-chairmen
It soon became clear that Erskine Bowles , the Democratic co-chairman , had a very Republican-sounding small-government agenda
Meanwhile , Alan Simpson , the Republican co-chairman , revealed the kind of honest broker he is by sending an abusive e-mail to the executive director of the National Older Women 's League in which he described Social Security as being `` like a milk cow with 310 million tits .
We 've known for a long time , then , that nothing good would come from the commission
But on Wednesday , when the co-chairmen released a PowerPoint outlining their proposal , it was even worse than the cynics expected
Start with the declaration of `` Our Guiding Principles and Values .
Among them is , `` Cap revenue at or below 21 % of G.D.P. '' This is a guiding principle
And why is a commission charged with finding every possible route to a balanced budget setting an upper -LRB- but not lower -RRB- limit on revenue
Matters become clearer once you reach the section on tax reform
The goals of reform , as Mr. Bowles and Mr. Simpson see them , are presented in the form of seven bullet points
`` Lower Rates '' is the first point ; `` Reduce the Deficit '' is the seventh
So how , exactly , did a deficit-cutting commission become a commission whose first priority is cutting tax rates , with deficit reduction literally at the bottom of the list
Actually , though , what the co-chairmen are proposing is a mixture of tax cuts and tax increases - tax cuts for the wealthy , tax increases for the middle class
They suggest eliminating tax breaks that , whatever you think of them , matter a lot to middle-class Americans - the deductibility of health benefits and mortgage interest - and using much of the revenue gained thereby , not to reduce the deficit , but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate
It will take time to crunch the numbers here , but this proposal clearly represents a major transfer of income upward , from the middle class to a small minority of wealthy Americans
And what does any of this have to do with deficit reduction
Let 's turn next to Social Security
There were rumors beforehand that the commission would recommend a rise in the retirement age , and sure enough , that 's what Mr. Bowles and Mr. Simpson do
They want the age at which Social Security becomes available to rise along with average life expectancy
Is that reasonable
The answer is no , for a number of reasons - including the point that working until you 're 69 , which may sound doable for people with desk jobs , is a lot harder for the many Americans who still do physical labor
But beyond that , the proposal seemingly ignores a crucial point : while average life expectancy is indeed rising , it 's doing so mainly for high earners , precisely the people who need Social Security least
Life expectancy in the bottom half of the income distribution has barely inched up over the past three decades
So the Bowles-Simpson proposal is basically saying that janitors should be forced to work longer because these days corporate lawyers live to a ripe old age
Still , ca n't we say that for all its flaws , the Bowles-Simpson proposal is a serious effort to tackle the nation 's long-run fiscal problem
No , we ca n't
It 's true that the PowerPoint contains nice-looking charts showing deficits falling and debt levels stabilizing
But it becomes clear , once you spend a little time trying to figure out what 's going on , that the main driver of those pretty charts is the assumption that the rate of growth in health-care costs will slow dramatically
And how is this to be achieved
By `` establishing a process to regularly evaluate cost growth '' and taking `` additional steps as needed .
What does that mean
I have no idea
It 's no mystery what has happened on the deficit commission : as so often happens in modern Washington , a process meant to deal with real problems has been hijacked on behalf of an ideological agenda
Under the guise of facing our fiscal problems , Mr. Bowles and Mr. Simpson are trying to smuggle in the same old , same old - tax cuts for the rich and erosion of the social safety net
Can anything be salvaged from this wreck
I doubt it
The deficit commission should be told to fold its tents and go away
Consider , for a moment , a tale of two countries
Both have suffered a severe recession and lost jobs as a result but not on the same scale
In Country A , employment has fallen more than 5 percent , and the unemployment rate has more than doubled
In Country B , employment has fallen only half a percent , and unemployment is only slightly higher than it was before the crisis
Do n't you think Country A might have something to learn from Country B
This story is n't hypothetical
Country A is the United States , where stocks are up , G.D.P. is rising , but the terrible employment situation just keeps getting worse
Country B is Germany , which took a hit to its G.D.P. when world trade collapsed , but has been remarkably successful at avoiding mass job losses
Germany 's jobs miracle has n't received much attention in this country but it 's real , it 's striking , and it raises serious questions about whether the U.S. government is doing the right things to fight unemployment
Here in America , the philosophy behind jobs policy can be summarized as `` if you grow it , they will come .
That is , we do n't really have a jobs policy : we have a G.D.P. policy
The theory is that by stimulating overall spending we can make G.D.P. grow faster , and this will induce companies to stop firing and resume hiring
The alternative would be policies that address the job issue more directly
We could , for example , have New-Deal-style employment programs
Perhaps such a thing is politically impossible now Glenn Beck would describe anything like the Works Progress Administration as a plan to recruit pro-Obama brownshirts but we should note , for the record , that at their peak , the W.P.A. and the Civilian Conservation Corps employed millions of Americans , at relatively low cost to the budget
Alternatively , or in addition , we could have policies that support private-sector employment
Such policies could range from labor rules that discourage firing to financial incentives for companies that either add workers or reduce hours to avoid layoffs
And that 's what the Germans have done
Germany came into the Great Recession with strong employment protection legislation
This has been supplemented with a `` short-time work scheme , '' which provides subsidies to employers who reduce workers ' hours rather than laying them off
These measures did n't prevent a nasty recession , but Germany got through the recession with remarkably few job losses
Should America be trying anything along these lines
In a recent interview in The Washington Post , Lawrence Summers , the Obama administration 's highest-ranking economist , was dismissive : `` It may be desirable to have a given amount of work shared among more people
But that 's not as desirable as expanding the total amount of work .
But we are not , in fact , expanding the total amount of work and Congress does n't seem willing to spend enough on stimulus to change that unfortunate fact
So should n't we be considering other measures , if only as a stopgap
Now , the usual objection to European-style employment policies is that they 're bad for long-run growth that protecting jobs and encouraging work-sharing makes companies in expanding sectors less likely to hire and reduces the incentives for workers to move to more productive occupations
And in normal times there 's something to be said for American-style `` free to lose '' labor markets , in which employers can fire workers at will but also face few barriers to new hiring
But these are n't normal times
Right now , workers who lose their jobs are n't moving to the jobs of the future ; they 're entering the ranks of the unemployed and staying there
Long-term unemployment is already at its highest levels since the 1930s , and it 's still on the rise
And long-term unemployment inflicts long-term damage
Workers who have been out of a job for too long often find it hard to get back into the labor market even when conditions improve
And there are hidden costs , too not least for children , who suffer physically and emotionally when their parents spend months or years unemployed
So it 's time to try something different
Just to be clear , I believe that a large enough conventional stimulus would do the trick
But since that does n't seem to be in the cards , we need to talk about cheaper alternatives that address the job problem directly
Should we introduce an employment tax credit , like the one proposed by the Economic Policy Institute
Should we introduce the German-style job-sharing subsidy proposed by the Center for Economic Policy Research
Both are worthy of consideration
The point is that we need to start doing something more than , and different from , what we 're already doing
And the experience of other countries suggests that it 's time for a policy that explicitly and directly targets job creation
The economic news , in case you have n't noticed , keeps getting worse
Bad as it is , however , I do n't expect another Great Depression
In fact , we probably wo n't see the unemployment rate match its post-Depression peak of 10.7 percent , reached in 1982 -LRB- although I wish I was sure about that -RRB-
We are already , however , well into the realm of what I call depression economics
By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy above all , the Federal Reserve 's ability to pump up the economy by cutting interest rates have lost all traction
When depression economics prevails , the usual rules of economic policy no longer apply : virtue becomes vice , caution is risky and prudence is folly
To see what I 'm talking about , consider the implications of the latest piece of terrible economic news : Thursday 's report on new claims for unemployment insurance , which have now passed the half-million mark
Bad as this report was , viewed in isolation it might not seem catastrophic
After all , it was in the same ballpark as numbers reached during the 2001 recession and the 1990-1991 recession , both of which ended up being relatively mild by historical standards -LRB- although in each case it took a long time before the job market recovered -RRB-
But on both of these earlier occasions the standard policy response to a weak economy a cut in the federal funds rate , the interest rate most directly affected by Fed policy was still available
Today , it is n't : the effective federal funds rate -LRB- as opposed to the official target , which for technical reasons has become meaningless -RRB- has averaged less than 0.3 percent in recent days
Basically , there 's nothing left to cut
And with no possibility of further interest rate cuts , there 's nothing to stop the economy 's downward momentum
Rising unemployment will lead to further cuts in consumer spending , which Best Buy warned this week has already suffered a `` seismic '' decline
Weak consumer spending will lead to cutbacks in business investment plans
And the weakening economy will lead to more job cuts , provoking a further cycle of contraction
To pull us out of this downward spiral , the federal government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress and the stimulus plan wo n't come soon enough or be strong enough unless politicians and economic officials are able to transcend several conventional prejudices
One of these prejudices is the fear of red ink
In normal times , it 's good to worry about the budget deficit and fiscal responsibility is a virtue we 'll need to relearn as soon as this crisis is past
When depression economics prevails , however , this virtue becomes a vice
F.D.R. 's premature attempt to balance the budget in 1937 almost destroyed the New Deal
Another prejudice is the belief that policy should move cautiously
In normal times , this makes sense : you should n't make big changes in policy until it 's clear they 're needed
Under current conditions , however , caution is risky , because big changes for the worse are already happening , and any delay in acting raises the chance of a deeper economic disaster
The policy response should be as well-crafted as possible , but time is of the essence
Finally , in normal times modesty and prudence in policy goals are good things
Under current conditions , however , it 's much better to err on the side of doing too much than on the side of doing too little
The risk , if the stimulus plan turns out to be more than needed , is that the economy might overheat , leading to inflation but the Federal Reserve can always head off that threat by raising interest rates
On the other hand , if the stimulus plan is too small there 's nothing the Fed can do to make up for the shortfall
So when depression economics prevails , prudence is folly
What does all this say about economic policy in the near future
The Obama administration will almost certainly take office in the face of an economy looking even worse than it does now
Indeed , Goldman Sachs predicts that the unemployment rate , currently at 6.5 percent , will reach 8.5 percent by the end of next year
All indications are that the new administration will offer a major stimulus package
My own back-of-the-envelope calculations say that the package should be huge , on the order of $ 600 billion
So the question becomes , will the Obama people dare to propose something on that scale
Let 's hope that the answer to that question is yes , that the new administration will indeed be that daring
For we 're now in a situation where it would be very dangerous to give in to conventional notions of prudence
The World as Obama Finds It On Wednesday David Axelrod , President Obama 's top political adviser , appeared to signal that the White House was ready to cave on tax cuts - to give in to Republican demands that tax cuts be extended for the wealthy as well as the middle class
`` We have to deal with the world as we find it , '' he declared
The White House then tried to walk back what Mr. Axelrod had said
But it was a telling remark , in more ways than one
The obvious point is the contrast between the administration 's current whipped-dog demeanor and Mr. Obama 's soaring rhetoric as a candidate
How did we get from `` We are the ones we 've been waiting for '' to here
But the bitter irony goes deeper than that : the main reason Mr. Obama finds himself in this situation is that two years ago he was not , in fact , prepared to deal with the world as he was going to find it
And it seems as if he still is n't
In retrospect , the roots of current Democratic despond go all the way back to the way Mr. Obama ran for president
Again and again , he defined America 's problem as one of process , not substance - we were in trouble not because we had been governed by people with the wrong ideas , but because partisan divisions and politics as usual had prevented men and women of good will from coming together to solve our problems
And he promised to transcend those partisan divisions
This promise of transcendence may have been good general election politics , although even that is questionable : people forget how close the presidential race was at the beginning of September 2008 , how worried Democrats were until Sarah Palin and Lehman Brothers pushed them over the hump
But the real question was whether Mr. Obama could change his tune when he ran into the partisan firestorm everyone who remembered the 1990s knew was coming
He could do uplift - but could he fight
So far the answer has been no.
Right at the beginning of his administration , what Mr. Obama needed to do , above all , was fight for an economic plan commensurate with the scale of the crisis
Instead , he negotiated with himself before he ever got around to negotiating with Congress , proposing a plan that was clearly , grossly inadequate - then allowed that plan to be scaled back even further without protest
And the failure to act forcefully on the economy , more than anything else , accounts for the midterm `` shellacking .
Even given the economy 's troubles , however , the administration 's efforts to limit the political damage were amazingly weak
There were no catchy slogans , no clear statements of principle ; the administration 's political messaging was not so much ineffective as invisible
How many voters even noticed the ever-changing campaign themes - does anyone remember the `` Summer of Recovery '' - that were rolled out as catastrophe loomed
And things have n't improved since the election
Consider Mr. Obama 's recent remarks on two fronts
At the predictably unproductive G-20 summit meeting in South Korea , the president faced demands from China and Germany that the Federal Reserve stop its policy of `` quantitative easing '' - which is , given Republican obstructionism , one of the few tools available to promote U.S. economic recovery
What Mr. Obama should have said is that nations ' running huge trade surpluses - and in China 's case , doing so thanks to currency manipulation on a scale unprecedented in world history - have no business telling the United States that it ca n't act to help its own economy
But what he actually said was `` From everything I can see , this decision was not one designed to have an impact on the currency , on the dollar .
Fighting words
And then there 's the tax-cut issue
Mr. Obama could and should be hammering Republicans for trying to hold the middle class hostage to secure tax cuts for the wealthy
He could be pointing out that making the Bush tax cuts for the wealthy permanent is a huge budget issue - over the next 75 years it would cost as much as the entire Social Security shortfall
Instead , however , he is once again negotiating with himself , long before he actually gets to the table with the G.O.P. Here 's the thing : Mr. Obama still has immense power , if he chooses to use it
At home , he has the veto pen , control of the Senate and the bully pulpit
He still has substantial executive authority to act on things like mortgage relief - there are billions of dollars not yet spent , not to mention the enormous leverage the government has via its ownership of Fannie and Freddie
Abroad , he still leads the world 's greatest economic power - and one area where he surely would get bipartisan support would be taking a tougher stand on China and other international bad actors
But none of this will matter unless the president can find it within himself to use his power , to actually take a stand
And the signs are n't good
Lately , Barack Obama has been saying that major action is needed to avert what he keeps calling a crisis in Social Security most recently in an interview with The National Journal
Progressives who fought hard and successfully against the Bush administration s attempt to panic America into privatizing the New Deal s crown jewel are outraged , and rightly so
But Mr. Obama s Social Security mistake was , in fact , exactly what you d expect from a candidate who promises to transcend partisanship in an age when that s neither possible nor desirable
To understand the nature of Mr. Obama s mistake , you need to know something about the special role of Social Security in American political discourse
Inside the Beltway , doomsaying about Social Security declaring that the program as we know it can t survive the onslaught of retiring baby boomers is regarded as a sort of badge of seriousness , a way of showing how statesmanlike and tough-minded you are
Consider , for example , this exchange about Social Security between Chris Matthews of MSNBC and Tim Russert of NBC , on a recent edition of Mr. Matthews s program Hardball
Mr. Russert : Everyone knows Social Security , as it s constructed , is not going to be in the same place it s going to be for the next generation , Democrats , Republicans , liberals , conservatives
Mr. Matthews : It s a bad Ponzi scheme , at this point
Mr. Russert : Yes
But the everyone who knows that Social Security is doomed doesn t include anyone who actually understands the numbers
In fact , the whole Beltway obsession with the fiscal burden of an aging population is misguided
As Peter Orszag , the director of the Congressional Budget Office , put it in a recent article co-authored with senior analyst Philip Ellis : The long-term fiscal condition of the United States has been largely misdiagnosed
Despite all the attention paid to demographic challenges , such as the coming retirement of the baby-boom generation , our country s financial health will in fact be determined primarily by the growth rate of per capita health care costs
How has conventional wisdom gotten this so wrong
Well , in large part it s the result of decades of scare-mongering about Social Security s future from conservative ideologues , whose ultimate goal is to undermine the program
Thus , in 2005 , the Bush administration tried to push through a combination of privatization and benefit cuts that would , over time , have reduced Social Security to nothing but a giant 401 -LRB- k -RRB-
The administration claimed that this was necessary to save the program , which officials insisted was heading toward an iceberg
But the administration s real motives were , in fact , ideological
The anti-tax activist Stephen Moore gave the game away when he described Social Security as the soft underbelly of the welfare state , and hailed the Bush plan as a way to put a spear through that soft underbelly
Fortunately , the scare tactics failed
Democrats in Congress stood their ground ; progressive analysts debunked , one after another , the phony arguments of the privatizers ; and the public made it clear that it wants to preserve a basic safety net for retired Americans
That should have been that
But what Jonathan Chait of The New Republic calls entitlement hysteria never seems to die
In October , The Washington Post published an editorial castigating Hillary Clinton for , um , not being panicky about Social Security and as we ve seen , nonsense like the claim that Social Security is a Ponzi scheme seems to be back in vogue
Which brings us back to Mr. Obama
Why would he , in effect , play along with this new round of scare-mongering and devalue one of the great progressive victories of the Bush years
I don t believe Mr. Obama is a closet privatizer
He is , however , someone who keeps insisting that he can transcend the partisanship of our times and in this case , that turned him into a sucker
Mr. Obama wanted a way to distinguish himself from Hillary Clinton and for Mr. Obama , who has said that the reason we can t tackle the big problems that demand solutions is that politics has become so bitter and partisan , joining in the attack on Senator Clinton s Social Security position must have seemed like a golden opportunity to sound forceful yet bipartisan
But Social Security isn t a big problem that demands a solution ; it s a small problem , way down the list of major issues facing America , that has nonetheless become an obsession of Beltway insiders
And on Social Security , as on many other issues , what Washington means by bipartisanship is mainly that everyone should come together to give conservatives what they want
We all wish that American politics weren t so bitter and partisan
But if you try to find common ground where none exists which is the case for many issues today you end up being played for a fool
And that s what has just happened to Mr. Obama
International travel by world leaders is mainly about making symbolic gestures
Nobody expects President Obama to come back from China with major new agreements , on economic policy or anything else
But let 's hope that when the cameras are n't rolling Mr. Obama and his hosts engage in some frank talk about currency policy
For the problem of international trade imbalances is about to get substantially worse
And there 's a potentially ugly confrontation looming unless China mends its ways
Some background : Most of the world 's major currencies `` float '' against one another
That is , their relative values move up or down depending on market forces
That does n't necessarily mean that governments pursue pure hands-off policies : countries sometimes limit capital outflows when there 's a run on their currency -LRB- as Iceland did last year -RRB- or take steps to discourage hot-money inflows when they fear that speculators love their economies not wisely but too well -LRB- which is what Brazil is doing right now -RRB-
But these days most nations try to keep the value of their currency in line with long-term economic fundamentals
China is the great exception
Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy forces that should have strengthened the renminbi , China 's currency Chinese authorities have kept that currency persistently weak
They 've done this mainly by trading renminbi for dollars , which they have accumulated in vast quantities
And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation , keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies
This has given Chinese exporters a growing competitive advantage over their rivals , especially producers in other developing countries
What makes China 's currency policy especially problematic is the depressed state of the world economy
Cheap money and fiscal stimulus seem to have averted a second Great Depression
But policy makers have n't been able to generate enough spending , public or private , to make progress against mass unemployment
And China 's weak-currency policy exacerbates the problem , in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters
But why do I say that this problem is about to get much worse
Because for the past year the true scale of the China problem has been masked by temporary factors
Looking forward , we can expect to see both China 's trade surplus and America 's trade deficit surge
That , at any rate , is the argument made in a new paper by Richard Baldwin and Daria Taglioni of the Graduate Institute , Geneva
As they note , trade imbalances , both China 's surplus and America 's deficit , have recently been much smaller than they were a few years ago
But , they argue , `` these global imbalance improvements are mostly illusory the transitory side effect of the greatest trade collapse the world has ever seen .
Indeed , the 2008-9 plunge in world trade was one for the record books
What it mainly reflected was the fact that modern trade is dominated by sales of durable manufactured goods and in the face of severe financial crisis and its attendant uncertainty , both consumers and corporations postponed purchases of anything that was n't needed immediately
How did this reduce the U.S. trade deficit
Imports of goods like automobiles collapsed ; so did some U.S. exports ; but because we came into the crisis importing much more than we exported , the net effect was a smaller trade gap
But with the financial crisis abating , this process is going into reverse
Last week 's U.S. trade report showed a sharp increase in the trade deficit between August and September
And there will be many more reports along those lines
So picture this : month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers
If I were the Chinese government , I 'd be really worried about that prospect
Unfortunately , the Chinese do n't seem to get it : rather than face up to the need to change their currency policy , they 've taken to lecturing the United States , telling us to raise interest rates and curb fiscal deficits that is , to make our unemployment problem even worse
And I 'm not sure the Obama administration gets it , either
The administration 's statements on Chinese currency policy seem pro forma , lacking any sense of urgency
That needs to change
I do n't begrudge Mr. Obama the banquets and the photo ops ; they 're part of his job
But behind the scenes he better be warning the Chinese that they 're playing a dangerous game
Over the past few weeks there have been a number of commentaries about Ronald Reagan s legacy , specifically about whether he exploited the white backlash against the civil rights movement
The controversy unfortunately obscures the larger point , which should be undeniable : the central role of this backlash in the rise of the modern conservative movement
The centrality of race and , in particular , of the switch of Southern whites from overwhelming support of Democrats to overwhelming support of Republicans is obvious from voting data
For example , everyone knows that white men have turned away from the Democrats over God , guns , national security and so on
But what everyone knows isn t true once you exclude the South from the picture
As the political scientist Larry Bartels points out , in the 1952 presidential election 40 percent of non-Southern white men voted Democratic ; in 2004 , that figure was virtually unchanged , at 39 percent
More than 40 years have passed since the Voting Rights Act , which Reagan described in 1980 as humiliating to the South
Yet Southern white voting behavior remains distinctive
Democrats decisively won the popular vote in last year s House elections , but Southern whites voted Republican by almost two to one
The G.O.P. s own leaders admit that the great Southern white shift was the result of a deliberate political strategy
Some Republicans gave up on winning the African-American vote , looking the other way or trying to benefit politically from racial polarization
So declared Ken Mehlman , the former chairman of the Republican National Committee , speaking in 2005
And Ronald Reagan was among the some who tried to benefit from racial polarization
True , he never used explicit racial rhetoric
Neither did Richard Nixon
As Thomas and Mary Edsall put it in their classic 1991 book , Chain Reaction : The impact of race , rights and taxes on American politics , Reagan paralleled Nixon s success in constructing a politics and a strategy of governing that attacked policies targeted toward blacks and other minorities without reference to race a conservative politics that had the effect of polarizing the electorate along racial lines
Thus , Reagan repeatedly told the bogus story of the Cadillac-driving welfare queen a gross exaggeration of a minor case of welfare fraud
He never mentioned the woman s race , but he didn t have to
There are many other examples of Reagan s tacit race-baiting in the historical record
My colleague Bob Herbert described some of these examples in a recent column
Here s one he didn t mention : During the 1976 campaign Reagan often talked about how upset workers must be to see an able-bodied man using food stamps at the grocery store
In the South but not in the North the food-stamp user became a strapping young buck buying T-bone steaks
Now , about the Philadelphia story : in December 1979 the Republican national committeeman from Mississippi wrote a letter urging that the party s nominee speak at the Neshoba Country Fair , just outside the town where three civil rights workers had been murdered in 1964
It would , he wrote , help win over George Wallace inclined voters
Sure enough , Reagan appeared , and declared his support for states rights which everyone took to be a coded declaration of support for segregationist sentiments
Reagan s defenders protest furiously that he wasn t personally bigoted
So what
We re talking about his political strategy
His personal beliefs are irrelevant
Why does this history matter now
Because it tells why the vision of a permanent conservative majority , so widely accepted a few years ago , is wrong
The point is that we have become a more diverse and less racist country over time
The macaca incident , in which Senator George Allen s use of a racial insult led to his election defeat , epitomized the way in which America has changed for the better
And because conservative ascendancy has depended so crucially on the racial backlash a close look at voting data shows that religion and values issues have been far less important I believe that the declining power of that backlash changes everything
Can anti-immigrant rhetoric replace old-fashioned racial politics
No , because it mobilizes the same shrinking pool of whites and alienates the growing number of Latino voters
Now , maybe I m wrong about all of this
But we should be able to discuss the role of race in American politics honestly
We shouldn t avert our gaze because we re unwilling to tarnish Ronald Reagan s image
Axis of Depression What do the government of China , the government of Germany and the Republican Party have in common
They 're all trying to bully the Federal Reserve into calling off its efforts to create jobs
And the motives of all three are highly suspect
It 's not as if the Fed is doing anything radical
It 's true that the Fed normally conducts monetary policy by buying short-term U.S. government debt , whereas now , under the unhelpful name of `` quantitative easing , '' it 's buying longer-term debt
-LRB- Buying more short-term debt is pointless because the interest rate on that debt is near zero .
But Ben Bernanke , the Fed chairman , had it right when he protested that this is `` just monetary policy .
The Fed is trying to reduce interest rates , as it always does when unemployment is high and inflation is low
And inflation is indeed low
Core inflation - a measure that excludes volatile food and energy prices , and is widely considered a better gauge of underlying trends than the headline number - is running at just 0.6 percent , the lowest level ever recorded
Meanwhile , unemployment is almost 10 percent , and long-term unemployment is worse than it has been since the Great Depression
So the case for Fed action is overwhelming
In fact , the main concern reasonable people have about the Fed 's plans - a concern that I share - is that they are likely to prove too weak , too ineffective
But there are reasonable people - and then there 's the China-Germany-G.O.P. axis of depression
It 's no mystery why China and Germany are on the warpath against the Fed
Both nations are accustomed to running huge trade surpluses
But for some countries to run trade surpluses , others must run trade deficits - and , for years , that has meant us
The Fed 's expansionary policies , however , have the side effect of somewhat weakening the dollar , making U.S. goods more competitive , and paving the way for a smaller U.S. deficit
And the Chinese and Germans do n't want to see that happen
For the Chinese government , by the way , attacking the Fed has the additional benefit of shifting attention away from its own currency manipulation , which keeps China 's currency artificially weak - precisely the sin China falsely accuses America of committing
But why are Republicans joining in this attack
Mr. Bernanke and his colleagues seem stunned to find themselves in the cross hairs
They thought they were acting in the spirit of none other than Milton Friedman , who blamed the Fed for not acting more forcefully during the Great Depression - and who , in 1998 , called on the Bank of Japan to `` buy government bonds on the open market , '' exactly what the Fed is now doing
Republicans , however , will have none of it , raising objections that range from the odd to the incoherent
The odd : on Monday , a somewhat strange group of Republican figures - who knew that William Kristol was an expert on monetary policy
- released an open letter to the Fed warning that its policies `` risk currency debasement and inflation .
These concerns were echoed in a letter the top four Republicans in Congress sent Mr. Bernanke on Wednesday
Neither letter explained why we should fear inflation when the reality is that inflation keeps hitting record lows
And about dollar debasement : leaving aside the fact that a weaker dollar actually helps U.S. manufacturing , where were these people during the previous administration
The dollar slid steadily through most of the Bush years , a decline that dwarfs the recent downtick
Why were n't there similar letters demanding that Alan Greenspan , the Fed chairman at the time , tighten policy
Meanwhile , the incoherent : Two Republicans , Mike Pence in the House and Bob Corker in the Senate , have called on the Fed to abandon all efforts to achieve full employment and focus solely on price stability
Because unemployment remains so high
No , I do n't understand the logic either
So what 's really motivating the G.O.P. attack on the Fed
Mr. Bernanke and his colleagues were clearly caught by surprise , but the budget expert Stan Collender predicted it all
Back in August , he warned Mr. Bernanke that `` with Republican policy makers seeing economic hardship as the path to election glory , '' they would be `` opposed to any actions taken by the Federal Reserve that would make the economy better .
In short , their real fear is not that Fed actions will be harmful , it is that they might succeed
Hence the axis of depression
No doubt some of Mr. Bernanke 's critics are motivated by sincere intellectual conviction , but the core reason for the attack on the Fed is self-interest , pure and simple
China and Germany want America to stay uncompetitive ; Republicans want the economy to stay weak as long as there 's a Democrat in the White House
And if Mr. Bernanke gives in to their bullying , they may all get their wish
Mugged by the Debt Moralizers `` How many of you people want to pay for your neighbor 's mortgage that has an extra bathroom and ca n't pay their bills ?
That 's the question CNBC 's Rick Santelli famously asked in 2009 , in a rant widely credited with giving birth to the Tea Party movement
It 's a sentiment that resonates not just in America but in much of the world
The tone differs from place to place - listening to a German official denounce deficits , my wife whispered , `` We 'll all be handed whips as we leave , so we can flagellate ourselves .
But the message is the same : debt is evil , debtors must pay for their sins , and from now on we all must live within our means
And that kind of moralizing is the reason we 're mired in a seemingly endless slump
The years leading up to the 2008 crisis were indeed marked by unsustainable borrowing , going far beyond the subprime loans many people still believe , wrongly , were at the heart of the problem
Real estate speculation ran wild in Florida and Nevada , but also in Spain , Ireland and Latvia
And all of it was paid for with borrowed money
This borrowing made the world as a whole neither richer nor poorer : one person 's debt is another person 's asset
But it made the world vulnerable
When lenders suddenly decided that they had lent too much , that debt levels were excessive , debtors were forced to slash spending
This pushed the world into the deepest recession since the 1930s
And recovery , such as it is , has been weak and uncertain - which is exactly what we should have expected , given the overhang of debt
The key thing to bear in mind is that for the world as a whole , spending equals income
If one group of people - those with excessive debts - is forced to cut spending to pay down its debts , one of two things must happen : either someone else must spend more , or world income will fall
Yet those parts of the private sector not burdened by high levels of debt see little reason to increase spending
Corporations are flush with cash - but why expand when so much of the capacity they already have is sitting idle
Consumers who did n't overborrow can get loans at low rates - but that incentive to spend is more than outweighed by worries about a weak job market
Nobody in the private sector is willing to fill the hole created by the debt overhang
So what should we be doing
First , governments should be spending while the private sector wo n't , so that debtors can pay down their debts without perpetuating a global slump
Second , governments should be promoting widespread debt relief : reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang
But the moralizers will have none of it
They denounce deficit spending , declaring that you ca n't solve debt problems with more debt
They denounce debt relief , calling it a reward for the undeserving
And if you point out that their arguments do n't add up , they fly into a rage
Try to explain that when debtors spend less , the economy will be depressed unless somebody else spends more , and they call you a socialist
Try to explain why mortgage relief is better for America than foreclosing on homes that must be sold at a huge loss , and they start ranting like Mr. Santelli
No question about it : the moralizers are filled with a passionate intensity
And those who should know better lack all conviction
John Boehner , the House minority leader , was widely mocked last year when he declared that `` It 's time for government to tighten their belts '' - in the face of depressed private spending , the government should spend more , not less
But since then President Obama has repeatedly used the same metaphor , promising to match private belt-tightening with public belt-tightening
Does he lack the courage to challenge popular misconceptions , or is this just intellectual laziness
Either way , if the president wo n't defend the logic of his own policies , who will
Meanwhile , the administration 's mortgage modification program - the program that inspired the Santelli rant - has , in the end , accomplished almost nothing
At least part of the reason is that officials were so worried that they might be accused of helping the undeserving that they ended up helping almost nobody
So the moralizers are winning
More and more voters , both here and in Europe , are convinced that what we need is not more stimulus but more punishment
Governments must tighten their belts ; debtors must pay what they owe
The irony is that in their determination to punish the undeserving , voters are punishing themselves : by rejecting fiscal stimulus and debt relief , they 're perpetuating high unemployment
They are , in effect , cutting off their own jobs to spite their neighbors
But they do n't know that
And because they do n't , the slump will go on
Earlier this week , the inspector general for the Troubled Asset Relief Program , a k a , the bank bailout fund , released his report on the 2008 rescue of the American International Group , the insurer
The gist of the report is that government officials made no serious attempt to extract concessions from bankers , even though these bankers received huge benefits from the rescue
And more than money was lost
By making what was in effect a multibillion-dollar gift to Wall Street , policy makers undermined their own credibility and put the broader economy at risk
For the A.I.G. rescue was part of a pattern : Throughout the financial crisis key officials most notably Timothy Geithner , who was president of the New York Fed in 2008 and is now Treasury secretary have shied away from doing anything that might rattle Wall Street
And the bitter paradox is that this play-it-safe approach has ended up undermining prospects for economic recovery
For the job of fixing the broken economy is far from done yet finishing the job has become nearly impossible now that the public has lost faith in the government 's efforts , viewing them as little more than handouts to the people who got us into this mess
About the A.I.G. affair : During the bubble years , many financial companies created the illusion of financial soundness by buying credit-default swaps from A.I.G. basically , insurance policies in which A.I.G. promised to make up the difference if borrowers defaulted on their debts
It was an illusion because the insurer did n't have remotely enough money to make good on its promises if things went bad
And sure enough , things went bad
So why protect bankers from the consequences of their errors
Well , by the time A.I.G. 's hollowness became apparent , the world financial system was on the edge of collapse and officials judged probably correctly that letting A.I.G. go bankrupt would push the financial system over that edge
So A.I.G. was effectively nationalized ; its promises became taxpayer liabilities
But was there any way to limit those liabilities
After all , banks would have suffered huge losses if A.I.G. had been allowed to fail
So it seemed only fair for them to bear part of the cost of the bailout , which they could have done by accepting a `` haircut '' on the amounts A.I.G. owed them
Indeed , the government asked them to do just that
But they said no and that was the end of the story
Taxpayers not only ended up honoring foolish promises made by other people , they ended up doing so at 100 cents on the dollar
Could things have been different
Some commentators argue that government officials had no way to force the banks to accept a haircut either they let A.I.G. go bankrupt , which they were n't ready to do , or they had to honor its contracts as written
But this seems like a na ve view of how Wall Street works
Major financial firms are a small club , with a shared interest in sustaining the system ; ever since the days of J.P. Morgan , it has been common in times of crisis to call on the big players to forgo short-term profits for the industry 's common good
Back in 1998 , it was a consortium of private bankers not the government that put up the funds to rescue the hedge fund Long Term Capital Management
Furthermore , big financial firms have a long-term relationship , both with the government and with each other , and can pay a price if they act selfishly in times of crisis
Bear Stearns , the investment bank , earned itself a lot of ill will by refusing to participate in that 1998 rescue , and it 's widely believed that this ill will played a major factor in the demise of Bear Stearns itself , 10 years later
So officials could have called on bankers to offer a better deal , for their own sake , and simultaneously threatened to name and shame those who balked
It was their choice not to do that , just as it was their choice not to push for more control over bailed-out banks in early 2009
And , as I said , these seemingly safe choices have now placed the economy in grave danger
For the economy is still in deep trouble and needs much more government help
Unemployment is in double-digits ; we desperately need more government spending on job creation
Banks are still weak , and credit is still tight ; we desperately need more government aid to the financial sector
But try to talk to an ordinary voter about this , and the response you 're likely to get is : `` No way
All they 'll do is hand out more money to Wall Street .
So here 's the real tragedy of the botched bailout : Government officials , perhaps influenced by spending too much time with bankers , forgot that if you want to govern effectively you have retain the trust of the people
And by treating the financial industry which got us into this mess in the first place with kid gloves , they have squandered that trust
Everyone 's talking about a new New Deal , for obvious reasons
In 2008 , as in 1932 , a long era of Republican political dominance came to an end in the face of an economic and financial crisis that , in voters ' minds , both discredited the G.O.P. 's free-market ideology and undermined its claims of competence
And for those on the progressive side of the political spectrum , these are hopeful times
There is , however , another and more disturbing parallel between 2008 and 1932 namely , the emergence of a power vacuum at the height of the crisis
The interregnum of 1932-1933 , the long stretch between the election and the actual transfer of power , was disastrous for the U.S. economy , at least in part because the outgoing administration had no credibility , the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action
And the same thing is happening now
It 's true that the interregnum will be shorter this time : F.D.R. was n't inaugurated until March ; Barack Obama will move into the White House on Jan. 20
But crises move faster these days
How much can go wrong in the two months before Mr. Obama takes the oath of office
The answer , unfortunately , is : a lot
Consider how much darker the economic picture has grown since the failure of Lehman Brothers , which took place just over two months ago
And the pace of deterioration seems to be accelerating
Most obviously , we 're in the midst of the worst stock market crash since the Great Depression : the Standard & Poor 's 500-stock index has now fallen more than 50 percent from its peak
Other indicators are arguably even more disturbing : unemployment claims are surging , manufacturing production is plunging , interest rates on corporate bonds which reflect investor fears of default are soaring , which will almost surely lead to a sharp fall in business spending
The prospects for the economy look much grimmer now than they did as little as a week or two ago
Yet economic policy , rather than responding to the threat , seems to have gone on vacation
In particular , panic has returned to the credit markets , yet no new rescue plan is in sight
On the contrary , Henry Paulson , the Treasury secretary , has announced that he wo n't even go back to Congress for the second half of the $ 700 billion already approved for financial bailouts
And financial aid for the beleaguered auto industry is being stalled by a political standoff
How much should we worry about what looks like two months of policy drift
At minimum , the next two months will inflict serious pain on hundreds of thousands of Americans , who will lose their jobs , their homes , or both
What 's really troubling , however , is the possibility that some of the damage being done right now will be irreversible
I 'm concerned , in particular , about the two D 's : deflation and Detroit
About deflation : Japan 's `` lost decade '' in the 1990s taught economists that it 's very hard to get the economy moving once expectations of inflation get too low -LRB- it does n't matter whether people literally expect prices to fall -RRB-
Yet there 's clear deflationary pressure on the U.S. economy right now , and every month that passes without signs of recovery increases the odds that we 'll find ourselves stuck in a Japan-type trap for years
About Detroit : There 's now a real risk that , in the absence of quick federal aid , the Big Three automakers and their network of suppliers will be forced into liquidation that is , forced to shut down , lay off all their workers and sell off their assets
And if that happens , it will be very hard to bring them back
Now , maybe letting the auto companies die is the right decision , even though an auto industry collapse would be a huge blow to an already slumping economy
But it 's a decision that should be taken carefully , with full consideration of the costs and benefits not a decision taken by default , because of a political standoff between Democrats who want Mr. Paulson to use some of that $ 700 billion and a lame-duck administration that 's trying to force Congress to divert funds from a fuel-efficiency program instead
Is economic policy completely paralyzed between now and Jan. 20
No , not completely
Some useful actions are being taken
For example , Fannie Mae and Freddie Mac , the lending agencies , have taken the helpful step of declaring a temporary halt to foreclosures , while Congress has passed a badly needed extension of unemployment benefits now that the White House has dropped its opposition
But nothing is happening on the policy front that is remotely commensurate with the scale of the economic crisis
And it 's scary to think how much more can go wrong before Inauguration Day
There Will Be Blood So here 's what the very serious Mr. Simpson said on Friday : `` I ca n't wait for the blood bath in April
... When debt limit time comes , they 're going to look around and say , ` What in the hell do we do now
We 've got guys who will not approve the debt limit extension unless we give 'em a piece of meat , real meat , ' '' meaning spending cuts
`` And boy , the blood bath will be extraordinary , '' he continued
Think of Mr. Simpson 's blood lust as one more piece of evidence that our nation is in much worse shape , much closer to a political breakdown , than most people realize
Some explanation : There 's a legal limit to federal debt , which must be raised periodically if the government keeps running deficits ; the limit will be reached again this spring
And since nobody , not even the hawkiest of deficit hawks , thinks the budget can be balanced immediately , the debt limit must be raised to avoid a government shutdown
But Republicans will probably try to blackmail the president into policy concessions by , in effect , holding the government hostage ; they 've done it before
Now , you might think that the prospect of this kind of standoff , which might deny many Americans essential services , wreak havoc in financial markets and undermine America 's role in the world , would worry all men of good will
But no , Mr. Simpson `` ca n't wait .
And he 's what passes , these days , for a reasonable Republican
The fact is that one of our two great political parties has made it clear that it has no interest in making America governable , unless it 's doing the governing
And that party now controls one house of Congress , which means that the country will not , in fact , be governable without that party 's cooperation - cooperation that wo n't be forthcoming
Elite opinion has been slow to recognize this reality
Thus on the same day that Mr. Simpson rejoiced in the prospect of chaos , Ben Bernanke , the Federal Reserve chairman , appealed for help in confronting mass unemployment
He asked for `` a fiscal program that combines near-term measures to enhance growth with strong , confidence-inducing steps to reduce longer-term structural deficits .
My immediate thought was , why not ask for a pony , too
After all , the G.O.P. is n't interested in helping the economy as long as a Democrat is in the White House
Indeed , far from being willing to help Mr. Bernanke 's efforts , Republicans are trying to bully the Fed itself into giving up completely on trying to reduce unemployment
And on matters fiscal , the G.O.P. program is to do almost exactly the opposite of what Mr. Bernanke called for
On one side , Republicans oppose just about everything that might reduce structural deficits : they demand that the Bush tax cuts be made permanent while demagoguing efforts to limit the rise in Medicare costs , which are essential to any attempts to get the budget under control
On the other , the G.O.P. opposes anything that might help sustain demand in a depressed economy - even aid to small businesses , which the party claims to love
Right now , in particular , Republicans are blocking an extension of unemployment benefits - an action that will both cause immense hardship and drain purchasing power from an already sputtering economy
But there 's no point appealing to the better angels of their nature ; America just does n't work that way anymore
And opposition for the sake of opposition is n't limited to economic policy
Politics , they used to tell us , stops at the water 's edge - but that was then
These days , national security experts are tearing their hair out over the decision of Senate Republicans to block a desperately needed new strategic arms treaty
And everyone knows that these Republicans oppose the treaty , not because of legitimate objections , but simply because it 's an Obama administration initiative ; if sabotaging the president endangers the nation , so be it
How does this end
Mr. Obama is still talking about bipartisan outreach , and maybe if he caves in sufficiently he can avoid a federal shutdown this spring
But any respite would be only temporary ; again , the G.O.P. is just not interested in helping a Democrat govern
My sense is that most Americans still do n't understand this reality
They still imagine that when push comes to shove , our politicians will come together to do what 's necessary
But that was another country
It 's hard to see how this situation is resolved without a major crisis of some kind
Mr. Simpson may or may not get the blood bath he craves this April , but there will be blood sooner or later
And we can only hope that the nation that emerges from that blood bath is still one we recognize
What were they smoking
asks the cover of the current issue of Fortune magazine
Underneath the headline are photos of recently deposed Wall Street titans , captioned with the staggering sums they managed to lose
The answer , of course , is that they were high on the usual drug greed
And they were encouraged to make socially destructive decisions by a system of executive compensation that should have been reformed after the Enron and WorldCom scandals , but wasn t. In a direct sense , the carnage on Wall Street is all about the great housing slump
This slump was both predictable and predicted
These days , I wrote in August 2005 , Americans make a living selling each other houses , paid for with money borrowed from the Chinese
Somehow , that doesn t seem like a sustainable lifestyle
It wasn t. But even as the danger signs multiplied , Wall Street piled into bonds backed by dubious home mortgages
Most of the bad investments now shaking the financial world seem to have been made in the final frenzy of the housing bubble , or even after the bubble began to deflate
In fact , according to Fortune , Merrill Lynch made its biggest purchases of bad debt in the first half of this year after the subprime crisis had already become public knowledge
Now the bill is coming due , and almost everyone that is , almost everyone except the people responsible is having to pay
The losses suffered by shareholders in Merrill , Citigroup , Bear Stearns and so on are the least of it
Far more important in human terms are the hundreds of thousands if not millions of American families lured into mortgage deals they didn t understand , who now face sharp increases in their payments and , in many cases , the loss of their houses as their interest rates reset
And then there s the collateral damage to the economy
You still hear occasional claims that the subprime fiasco is no big deal
Even though the numbers keep getting bigger some observers are now talking about $ 400 billion in losses these losses are small compared with the total value of financial assets
But bad housing investments are crippling financial institutions that play a crucial role in providing credit , by wiping out much of their capital
In a recent report , Goldman Sachs suggested that housing-related losses could force banks and other players to cut lending by as much as $ 2 trillion enough to trigger a nasty recession , if it happens quickly
Beyond that , there s a pervasive loss of trust , which is like sand thrown in the gears of the financial system
The crisis of confidence is plainly visible in the market data : there s an almost unprecedented spread between the very low interest rates investors are willing to accept on U.S. government debt which is still considered safe and the much higher interest rates at which banks are willing to lend to each other
How did things go so wrong
Part of the answer is that people who should have been alert to the dangers , and taken precautionary measures , instead blithely assured Americans that everything was fine , and even encouraged them to take out risky mortgages
Yes , Alan Greenspan , that means you
But another part of the answer lies in what hasn t happened to the men on that Fortune cover namely , they haven t been forced to give back any of the huge paychecks they received before the folly of their decisions became apparent
Around 25 years ago , American business and the American political system bought into the idea that greed is good
Executives are lavishly rewarded if the companies they run seem successful : last year the chief executives of Merrill and Citigroup were paid $ 48 million and $ 25.6 million , respectively
But if the success turns out to have been an illusion well , they still get to keep the money
Heads they win , tails we lose
Not only is this grossly unfair , it encourages bad risk-taking , and sometimes fraud
If an executive can create the appearance of success , even for a couple of years , he will walk away immensely wealthy
Meanwhile , the subsequent revelation that appearances were deceiving is someone else s problem
If all this sounds familiar , it should
The huge rewards executives receive if they can fake success are what led to the great corporate scandals of a few years back
There s no indication that any laws were broken this time but the public s trust was nonetheless betrayed , once again
The point is that the subprime crisis and the credit crunch are , in an important sense , the result of our failure to effectively reform corporate governance after the last set of scandals
John Edwards recently came out with a corporate reform plan , but it didn t receive a lot of attention
Corporate governance still isn t regarded as a major political issue
But it should be
A funny thing happened on the way to a new New Deal
A year ago , the only thing we had to fear was fear itself ; today , the reigning doctrine in Washington appears to be `` Be afraid
Be very afraid .
What happened
To be sure , `` centrists '' in the Senate have hobbled efforts to rescue the economy
But the evidence suggests that in addition to facing political opposition , President Obama and his inner circle have been intimidated by scare stories from Wall Street
Consider the contrast between what Mr. Obama 's advisers were saying on the eve of his inauguration , and what he himself is saying now
In December 2008 Lawrence Summers , soon to become the administration 's highest-ranking economist , called for decisive action
`` Many experts , '' he warned , `` believe that unemployment could reach 10 percent by the end of next year .
In the face of that prospect , he continued , `` doing too little poses a greater threat than doing too much .
Ten months later unemployment reached 10.2 percent , suggesting that despite his warning the administration had n't done enough to create jobs
You might have expected , then , a determination to do more
But in a recent interview with Fox News , the president sounded diffident and nervous about his economic policy
He spoke vaguely about possible tax incentives for job creation
But `` it is important though to recognize , '' he went on , `` that if we keep on adding to the debt , even in the midst of this recovery , that at some point , people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession .
Most economists I talk to believe that the big risk to recovery comes from the inadequacy of government efforts : the stimulus was too small , and it will fade out next year , while high unemployment is undermining both consumer and business confidence
Now , it 's politically difficult for the Obama administration to enact a full-scale second stimulus
Still , he should be trying to push through as much aid to the economy as possible
And remember , Mr. Obama has the bully pulpit ; it 's his job to persuade America to do what needs to be done
Instead , however , Mr. Obama is lending his voice to those who say that we ca n't create more jobs
And a report on Politico.com suggests that deficit reduction , not job creation , will be the centerpiece of his first State of the Union address
What happened
It took me a while to puzzle this out
But the concerns Mr. Obama expressed become comprehensible if you suppose that he 's getting his views , directly or indirectly , from Wall Street
Ever since the Great Recession began economic analysts at some -LRB- not all -RRB- major Wall Street firms have warned that efforts to fight the slump will produce even worse economic evils
In particular , they say , never mind the current ability of the U.S. government to borrow long term at remarkably low interest rates any day now , budget deficits will lead to a collapse in investor confidence , and rates will soar
And it 's this latter claim that Mr. Obama echoed in that Fox News interview
Is he right to be worried
Well , spikes in long-term interest rates have happened in the past , most famously in 1994
But in 1994 the U.S. economy was adding 300,000 jobs a month , and the Fed was steadily raising short-term rates
It 's hard to see why anything similar should happen now , with the economy still bleeding jobs and the Fed showing no desire to raise rates anytime soon
A better model , I 'd argue , is Japan in the 1990s , which ran persistent large budget deficits , but also had a persistently depressed economy and saw long-term interest rates fall almost steadily
There 's a good chance that officials are being terrorized by a phantom menace a threat that exists only in their minds
And should n't we consider the source
As far as I can tell , the analysts now warning about soaring interest rates tend to be the same people who insisted , months after the Great Recession began , that the biggest threat facing the economy was inflation
And let 's not forget that Wall Street which somehow failed to recognize the biggest housing bubble in history has a less than stellar record at predicting market behavior
Still , let 's grant that there is some risk that doing more about double-digit unemployment would undermine confidence in the bond markets
This risk must be set against the certainty of mass suffering if we do n't do more and the possibility , as I said , of a collapse of confidence among ordinary workers and businesses
And Mr. Summers was right the first time : in the face of the greatest economic catastrophe since the Great Depression , it 's much riskier to do too little than it is to do too much
It 's sad , and unfortunate , that the administration appears to have lost sight of that truth
Americans Economic Pessimism Reaches Record High
That s the headline on a recent Gallup report , which shows a nation deeply unhappy with the state of the economy
Right now , 27 % of Americans rate current economic conditions as either excellent or good , while 44 % say they are only fair and 28 % say they are poor
Moreover , an extraordinary 78 % of Americans now say the economy is getting worse , while a scant 13 % say it is getting better
What s really remarkable about this dismal outlook is that the economy isn t -LRB- yet ?
in recession , and consumers haven t yet felt the full effects of $ 98 oil -LRB- wait until they see this winter s heating bills -RRB- or the plunging dollar , which will raise the prices of imported goods
The response of those who support the Bush administration s economic policies is to complain about the unfairness of it all
They rattle off statistics that supposedly show how wonderful the economy really is
Many of these statistics are misleading or irrelevant , but it s true that the official unemployment rate is fairly low by historical standards
So why are people so unhappy
The answer from Bush supporters who are , on this and other matters , a strikingly whiny bunch is to blame the liberal media for failing to report the good news
But the real explanation for the public s pessimism is that whatever good economic news there is hasn t translated into gains for most working Americans
One way to drive this point home is to compare the situation for workers today with that in the late 1990s , when the country s economic optimism was almost as remarkable as its pessimism today
For example , in the fall of 1998 almost two-thirds of Americans thought the economy was excellent or good
The unemployment rate in 1998 was only slightly lower than the unemployment rate today
But for working Americans , everything else was different
Wages were rising , yet inflation was low , so the purchasing power of workers take-home pay was steadily improving
So , too , were job benefits , including the availability of health insurance
And homeownership was rising steadily
It was , in other words , a time when Americans felt they were sharing in the country s prosperity
Today , by contrast , wage gains for most workers are being swallowed by inflation
In fact , the reality for lower - and middle-income workers may be worse than the official statistics say , because the prices of necessities like food , transportation and medical care are rising considerably faster than the Consumer Price Index as a whole
One striking statistic : the cost of a traditional Thanksgiving turkey dinner was 11 percent higher this year than last year
Meanwhile , the percentage of Americans receiving health insurance from their employers , which began to decline in 2001 , is continuing its downward trend
And homeownership , after rising for several years on a tide of subprime mortgages well , you know how that s going
In short , working Americans have very good reason to feel unhappy about the state of the economy
But what will it take to make their situation better
The leading Republican candidates for president don t even seem to realize that there s a problem
A few months ago Rudy Giuliani , denouncing Hillary Clinton s economic proposals , declared that she wants to go back to the 1990s as if that would be a bad thing
In fact , memories of how much better the economy was under Bill Clinton will be a potent political advantage for the Democrats next year
But simply putting another Clinton , or any Democrat , in the White House won t ensure that the good times will roll again
President Clinton was a good economic manager , but much of the good news during the 1990s reflected events that won t be repeated , including low oil prices and the great medical cost pause the temporary leveling off of health care spending as a percentage of G.D.P. that took place in the 1990s despite his failure to pass health care reform
Despite these caveats , Democrats have every right to make a political issue out of the failure of the Bush economy to deliver gains to working Americans especially because conservatives continue to insist that tax cuts for the affluent are the answer to all problems
Eating the Irish Most people know Swift as the author of `` Gulliver 's Travels .
But recent events have me thinking of his 1729 essay `` A Modest Proposal , '' in which he observed the dire poverty of the Irish , and offered a solution : sell the children as food
`` I grant this food will be somewhat dear , '' he admitted , but this would make it `` very proper for landlords , who , as they have already devoured most of the parents , seem to have the best title to the children .
O.K. , these days it 's not the landlords , it 's the bankers - and they 're just impoverishing the populace , not eating it
But only a satirist - and one with a very savage pen - could do justice to what 's happening to Ireland now
The Irish story began with a genuine economic miracle
But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers , all in a cozy relationship with leading politicians
The frenzy was financed with huge borrowing on the part of Irish banks , largely from banks in other European nations
Then the bubble burst , and those banks faced huge losses
You might have expected those who lent money to the banks to share in the losses
After all , they were consenting adults , and if they failed to understand the risks they were taking that was nobody 's fault but their own
But , no , the Irish government stepped in to guarantee the banks ' debt , turning private losses into public obligations
Before the bank bust , Ireland had little public debt
But with taxpayers suddenly on the hook for gigantic bank losses , even as revenues plunged , the nation 's creditworthiness was put in doubt
So Ireland tried to reassure the markets with a harsh program of spending cuts
Step back for a minute and think about that
These debts were incurred , not to pay for public programs , but by private wheeler-dealers seeking nothing but their own profit
Yet ordinary Irish citizens are now bearing the burden of those debts
Or to be more accurate , they 're bearing a burden much larger than the debt - because those spending cuts have caused a severe recession so that in addition to taking on the banks ' debts , the Irish are suffering from plunging incomes and high unemployment
But there is no alternative , say the serious people : all of this is necessary to restore confidence
Strange to say , however , confidence is not improving
On the contrary : investors have noticed that all those austerity measures are depressing the Irish economy - and are fleeing Irish debt because of that economic weakness
Now what
Last weekend Ireland and its neighbors put together what has been widely described as a `` bailout .
But what really happened was that the Irish government promised to impose even more pain , in return for a credit line - a credit line that would presumably give Ireland more time to , um , restore confidence
Markets , understandably , were not impressed : interest rates on Irish bonds have risen even further
Does it really have to be this way
In early 2009 , a joke was making the rounds : `` What 's the difference between Iceland and Ireland
Answer : One letter and about six months .
This was supposed to be gallows humor
No matter how bad the Irish situation , it could n't be compared with the utter disaster that was Iceland
But at this point Iceland seems , if anything , to be doing better than its near-namesake
Its economic slump was no deeper than Ireland 's , its job losses were less severe and it seems better positioned for recovery
In fact , investors now appear to consider Iceland 's debt safer than Ireland 's
How is that possible
Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment , rather than putting its own taxpayers on the line to guarantee bad private debts
As the International Monetary Fund notes - approvingly
- `` private sector bankruptcies have led to a marked decline in external debt .
Meanwhile , Iceland helped avoid a financial panic in part by imposing temporary capital controls - that is , by limiting the ability of residents to pull funds out of the country
And Iceland has also benefited from the fact that , unlike Ireland , it still has its own currency ; devaluation of the krona , which has made Iceland 's exports more competitive , has been an important factor in limiting the depth of Iceland 's slump
None of these heterodox options are available to Ireland , say the wise heads
Ireland , they say , must continue to inflict pain on its citizens - because to do anything else would fatally undermine confidence
But Ireland is now in its third year of austerity , and confidence just keeps draining away
And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers ' sins is worse than a crime ; it 's a mistake
Should we use taxes to deter financial speculation
Yes , say top British officials , who oversee the City of London , one of the world 's two great banking centers
Other European governments agree and they 're right
Unfortunately , United States officials especially Timothy Geithner , the Treasury secretary are dead set against the proposal
Let 's hope they reconsider : a financial transactions tax is an idea whose time has come
The dispute began back in August , when Adair Turner , Britain 's top financial regulator , called for a tax on financial transactions as a way to discourage `` socially useless '' activities
Gordon Brown , the British prime minister , picked up on his proposal , which he presented at the Group of 20 meeting of leading economies this month
Why is this a good idea
The Turner-Brown proposal is a modern version of an idea originally floated in 1972 by the late James Tobin , the Nobel-winning Yale economist
Tobin argued that currency speculation money moving internationally to bet on fluctuations in exchange rates was having a disruptive effect on the world economy
To reduce these disruptions , he called for a small tax on every exchange of currencies
Such a tax would be a trivial expense for people engaged in foreign trade or long-term investment ; but it would be a major disincentive for people trying to make a fast buck -LRB- or euro , or yen -RRB- by outguessing the markets over the course of a few days or weeks
It would , as Tobin said , `` throw some sand in the well-greased wheels '' of speculation
Tobin 's idea went nowhere at the time
Later , much to his dismay , it became a favorite hobbyhorse of the anti-globalization left
But the Turner-Brown proposal , which would apply a `` Tobin tax '' to all financial transactions not just those involving foreign currency is very much in Tobin 's spirit
It would be a trivial expense for long-term investors , but it would deter much of the churning that now takes place in our hyperactive financial markets
This would be a bad thing if financial hyperactivity were productive
But after the debacle of the past two years , there 's broad agreement I 'm tempted to say , agreement on the part of almost everyone not on the financial industry 's payroll with Mr. Turner 's assertion that a lot of what Wall Street and the City do is `` socially useless .
And a transactions tax could generate substantial revenue , helping alleviate fears about government deficits
What 's not to like
The main argument made by opponents of a financial transactions tax is that it would be unworkable , because traders would find ways to avoid it
Some also argue that it would n't do anything to deter the socially damaging behavior that caused our current crisis
But neither claim stands up to scrutiny
On the claim that financial transactions ca n't be taxed : modern trading is a highly centralized affair
Take , for example , Tobin 's original proposal to tax foreign exchange trades
How can you do this , when currency traders are located all over the world
The answer is , while traders are all over the place , a majority of their transactions are settled i.e. , payment is made at a single London-based institution
This centralization keeps the cost of transactions low , which is what makes the huge volume of wheeling and dealing possible
It also , however , makes these transactions relatively easy to identify and tax
What about the claim that a financial transactions tax does n't address the real problem
It 's true that a transactions tax would n't have stopped lenders from making bad loans , or gullible investors from buying toxic waste backed by those loans
But bad investments are n't the whole story of the crisis
What turned those bad investments into catastrophe was the financial system 's excessive reliance on short-term money
As Gary Gorton and Andrew Metrick of Yale have shown , by 2007 the United States banking system had become crucially dependent on `` repo '' transactions , in which financial institutions sell assets to investors while promising to buy them back after a short period often a single day
Losses in subprime and other assets triggered a banking crisis because they undermined this system there was a `` run on repo .
And a financial transactions tax , by discouraging reliance on ultra-short-run financing , would have made such a run much less likely
So contrary to what the skeptics say , such a tax would have helped prevent the current crisis and could help us avoid a future replay
Would a Tobin tax solve all our problems
Of course not
But it could be part of the process of shrinking our bloated financial sector
On this , as on other issues , the Obama administration needs to free its mind from Wall Street 's thrall
A few months ago I found myself at a meeting of economists and finance officials , discussing what else
the crisis
There was a lot of soul-searching going on
One senior policy maker asked , `` Why did n't we see this coming ?
There was , of course , only one thing to say in reply , so I said it : `` What do you mean ` we , ' white man ?
Seriously , though , the official had a point
Some people say that the current crisis is unprecedented , but the truth is that there were plenty of precedents , some of them of very recent vintage
Yet these precedents were ignored
And the story of how `` we '' failed to see this coming has a clear policy implication namely , that financial market reform should be pressed quickly , that it should n't wait until the crisis is resolved
About those precedents : Why did so many observers dismiss the obvious signs of a housing bubble , even though the 1990s dot-com bubble was fresh in our memories
Why did so many people insist that our financial system was `` resilient , '' as Alan Greenspan put it , when in 1998 the collapse of a single hedge fund , Long-Term Capital Management , temporarily paralyzed credit markets around the world
Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart , the Bank of Japan , spent a decade trying and failing to jump-start a stalled economy
One answer to these questions is that nobody likes a party pooper
While the housing bubble was still inflating , lenders were making lots of money issuing mortgages to anyone who walked in the door ; investment banks were making even more money repackaging those mortgages into shiny new securities ; and money managers who booked big paper profits by buying those securities with borrowed funds looked like geniuses , and were paid accordingly
Who wanted to hear from dismal economists warning that the whole thing was , in effect , a giant Ponzi scheme
There 's also another reason the economic policy establishment failed to see the current crisis coming
The crises of the 1990s and the early years of this decade should have been seen as dire omens , as intimations of still worse troubles to come
But everyone was too busy celebrating our success in getting through those crises to notice
Consider , in particular , what happened after the crisis of 1997-98
This crisis showed that the modern financial system , with its deregulated markets , highly leveraged players and global capital flows , was becoming dangerously fragile
But when the crisis abated , the order of the day was triumphalism , not soul-searching
Time magazine famously named Mr. Greenspan , Robert Rubin and Lawrence Summers `` The Committee to Save the World '' the `` Three Marketeers '' who `` prevented a global meltdown .
In effect , everyone declared a victory party over our pullback from the brink , while forgetting to ask how we got so close to the brink in the first place
In fact , both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more , not less , complacent
Because neither crisis quite lived up to our worst fears , because neither brought about another Great Depression , investors came to believe that Mr. Greenspan had the magical power to solve all problems and so , one suspects , did Mr. Greenspan himself , who opposed all proposals for prudential regulation of the financial system
Now we 're in the midst of another crisis , the worst since the 1930s
For the moment , all eyes are on the immediate response to that crisis
Will the Fed 's ever more aggressive efforts to unfreeze the credit markets finally start getting somewhere
Will the Obama administration 's fiscal stimulus turn output and employment around
-LRB- I 'm still not sure , by the way , whether the economic team is thinking big enough .
And because we 're all so worried about the current crisis , it 's hard to focus on the longer-term issues on reining in our out-of-control financial system , so as to prevent or at least limit the next crisis
Yet the experience of the last decade suggests that we should be worrying about financial reform , above all regulating the `` shadow banking system '' at the heart of the current mess , sooner rather than later
For once the economy is on the road to recovery , the wheeler-dealers will be making easy money again and will lobby hard against anyone who tries to limit their bottom lines
Moreover , the success of recovery efforts will come to seem preordained , even though it was n't , and the urgency of action will be lost
So here 's my plea : even though the incoming administration 's agenda is already very full , it should not put off financial reform
The time to start preventing the next crisis is now
The Spanish Prisoner The best thing about the Irish right now is that there are so few of them
By itself , Ireland ca n't do all that much damage to Europe 's prospects
The same can be said of Greece and of Portugal , which is widely regarded as the next potential domino
What 's striking about Spain , from an American perspective , is how much its economic story resembles our own
Like America , Spain experienced a huge property bubble , accompanied by a huge rise in private-sector debt
Like America , Spain fell into recession when that bubble burst , and has experienced a surge in unemployment
And like America , Spain has seen its budget deficit balloon thanks to plunging revenues and recession-related costs
But unlike America , Spain is on the edge of a debt crisis
The U.S. government is having no trouble financing its deficit , with interest rates on long-term federal debt under 3 percent
Spain , by contrast , has seen its borrowing cost shoot up in recent weeks , reflecting growing fears of a possible future default
Why is Spain in so much trouble
In a word , it 's the euro
Spain was among the most enthusiastic adopters of the euro back in 1999 , when the currency was introduced
And for a while things seemed to go swimmingly : European funds poured into Spain , powering private-sector spending , and the Spanish economy experienced rapid growth
Through the good years , by the way , the Spanish government appeared to be a model of both fiscal and financial responsibility : unlike Greece , it ran budget surpluses , and unlike Ireland , it tried hard -LRB- though with only partial success -RRB- to regulate its banks
At the end of 2007 Spain 's public debt , as a share of the economy , was only about half as high as Germany 's , and even now its banks are in nowhere near as bad shape as Ireland 's
But problems were developing under the surface
During the boom , prices and wages rose more rapidly in Spain than in the rest of Europe , helping to feed a large trade deficit
And when the bubble burst , Spanish industry was left with costs that made it uncompetitive with other nations
Now what
If Spain still had its own currency , like the United States - or like Britain , which shares some of the same characteristics - it could have let that currency fall , making its industry competitive again
But with Spain on the euro , that option is n't available
Instead , Spain must achieve `` internal devaluation '' : it must cut wages and prices until its costs are back in line with its neighbors
And internal devaluation is an ugly affair
For one thing , it 's slow : it normally take years of high unemployment to push wages down
Beyond that , falling wages mean falling incomes , while debt stays the same
So internal devaluation worsens the private sector 's debt problems
What all this means for Spain is very poor economic prospects over the next few years
America 's recovery has been disappointing , especially in terms of jobs - but at least we 've seen some growth , with real G.D.P. more or less back to its pre-crisis peak , and we can reasonably expect future growth to help bring our deficit under control
Spain , on the other hand , has n't recovered at all
And the lack of recovery translates into fears about Spain 's fiscal future
Should Spain try to break out of this trap by leaving the euro , and re-establishing its own currency
Will it
The answer to both questions is , probably not
Spain would be better off now if it had never adopted the euro - but trying to leave would create a huge banking crisis , as depositors raced to move their money elsewhere
Unless there 's a catastrophic bank crisis anyway - which seems plausible for Greece and increasingly possible in Ireland , but unlikely though not impossible for Spain - it 's hard to see any Spanish government taking the risk of `` de-euroizing .
So Spain is in effect a prisoner of the euro , leaving it with no good options
The good news about America is that we are n't in that kind of trap : we still have our own currency , with all the flexibility that implies
By the way , so does Britain , whose deficits and debt are comparable to Spain 's , but which investors do n't see as a default risk
The bad news about America is that a powerful political faction is trying to shackle the Federal Reserve , in effect removing the one big advantage we have over the suffering Spaniards
Republican attacks on the Fed - demands that it stop trying to promote economic recovery and focus instead on keeping the dollar strong and fighting the imaginary risks of inflation - amount to a demand that we voluntarily put ourselves in the Spanish prison
Let 's hope that the Fed does n't listen
Things in America are bad , but they could be much worse
And if the hard-money faction gets its way , they will be
My chance of surviving prostate cancer and thank God I was cured of it in the United States
Eighty-two percent , says Rudy Giuliani in a new radio ad attacking Democratic plans for universal health care
My chances of surviving prostate cancer in England
Only 44 percent , under socialized medicine
It would be a stunning comparison if it were true
But it isn t. And thereby hangs a tale one of scare tactics , of the character of a man who would be president and , I m sorry to say , about what s wrong with political news coverage
Let s start with the facts : Mr. Giuliani s claim is wrong on multiple levels bogus numbers wrapped in an invalid comparison embedded in a smear
Mr. Giuliani got his numbers from a recent article in City Journal , a publication of the conservative Manhattan Institute
The author gave no source for his numbers on five-year survival rates the probability that someone diagnosed with prostate cancer would still be alive five years after the diagnosis
And they re just wrong
You see , the actual survival rate in Britain is 74.4 percent
That still looks a bit lower than the U.S. rate , but the difference turns out to be mainly a statistical illusion
The details are technical , but the bottom line is that a man s chance of dying from prostate cancer is about the same in Britain as it is in America
So Mr. Giuliani s supposed killer statistic about the defects of socialized medicine is entirely false
In fact , there s very little evidence that Americans get better health care than the British , which is amazing given the fact that Britain spends only 41 percent as much on health care per person as we do
Anyway , comparisons with Britain have absolutely nothing to do with what the Democrats are proposing
In Britain , doctors are government employees ; despite what Mr. Giuliani is suggesting , none of the Democratic candidates have proposed to make American doctors work for the government
As a fact-check in The Washington Post put it : The Clinton health care plan which is very similar to the Edwards and Obama plans has more in common with the Massachusetts plan signed into law by Gov. Mitt Romney than the British National Health system
Of course , this hasn t stopped Mr. Romney from making similar smears
At one level , what Mr. Giuliani and Mr. Romney are doing here is engaging in time-honored scare tactics
For generations , conservatives have denounced every attempt to ensure that Americans receive needed health care , from Medicare to S-chip , as socialized medicine
Part of the strategy has always involved claiming that health reform is suspect because it s un-American , and exaggerating health care problems in other countries usually on the basis of unsubstantiated anecdotes or fraudulent statistics
Opponents of reform also make a practice of lumping all forms of government intervention together , pretending that having the government pay some health care bills is just the same as having the government take over the whole health care system
But here s what I don t understand : Why isn t Mr. Giuliani s behavior here considered not just a case of bad policy analysis but a character issue
For better or -LRB- mostly -RRB- for worse , political reporting is dominated by the search for the supposedly revealing incident , in which the candidate says or does something that reveals his true character
And this incident surely seems to fit the bill
Leave aside the fact that Mr. Giuliani is simply lying about what the Democrats are proposing ; after all , Mitt Romney is doing the same thing
But health care is the pre-eminent domestic issue for the 2008 election
Surely the American people deserve candidates who do their homework on the subject
Yet what we actually have is the front-runner for the Republican nomination apparently basing his health-care views on something he read somewhere , which he believed without double-checking because it confirmed his prejudices
By rights , then , Mr. Giuliani s false claims about prostate cancer which he has , by the way , continued to repeat , along with some fresh false claims about breast cancer should be a major political scandal
As far as I can tell , however , they aren t being treated that way
To be fair , there has been some news coverage of the prostate affair
But it s only a tiny fraction of the coverage received by Hillary s laugh and John Edwards s haircut
And much of the coverage seems weirdly diffident
Memo to editors : If a candidate says something completely false , it s not in dispute
It s not the case that Democrats say they re not advocating British-style socialized medicine ; they aren t. The fact is that the prostate affair is part of a pattern : Mr. Giuliani has a habit of saying things , on issues that range from health care to national security , that are demonstrably untrue
And the American people have a right to know that
The good news is that the American Recovery and Reinvestment Act , a k a the Obama stimulus plan , is working just about the way textbook macroeconomics said it would
But that 's also the bad news because the same textbook analysis says that the stimulus was far too small given the scale of our economic problems
Unless something changes drastically , we 're looking at many years of high unemployment
And the really bad news is that `` centrists '' in Congress are n't able or willing to draw the obvious conclusion , which is that we need a lot more federal spending on job creation
About that good news : not that long ago the U.S. economy was in free fall
Without the recovery act , the free fall would probably have continued , as unemployed workers slashed their spending , cash-strapped state and local governments engaged in mass layoffs , and more
The stimulus did n't completely eliminate these effects , but it was enough to break the vicious circle of economic decline
Aid to the unemployed and help for state and local governments were probably the most important factors
If you want to see the recovery act in action , visit a classroom : your local school probably would have had to fire a lot of teachers if the stimulus had n't been enacted
And the free fall has ended
Last week 's G.D.P. report showed the economy growing again , at a better-than-expected annual rate of 3.5 percent
As Mark Zandi of Moody 's Economy.com put it in recent testimony , `` The stimulus is doing what it was supposed to do : short-circuit the recession and spur recovery .
But it 's not doing enough
Suppose that the economy were to keep growing at 3.5 percent
If that happened , unemployment would eventually start falling but very , very slowly
The experience of the Clinton era , when the economy grew at an average rate of 3.7 percent for eight years -LRB- did you know that ?
suggests that at current growth rates we 'd be lucky to see the unemployment rate fall by half a percentage point per year , meaning that it would take a decade to return to something like full employment
Worse yet , it 's far from clear that growth will continue at this rate
The effects of the stimulus will build over time it 's still likely to create or save a total of around three million jobs but its peak impact on the growth of G.D.P. -LRB- as opposed to its level -RRB- is already behind us
Solid growth will continue only if private spending takes up the baton as the effect of the stimulus fades
And so far there 's no sign that this is happening
So the government needs to do much more
Unfortunately , the political prospects for further action are n't good
What I keep hearing from Washington is one of two arguments : either -LRB- 1 -RRB- the stimulus has failed , unemployment is still rising , so we should n't do any more , or -LRB- 2 -RRB- the stimulus has succeeded , G.D.P. is growing , so we do n't need to do any more
The truth , which is that the stimulus was too little of a good thing that it helped , but it was n't big enough seems to be too complicated for an era of sound-bite politics
But can we afford to do more
We ca n't afford not to
High unemployment does n't just punish the economy today ; it punishes the future , too
In the face of a depressed economy , businesses have slashed investment spending both spending on plant and equipment and `` intangible '' investments in such things as product development and worker training
This will hurt the economy 's potential for years to come
Deficit hawks like to complain that today 's young people will end up having to pay higher taxes to service the debt we 're running up right now
But anyone who really cared about the prospects of young Americans would be pushing for much more job creation , since the burden of high unemployment falls disproportionately on young workers and those who enter the work force in years of high unemployment suffer permanent career damage , never catching up with those who graduated in better times
Even the claim that we 'll have to pay for stimulus spending now with higher taxes later is mostly wrong
Spending more on recovery will lead to a stronger economy , both now and in the future and a stronger economy means more government revenue
Stimulus spending probably does n't pay for itself , but its true cost , even in a narrow fiscal sense , is only a fraction of the headline number
O.K. , I know I 'm being impractical : major economic programs ca n't pass Congress without the support of relatively conservative Democrats , and these Democrats have been telling reporters that they have lost their appetite for stimulus
But I hope their stomachs start rumbling soon
We now know that stimulus works , but we are n't doing nearly enough of it
For the sake of today 's unemployed , and for the sake of the nation 's future , we need to do much more
From the beginning , advocates of universal health care were troubled by the incompleteness of Barack Obama s plan , which unlike those of his Democratic rivals wouldn t cover everyone
But they were willing to cut Mr. Obama slack on the issue , assuming that in the end he would do the right thing
Now , however , Mr. Obama is claiming that his plan s weakness is actually a strength
What s more , he s doing the same thing in the health care debate he did when claiming that Social Security faces a crisis attacking his rivals by echoing right-wing talking points
The central question is whether there should be a health insurance mandate a requirement that everyone sign up for health insurance , even if they don t think they need it
The Edwards and Clinton plans have mandates ; the Obama plan has one for children , but not for adults
Why have a mandate
The whole point of a universal health insurance system is that everyone pays in , even if they re currently healthy , and in return everyone has insurance coverage if and when they need it
And it s not just a matter of principle
As a practical matter , letting people opt out if they don t feel like buying insurance would make insurance substantially more expensive for everyone else
Here s why : under the Obama plan , as it now stands , healthy people could choose not to buy insurance then sign up for it if they developed health problems later
Insurance companies couldn t turn them away , because Mr. Obama s plan , like those of his rivals , requires that insurers offer the same policy to everyone
As a result , people who did the right thing and bought insurance when they were healthy would end up subsidizing those who didn t sign up for insurance until or unless they needed medical care
In other words , when Mr. Obama declares that the reason people don t have health insurance isn t because they don t want it , it s because they can t afford it , he s saying something that is mostly true now but wouldn t be true under his plan
The fundamental weakness of the Obama plan was apparent from the beginning
Still , as I said , advocates of health care reform were willing to cut Mr. Obama some slack
But now Mr. Obama , who just two weeks ago was telling audiences that his plan was essentially identical to the Edwards and Clinton plans , is attacking his rivals and claiming that his plan is superior
It isn t and his attacks amount to cheap shots
First , Mr. Obama claims that his plan does much more to control costs than his rivals plans
In fact , all three plans include impressive cost control measures
Second , Mr. Obama claims that mandates won t work , pointing out that many people don t have car insurance despite state requirements that all drivers be insured
Um , is he saying that states shouldn t require that drivers have insurance
If not , what s his point
Look , law enforcement is sometimes imperfect
That doesn t mean we shouldn t have laws
Third , and most troubling , Mr. Obama accuses his rivals of not explaining how they would enforce mandates , and suggests that the mandate would require some kind of nasty , punitive enforcement : Their essential argument , he says , is the only way to get everybody covered is if the government forces you to buy health insurance
If you don t buy it , then you ll be penalized in some way
Well , John Edwards has just called Mr. Obama s bluff , by proposing that individuals be required to show proof of insurance when filing income taxes or receiving health care
If they don t have insurance , they won t be penalized they ll be automatically enrolled in an insurance plan
That s actually a terrific idea not only would it prevent people from gaming the system , it would have the side benefit of enrolling people who qualify for S-chip and other government programs , but don t know it
Mr. Obama , then , is wrong on policy
Worse yet , the words he uses to defend his position make him sound like Rudy Giuliani inveighing against socialized medicine : he doesn t want the government to force people to have insurance , to penalize people who don t participate
I recently castigated Mr. Obama for adopting right-wing talking points about a Social Security crisis
Now he s echoing right-wing talking points on health care
What seems to have happened is that Mr. Obama s caution , his reluctance to stake out a clearly partisan position , led him to propose a relatively weak , incomplete health care plan
Although he declared , in his speech announcing the plan , that my plan begins by covering every American , it didn t and he shied away from doing what was necessary to make his claim true
Now , in the effort to defend his plan s weakness , he s attacking his Democratic opponents from the right and in so doing giving aid and comfort to the enemies of reform
If you 're looking for a job right now , your prospects are terrible
There are six times as many Americans seeking work as there are job openings , and the average duration of unemployment the time the average job-seeker has spent looking for work is more than six months , the highest level since the 1930s
You might think , then , that doing something about the employment situation would be a top policy priority
But now that total financial collapse has been averted , all the urgency seems to have vanished from policy discussion , replaced by a strange passivity
There 's a pervasive sense in Washington that nothing more can or should be done , that we should just wait for the economic recovery to trickle down to workers
This is wrong and unacceptable
Yes , the recession is probably over in a technical sense , but that does n't mean that full employment is just around the corner
Historically , financial crises have typically been followed not just by severe recessions but by anemic recoveries ; it 's usually years before unemployment declines to anything like normal levels
And all indications are that the aftermath of the latest financial crisis is following the usual script
The Federal Reserve , for example , expects unemployment , currently 10.2 percent , to stay above 8 percent a number that would have been considered disastrous not long ago until sometime in 2012
And the damage from sustained high unemployment will last much longer
The long-term unemployed can lose their skills , and even when the economy recovers they tend to have difficulty finding a job , because they 're regarded as poor risks by potential employers
Meanwhile , students who graduate into a poor labor market start their careers at a huge disadvantage and pay a price in lower earnings for their whole working lives
Failure to act on unemployment is n't just cruel , it 's short-sighted
So it 's time for an emergency jobs program
How is a jobs program different from a second stimulus
It 's a matter of priorities
The 2009 Obama stimulus bill was focused on restoring economic growth
It was , in effect , based on the belief that if you build G.D.P. , the jobs will come
That strategy might have worked if the stimulus had been big enough but it was n't
And as a matter of political reality , it 's hard to see how the administration could pass a second stimulus big enough to make up for the original shortfall
So our best hope now is for a somewhat cheaper program that generates more jobs for the buck
Such a program should shy away from measures , like general tax cuts , that at best lead only indirectly to job creation , with many possible disconnects along the way
Instead , it should consist of measures that more or less directly save or add jobs
One such measure would be another round of aid to beleaguered state and local governments , which have seen their tax receipts plunge and which , unlike the federal government , ca n't borrow to cover a temporary shortfall
More aid would help avoid both a drastic worsening of public services -LRB- especially education -RRB- and the elimination of hundreds of thousands of jobs
Meanwhile , the federal government could provide jobs by ... providing jobs
It 's time for at least a small-scale version of the New Deal 's Works Progress Administration , one that would offer relatively low-paying -LRB- but much better than nothing -RRB- public-service employment
There would be accusations that the government was creating make-work jobs , but the W.P.A. left many solid achievements in its wake
And the key point is that direct public employment can create a lot of jobs at relatively low cost
In a proposal to be released today , the Economic Policy Institute , a progressive think tank , argues that spending $ 40 billion a year for three years on public-service employment would create a million jobs , which sounds about right
Finally , we can offer businesses direct incentives for employment
It 's probably too late for a job-conserving program , like the highly successful subsidy Germany offered to employers who maintained their work forces
But employers could be encouraged to add workers as the economy expands
The Economic Policy Institute proposes a tax credit for employers who increase their payrolls , which is certainly worth trying
All of this would cost money , probably several hundred billion dollars , and raise the budget deficit in the short run
But this has to be weighed against the high cost of inaction in the face of a social and economic emergency
Later this week , President Obama will hold a `` jobs summit .
Most of the people I talk to are cynical about the event , and expect the administration to offer no more than symbolic gestures
But it does n't have to be that way
Yes , we can create more jobs and yes , we should
Maybe the polls are wrong , and John McCain is about to pull off the biggest election upset in American history
But right now the Democrats seem poised both to win the White House and to greatly expand their majorities in both houses of Congress
Most of the post-election discussion will presumably be about what the Democrats should and will do with their mandate
But let me ask a different question that will also be important for the nation 's future : What will defeat do to the Republicans
You might think , perhaps hope , that Republicans will engage in some soul-searching , that they 'll ask themselves whether and how they lost touch with the national mainstream
But my prediction is that this wo n't happen any time soon
Instead , the Republican rump , the party that 's left after the election , will be the party that attends Sarah Palin 's rallies , where crowds chant `` Vote McCain , not Hussein !
It will be the party of Saxby Chambliss , the senator from Georgia , who , observing large-scale early voting by African-Americans , warns his supporters that `` the other folks are voting .
It will be the party that harbors menacing fantasies about Barack Obama 's Marxist or was that Islamic
Why will the G.O.P. become more , not less , extreme
For one thing , projections suggest that this election will drive many of the remaining Republican moderates out of Congress , while leaving the hard right in place
For example , Larry Sabato , the election forecaster , predicts that seven Senate seats currently held by Republicans will go Democratic on Tuesday
According to the liberal-conservative rankings of the political scientists Keith Poole and Howard Rosenthal , five of the soon-to-be-gone senators are more moderate than the median Republican senator so the rump , the G.O.P. caucus that remains , will have shifted further to the right
The same thing seems set to happen in the House
Also , the Republican base already seems to be gearing up to regard defeat not as a verdict on conservative policies , but as the result of an evil conspiracy
A recent Democracy Corps poll found that Republicans , by a margin of more than two to one , believe that Mr. McCain is losing `` because the mainstream media is biased '' rather than `` because Americans are tired of George Bush .
And Mr. McCain has laid the groundwork for feverish claims that the election was stolen , declaring that the community activist group Acorn which , as Factcheck.org points out , has never `` been found guilty of , or even charged with '' causing fraudulent votes to be cast `` is now on the verge of maybe perpetrating one of the greatest frauds in voter history in this country , maybe destroying the fabric of democracy .
Needless to say , the potential voters Acorn tries to register are disproportionately `` other folks , '' as Mr. Chambliss might put it
Anyway , the Republican base , egged on by the McCain-Palin campaign , thinks that elections should reflect the views of `` real Americans '' and most of the people reading this column probably do n't qualify
Thus , in the face of polls suggesting that Mr. Obama will win Virginia , a top McCain aide declared that the `` real Virginia '' the southern part of the state , excluding the Washington , D.C. , suburbs favors Mr. McCain
A majority of Americans now live in big metropolitan areas , but while visiting a small town in North Carolina , Ms. Palin described it as `` what I call the real America , '' one of the `` pro-America '' parts of the nation
The real America , it seems , is small-town , mainly southern and , above all , white
I 'm not saying that the G.O.P. is about to become irrelevant
Republicans will still be in a position to block some Democratic initiatives , especially if the Democrats fail to achieve a filibuster-proof majority in the Senate
And that blocking ability will ensure that the G.O.P. continues to receive plenty of corporate dollars : this year the U.S. Chamber of Commerce has poured money into the campaigns of Senate Republicans like Minnesota 's Norm Coleman , precisely in the hope of denying Democrats a majority large enough to pass pro-labor legislation
But the G.O.P. 's long transformation into the party of the unreasonable right , a haven for racists and reactionaries , seems likely to accelerate as a result of the impending defeat
This will pose a dilemma for moderate conservatives
Many of them spent the Bush years in denial , closing their eyes to the administration 's dishonesty and contempt for the rule of law
Some of them have tried to maintain that denial through this year 's election season , even as the McCain-Palin campaign 's tactics have grown ever uglier
But one of these days they 're going to have to realize that the G.O.P. has become the party of intolerance
At just about every stop I ve made so far on my book tour , what I ve come to think of as The Question comes up
I talk about the origins of the long right-wing dominance of American politics , and the reasons I believe that dominance is coming to an end
Then someone asks , How can you be optimistic about the prospects for progressive change , when big money has so much influence on politics
The public wants change
If Americans have ever been angrier with the state of the country , begins a new strategy memo from the polling organization Democracy Corps , we have not witnessed it
Nor is the demand for change solely about Iraq : there has been a strong revival of economic populism
Democracy Corps asked those who believe America is on the wrong track to choose phrases that best described their views of what s gone wrong
The most commonly chosen were Big businesses get whatever they want in Washington and Leaders have forgotten the middle class
So much , by the way , for pundits who claim that Americans don t care about economic inequality
Longer-term studies of public opinion suggest a substantial leftward shift
James Stimson , a political scientist who uses data from many polls to construct an index of the overall liberalism or conservatism of the electorate , finds that America is now more liberal than it has been since the early 1960s
And the tactics the right has historically used to distract voters from economic issues , above all the exploitation of racial tensions , have been losing their effectiveness
But the Democracy Corps memo warns that Democrats have not yet found their voice as agents of change
What the memo doesn t say , but is all too obvious , is that one big reason the Democrats are having trouble finding their voice is the influence of big money
The most conspicuous example of this influence right now is the way Senate Democrats are dithering over whether to close the hedge fund tax loophole which allows executives at private equity firms and hedge funds to pay a tax rate of only 15 percent on most of their income
Only a handful of very wealthy people benefit from this loophole , while closing the loophole would yield billions of dollars each year in revenue
Retrieving this revenue is a key ingredient in legislation approved by the House Ways and Means Committee to reform the alternative minimum tax , something that must be done to avoid a de facto tax increase for millions of middle-class Americans
A handful of superwealthy hedge fund managers versus millions of middle-class Americans it sounds like a no-brainer
But as The Financial Times reports , Key votes have been delayed and time bought after the investment industry hired some of Washington s most prominent lobbyists to influence lawmakers and spread largesse through campaign donations
It goes on to describe how Harry Reid , the Senate majority leader , was toasted by industry lobbyists -LRB- and serenaded by Barry Manilow -RRB- at a money-raising party for his special fund to help Democrats get elected next year
Is this the shape of things to come
My questioners fear that it is
Fears of betrayal are often focused on Hillary Clinton
Some people who raise The Question cite an article in The Nation from last summer , which suggested that Hillary Clinton s commitment to change is suspect
Not only is Hillary more reliant on large donations and corporate money than her Democratic rivals , warned the article , but advisers in her inner circle are closely affiliated with unionbusters , G.O.P. operatives , conservative media and other Democratic Party antagonists
O.K. , some perspective
I sometimes hear people say that there s no difference between Democrats and Republicans ; that s foolish
Look at the fight over children s health insurance , and you can see how different the parties philosophies and priorities really are
All of the leading Democratic candidates are offering strongly progressive policy proposals ; the Republicans are , if anything , running to the right of the Bush administration
Also , even history s greatest progressives had to make compromises to win their victories
F.D.R. s New Deal depended on the support of Southern segregationists
Compared with that , Senator Clinton s acceptance of lots of corporate donations doesn t look so bad though I d be reassured if she made her views on tax reform clearer , and matched John Edwards s focus on corporate reform
Still , I am worried
One of the saddest stories I tell in my book is that of Al Smith , the great reformist governor of New York , who gradually turned into a narrow-minded economic conservative and bitter critic of F.D.R. H. L. Mencken explained it thusly : His association with the rich has apparently wobbled him and changed him
He has become a golf player
So , how wobbled are today s Democrats
I guess we ll find out
Related Searches Democratic Party United States Politics and
The Focus Hocus-Pocus Democrats , declared Evan Bayh in an Op-Ed article on Wednesday in The Times , `` overreached by focusing on health care rather than job creation during a severe recession .
Many others have been saying the same thing : the notion that the Obama administration erred by not focusing on the economy is hardening into conventional wisdom
But I have no idea what , if anything , people mean when they say that
The whole focus on `` focus '' is , as I see it , an act of intellectual cowardice - a way to criticize President Obama 's record without explaining what you would have done differently
After all , are people who say that Mr. Obama should have focused on the economy saying that he should have pursued a bigger stimulus package
Are they saying that he should have taken a tougher line with the banks
If not , what are they saying
That he should have walked around with furrowed brow muttering , `` I 'm focused , I 'm focused ''
Mr. Obama 's problem was n't lack of focus ; it was lack of audacity
At the start of his administration he settled for an economic plan that was far too weak
He compounded this original sin both by pretending that everything was on track and by adopting the rhetoric of his enemies
The aftermath of major financial crises is almost always terrible : severe crises are typically followed by multiple years of very high unemployment
And when Mr. Obama took office , America had just suffered its worst financial crisis since the 1930s
What the nation needed , given this grim prospect , was a really ambitious recovery plan
Could Mr. Obama actually have offered such a plan
He might not have been able to get a big plan through Congress , or at least not without using extraordinary political tactics
Still , he could have chosen to be bold - to make Plan A the passage of a truly adequate economic plan , with Plan B being to place blame for the economy 's troubles on Republicans if they succeeded in blocking such a plan
But he chose a seemingly safer course : a medium-size stimulus package that was clearly not up to the task
And that 's not 20\/20 hindsight
In early 2009 , many economists , yours truly included , were more or less frantically warning that the administration 's proposals were nowhere near bold enough
Worse , there was no Plan B. By late 2009 , it was already obvious that the worriers had been right , that the program was much too small
Mr. Obama could have gone to the nation and said , `` My predecessor left the economy in even worse shape than we realized , and we need further action .
But he did n't
Instead , he and his officials continued to claim that their original plan was just right , damaging their credibility even further as the economy continued to fall short
Meanwhile , the administration 's bank-friendly policies and rhetoric - dictated by fear of hurting financial confidence - ended up fueling populist anger , to the benefit of even more bank-friendly Republicans
Mr. Obama added to his problems by effectively conceding the argument over the role of government in a depressed economy
I felt a sense of despair during Mr. Obama 's first State of the Union address , in which he declared that `` families across the country are tightening their belts and making tough decisions
The federal government should do the same .
Not only was this bad economics - right now the government must spend , because the private sector ca n't or wo n't - it was almost a verbatim repeat of what John Boehner , the soon-to-be House speaker , said when attacking the original stimulus
If the president wo n't speak up for his own economic philosophy , who will
So where , in this story , does `` focus '' come in
Lack of nerve
Lack of courage in one 's own convictions
Lack of focus
And why would failing to tackle health care have produced a better outcome
The focus people never explain
Of course , there 's a subtext to the whole line that health reform was a mistake : namely , that Democrats should stop acting like Democrats and go back to being Republicans-lite
Parse what people like Mr. Bayh are saying , and it amounts to demanding that Mr. Obama spend the next two years cringing and admitting that conservatives were right
There is an alternative : Mr. Obama can take a stand
For one thing , he still has the ability to engineer significant relief to homeowners , one area where his administration completely dropped the ball during its first two years
Beyond that , Plan B is still available
He can propose real measures to create jobs and aid the unemployed and put Republicans on the spot for standing in the way of the help Americans need
Would taking such a stand be politically risky
Yes , of course
But Mr. Obama 's economic policy ended up being a political disaster precisely because he tried to play it safe
It 's time for him to try something different
Remember those Republican boasts that they would turn health care into President Obama 's Waterloo
Well , exit polls suggest that to the extent that health care was an issue in Tuesday 's elections , it worked in Democrats ' favor
But while health care wo n't be Mr. Obama 's Waterloo , economic policy is starting to look like his Anzio
True , the elections were n't a referendum on Mr. Obama
Most voters focused on local issues and those who did focus on national issues tended , if anything , to go Democratic
In New Jersey , voters who considered health care the top issue went for Gov. Jon Corzine by a 4-to-1 margin ; Chris Christie won voters who were concerned about property taxes and corruption
Yet there was a national element to the election
Voters across America are in a bad mood , largely because of the still-grim economic situation
And when voters are feeling bad , they turn on whomever currently holds office
Even Michael Bloomberg , the mayor of New York City , saw his supposedly easy reelection turn into a tight race
And challengers did well even if they had no coherent alternative to offer
Mr. Christie never explained how he can reduce property taxes given New Jersey 's dire fiscal straits but voters were nonetheless willing to take a flier
This bodes ill for the Democrats in the midterm elections next year not because voters will reject their agenda , but because all indications are that a year from now unemployment will still be painfully high
And Republicans may well benefit , despite having become the party of no ideas
Which brings me to the Anzio analogy
The World War II battle of Anzio was a classic example of the perils of being too cautious
Allied forces landed far behind enemy lines , catching their opponents by surprise
Instead of following up on this advantage , however , the American commander hunkered down in his beachhead and soon found himself penned in by German forces on the surrounding hills , suffering heavy casualties
The parallel with current economic policy runs as follows : early this year , President Obama came into office with a strong mandate and proclaimed the need to take bold action on the economy
His actual actions , however , were cautious rather than bold
They were enough to pull the economy back from the brink , but not enough to bring unemployment down
Thus the stimulus bill fell far short of what many economists including some in the administration itself considered appropriate
According to The New Yorker , Christina Romer , the chairwoman of the president 's Council of Economic Advisers , estimated that a package of more than $ 1.2 trillion was justified
Meanwhile , the administration balked at proposals to put large amounts of additional capital into banks , which would probably have required temporary nationalization of the weakest institutions
Instead , it turned to a strategy of benign neglect basically , hoping that the banks could earn their way back to financial health
Administration officials would presumably argue that they were constrained by political realities , that a bolder policy could n't have passed Congress
But they never tested that assumption , and they also never gave any public indication that they were doing less than they wanted
The official line was that policy was just right , making it hard to explain now why more is needed
And more is needed
Yes , the economy grew fairly fast in the third quarter but not fast enough to make significant progress on jobs
And there 's little reason to expect things to look better going forward
The stimulus has already had its maximum effect on growth
Even Timothy Geithner , the Treasury secretary , admits that banks remain reluctant to lend
Many economists predict that the economy 's growth , such as it is , will fade out over the course of next year
The problem is that it 's not clear what Mr. Obama can do about this prospect
Conventional wisdom in Washington seems to have congealed around the view that budget deficits preclude any further fiscal stimulus a view that 's all wrong on the economics , but that does n't seem to matter
Meanwhile , the Democratic base , so energized last year , has lost much of its passion , at least partly because the administration 's soft-touch approach to Wall Street has seemed to many like a betrayal of their ideals
The president , then , having failed to exploit his early opportunities , is pinned down in his too-small beachhead
If the Democrats lose badly in the midterms , the talking heads will say that Mr. Obama tried to do too much , this is a center-right nation , and so on
But the truth is that Mr. Obama put his agenda at risk by doing too little
The fateful decision , early this year , to go for economic half-measures may haunt Democrats for years to come
Tuesday , Nov. 4 , 2008 , is a date that will live in fame -LRB- the opposite of infamy -RRB- forever
If the election of our first African-American president did n't stir you , if it did n't leave you teary-eyed and proud of your country , there 's something wrong with you
But will the election also mark a turning point in the actual substance of policy
Can Barack Obama really usher in a new era of progressive policies
Yes , he can
Right now , many commentators are urging Mr. Obama to think small
Some make the case on political grounds : America , they say , is still a conservative country , and voters will punish Democrats if they move to the left
Others say that the financial and economic crisis leaves no room for action on , say , health care reform
Let 's hope that Mr. Obama has the good sense to ignore this advice
About the political argument : Anyone who doubts that we 've had a major political realignment should look at what 's happened to Congress
After the 2004 election , there were many declarations that we 'd entered a long-term , perhaps permanent era of Republican dominance
Since then , Democrats have won back-to-back victories , picking up at least 12 Senate seats and more than 50 House seats
They now have bigger majorities in both houses than the G.O.P. ever achieved in its 12-year reign
Bear in mind , also , that this year 's presidential election was a clear referendum on political philosophies and the progressive philosophy won
Maybe the best way to highlight the importance of that fact is to contrast this year 's campaign with what happened four years ago
In 2004 , President Bush concealed his real agenda
He basically ran as the nation 's defender against gay married terrorists , leaving even his supporters nonplussed when he announced , soon after the election was over , that his first priority was Social Security privatization
That was n't what people thought they had been voting for , and the privatization campaign quickly devolved from juggernaut to farce
This year , however , Mr. Obama ran on a platform of guaranteed health care and tax breaks for the middle class , paid for with higher taxes on the affluent
John McCain denounced his opponent as a socialist and a `` redistributor , '' but America voted for him anyway
That 's a real mandate
What about the argument that the economic crisis will make a progressive agenda unaffordable
Well , there 's no question that fighting the crisis will cost a lot of money
Rescuing the financial system will probably require large outlays beyond the funds already disbursed
And on top of that , we badly need a program of increased government spending to support output and employment
Could next year 's federal budget deficit reach $ 1 trillion
But standard textbook economics says that it 's O.K. , in fact appropriate , to run temporary deficits in the face of a depressed economy
Meanwhile , one or two years of red ink , while it would add modestly to future federal interest expenses , should n't stand in the way of a health care plan that , even if quickly enacted into law , probably would n't take effect until 2011
Beyond that , the response to the economic crisis is , in itself , a chance to advance the progressive agenda
Now , the Obama administration should n't emulate the Bush administration 's habit of turning anything and everything into an argument for its preferred policies
#NAME?
The economy needs help let 's cut taxes on rich people
Tax cuts for rich people work let 's do some more !
But it would be fair for the new administration to point out how conservative ideology , the belief that greed is always good , helped create this crisis
What F.D.R. said in his second inaugural address `` We have always known that heedless self-interest was bad morals ; we know now that it is bad economics '' has never rung truer
And right now happens to be one of those times when the converse is also true , and good morals are good economics
Helping the neediest in a time of crisis , through expanded health and unemployment benefits , is the morally right thing to do ; it 's also a far more effective form of economic stimulus than cutting the capital gains tax
Providing aid to beleaguered state and local governments , so that they can sustain essential public services , is important for those who depend on those services ; it 's also a way to avoid job losses and limit the depth of the economy 's slump
So a serious progressive agenda call it a new New Deal is n't just economically possible , it 's exactly what the economy needs
The bottom line , then , is that Barack Obama should n't listen to the people trying to scare him into being a do-nothing president
He has the political mandate ; he has good economics on his side
You might say that the only thing he has to fear is fear itself
The Fed - Doing It Again Eight years ago Ben Bernanke , already a governor at the Federal Reserve although not yet chairman , spoke at a conference honoring Milton Friedman
He closed his talk by addressing Friedman 's famous claim that the Fed was responsible for the Great Depression , because it failed to do what was necessary to save the economy
`` You 're right , '' said Mr. Bernanke , `` we did it
We 're very sorry
But thanks to you , we wo n't do it again .
Famous last words
For we are , in fact , doing it again
It 's true that things are n't as bad as they were during the worst of the Depression
But that 's not saying much
And as in the 1930s , every proposal to do something to improve the situation is met with a firestorm of opposition and criticism
As a result , by the time the actual policy emerges , it 's watered down to such an extent that it 's almost guaranteed to fail
We 've already seen this happen with fiscal policy : fearing opposition in Congress , the Obama administration offered an inadequate plan , only to see the plan weakened further in the Senate
In the end , the small rise in federal spending was effectively offset by cuts at the state and local level , so that there was no real stimulus to the economy
Now the same thing is happening to monetary policy
The case for a more expansionary policy by the Fed is overwhelming
Unemployment is disastrously high , while U.S. inflation data over the past few years almost perfectly match the early stages of Japan 's relentless slide into corrosive deflation
Unfortunately , conventional monetary policy is no longer available : the short-term interest rates the Fed normally targets are already close to zero
So the Fed is shifting from its usual policy of buying only short-term debt , and is now buying long-term debt - a policy generally referred to as `` quantitative easing .
#NAME?
Do n't ask .
There 's nothing outlandish about this action
As Mr. Bernanke tried to explain Saturday , `` This is just monetary policy , '' adding , `` It will work or not work in much the same way that ordinary , more conventional , familiar monetary policy works .
Yet the Pain Caucus - my term for those who have opposed every effort to break out of our economic trap - is going wild
This time , much of the noise is coming from foreign governments , many of which are complaining vociferously that the Fed 's actions have weakened the dollar
All I can say about this line of criticism is that the hypocrisy is so thick you could cut it with a knife
After all , you have China , which is engaged in currency manipulation on a scale unprecedented in world history - and hurting the rest of the world by doing so - attacking America for trying to put its own house in order
You have Germany , whose economy is kept afloat by a huge trade surplus , criticizing America for running trade deficits - then lashing out at a policy that might , by weakening the dollar , actually do something to reduce those deficits
As a practical matter , however , this foreign criticism does n't matter much
The real damage is being done by our domestic inflationistas - the people who have spent every step of our march toward Japan-style deflation warning about runaway inflation just around the corner
They 're doing it again - and they may already have succeeded in emasculating the Fed 's new policy
For the big concern about quantitative easing is n't that it will do too much ; it is that it will accomplish too little
Reasonable estimates suggest that the Fed 's new policy is unlikely to reduce interest rates enough to make more than a modest dent in unemployment
The only way the Fed might accomplish more is by changing expectations - specifically , by leading people to believe that we will have somewhat above-normal inflation over the next few years , which would reduce the incentive to sit on cash
The idea that higher inflation might help is n't outlandish ; it has been raised by many economists , some regional Fed presidents and the International Monetary Fund
But in the same remarks in which he defended his new policy , Mr. Bernanke - clearly trying to appease the inflationistas - vowed not to change the Fed 's price target : `` I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy .
And there goes the best hope that the Fed 's plan might actually work
Think of it this way : Mr. Bernanke is getting the Obama treatment , and making the Obama response
He 's facing intense , knee-jerk opposition to his efforts to rescue the economy
In an effort to mute that criticism , he 's scaling back his plans in such a way as to guarantee that they 'll fail
And the almost 15 million unemployed American workers , half of whom have been jobless for 21 weeks or more , will pay the price , as the slump goes on and on
The United States spends far more on health care per person than any other nation
Yet we have lower life expectancy than most other rich countries
Furthermore , every other advanced country provides all its citizens with health insurance ; only in America is a large fraction of the population uninsured or underinsured
You might think that these facts would make the case for major reform of America s health care system reform that would involve , among other things , learning from other countries experience irrefutable
Instead , however , apologists for the status quo offer a barrage of excuses for our system s miserable performance
So I thought it would be useful to offer a catalog of the most commonly heard apologies for American health care , and the reasons they won t wash.
Excuse No. 1 : No insurance , no problem
I mean , people have access to health care in America , said President Bush a few months ago
After all , you just go to an emergency room
He was widely mocked for his cluelessness , yet many apologists for the health care system in the United States seem almost equally clueless
We re told , for example , that there really aren t that many uninsured American citizens , because some of the uninsured are illegal immigrants , while some of the rest are actually entitled to Medicaid
This misses the point that the 47 million people in this country without insurance are an ever-changing group , so that the experience of being without insurance extends to a much broader group in fact , more than one in every three people in America under the age of 65 was uninsured at some point in 2006 or 2007
Oh , and finding out that you re covered by Medicaid when you show up at an emergency room isn t at all the same thing as receiving regular medical care
Beyond that , a large fraction of the population about one in four nonelderly Americans , according to a Consumer Reports survey is underinsured , with coverage so meager they often postponed medical care because of costs
So , yes , lack of insurance is a very big problem , a problem that reaches deep into the middle class
Excuse No. 2 : It s the cheeseburgers
Americans don t have a bad health system , say the apologists , they just have bad habits
Overeating and teenage sex , not the huge overhead of America s private health insurance companies the United States spends almost six times as much on health care administration as other advanced countries are the source of our problems
There s a grain of truth to this claim : Bad habits may partially explain America s low life expectancy
But the big question isn t why we have lower life expectancy than Britain , Canada or France , it s why we spend far more on health care without getting better results
And lifestyle isn t the explanation : the most definitive estimates , such as those of the McKinsey Global Institute , say that diseases that are associated with obesity and other lifestyle-related problems play , at most , a minor role in high U.S. health care costs
Excuse No. 3 : 2007 is better than 1950
This is an argument that baffles me , but you hear it all the time
When you point out that America spends far more on health care than other countries , but gets worse results , the apologists reply : Sure , we spend a lot of money on health care , but medical care is a lot better than it was in 1950 , so it s money well spent
It s as if you went to a store to buy a DVD player , and the salesman told you not to worry about the fact that his prices are twice those of his competitors after all , the machines on offer at his store are a lot better than they were five years ago
It is , in other words , an argument that makes no sense at all , yet respectable economists make it with a straight face
Excuse No. 4 : Socialized medicine
Socialized medicine
Rudy Giuliani s fake numbers on prostate cancer which , by the way , he still refuses to admit were wrong were the latest entry in a long , dishonorable tradition of peddling scare stories about the evils of government run health care
The reality is that the best foreign health care systems , especially those of France and Germany , do as well or better than the U.S. system on every dimension , while costing far less money
But the best way to counter scare talk about socialized medicine , aside from swatting down falsehoods would journalists please stop saying that Rudy s claims , which are just wrong , are in dispute
may be to point out that every American 65 and older is covered by a government health insurance program called Medicare
And Americans like that program very much , thank you
So , now you know how to answer the false claims you ll hear about health care
And believe me , you re going to hear them again , and again , and again
Last Thursday there was a rally outside the U.S. Capitol to protest pending health care legislation , featuring the kinds of things we 've grown accustomed to , including large signs showing piles of bodies at Dachau with the caption `` National Socialist Healthcare .
It was grotesque and it was also ominous
For what we may be seeing is America starting to be Californiafied
The key thing to understand about that rally is that it was n't a fringe event
It was sponsored by the House Republican leadership in fact , it was officially billed as a G.O.P. press conference
Senior lawmakers were in attendance , and apparently had no problem with the tone of the proceedings
True , Eric Cantor , the second-ranking House Republican , offered some mild criticism after the fact
But the operative word is `` mild .
The signs were `` inappropriate , '' said his spokesman , and the use of Hitler comparisons by such people as Rush Limbaugh , said Mr. Cantor , `` conjures up images that frankly are not , I think , very helpful .
What all this shows is that the G.O.P. has been taken over by the people it used to exploit
The state of mind visible at recent right-wing demonstrations is nothing new
Back in 1964 the historian Richard Hofstadter published an essay titled , `` The Paranoid Style in American Politics , '' which reads as if it were based on today 's headlines : Americans on the far right , he wrote , feel that `` America has been largely taken away from them and their kind , though they are determined to try to repossess it and to prevent the final destructive act of subversion .
Sound familiar
But while the paranoid style is n't new , its role within the G.O.P. is
When Hofstadter wrote , the right wing felt dispossessed because it was rejected by both major parties
That changed with the rise of Ronald Reagan : Republican politicians began to win elections in part by catering to the passions of the angry right
Until recently , however , that catering mostly took the form of empty symbolism
Once elections were won , the issues that fired up the base almost always took a back seat to the economic concerns of the elite
Thus in 2004 George W. Bush ran on antiterrorism and `` values , '' only to announce , as soon as the election was behind him , that his first priority was changing Social Security
But something snapped last year
Conservatives had long believed that history was on their side , so the G.O.P. establishment could , in effect , urge hard-right activists to wait just a little longer : once the party consolidated its hold on power , they 'd get what they wanted
After the Democratic sweep , however , extremists could no longer be fobbed off with promises of future glory
Furthermore , the loss of both Congress and the White House left a power vacuum in a party accustomed to top-down management
At this point Newt Gingrich is what passes for a sober , reasonable elder statesman of the G.O.P. And he has no authority : Republican voters ignored his call to support a relatively moderate , electable candidate in New York 's special Congressional election
Real power in the party rests , instead , with the likes of Rush Limbaugh , Glenn Beck and Sarah Palin -LRB- who at this point is more a media figure than a conventional politician -RRB-
Because these people are n't interested in actually governing , they feed the base 's frenzy instead of trying to curb or channel it
So all the old restraints are gone
In the short run , this may help Democrats , as it did in that New York race
But maybe not : elections are n't necessarily won by the candidate with the most rational argument
They 're often determined , instead , by events and economic conditions
In fact , the party of Limbaugh and Beck could well make major gains in the midterm elections
The Obama administration 's job-creation efforts have fallen short , so that unemployment is likely to stay disastrously high through next year and beyond
The banker-friendly bailout of Wall Street has angered voters , and might even let Republicans claim the mantle of economic populism
Conservatives may not have better ideas , but voters might support them out of sheer frustration
And if Tea Party Republicans do win big next year , what has already happened in California could happen at the national level
In California , the G.O.P. has essentially shrunk down to a rump party with no interest in actually governing but that rump remains big enough to prevent anyone else from dealing with the state 's fiscal crisis
If this happens to America as a whole , as it all too easily could , the country could become effectively ungovernable in the midst of an ongoing economic disaster
The point is that the takeover of the Republican Party by the irrational right is no laughing matter
Something unprecedented is happening here and it 's very bad for America
Last month , when the U.S. Treasury Department allowed Lehman Brothers to fail , I wrote that Henry Paulson , the Treasury secretary , was playing financial Russian roulette
Sure enough , there was a bullet in that chamber : Lehman 's failure caused the world financial crisis , already severe , to get much , much worse
The consequences of Lehman 's fall were apparent within days , yet key policy players have largely wasted the past four weeks
Now they 've reached a moment of truth : They 'd better do something soon in fact , they 'd better announce a coordinated rescue plan this weekend or the world economy may well experience its worst slump since the Great Depression
Let 's talk about where we are right now
The current crisis started with a burst housing bubble , which led to widespread mortgage defaults , and hence to large losses at many financial institutions
That initial shock was compounded by secondary effects , as lack of capital forced banks to pull back , leading to further declines in the prices of assets , leading to more losses , and so on a vicious circle of `` deleveraging .
Pervasive loss of trust in banks , including on the part of other banks , reinforced the vicious circle
The downward spiral accelerated post-Lehman
Money markets , already troubled , effectively shut down one line currently making the rounds is that the only things anyone wants to buy right now are Treasury bills and bottled water
The response to this downward spiral on the part of the world 's two great monetary powers the United States , on one side , and the 15 nations that use the euro , on the other has been woefully inadequate
Europe , lacking a common government , has literally been unable to get its act together ; each country has been making up its own policy , with little coordination , and proposals for a unified response have gone nowhere
The United States should have been in a much stronger position
And when Mr. Paulson announced his plan for a huge bailout , there was a temporary surge of optimism
But it soon became clear that the plan suffered from a fatal lack of intellectual clarity
Mr. Paulson proposed buying $ 700 billion worth of `` troubled assets '' toxic mortgage-related securities from banks , but he was never able to explain why this would resolve the crisis
What he should have proposed instead , many economists agree , was direct injection of capital into financial firms : The U.S. government would provide financial institutions with the capital they need to do business , thereby halting the downward spiral , in return for partial ownership
When Congress modified the Paulson plan , it introduced provisions that made such a capital injection possible , but not mandatory
And until two days ago , Mr. Paulson remained resolutely opposed to doing the right thing
But on Wednesday the British government , showing the kind of clear thinking that has been all too scarce on this side of the pond , announced a plan to provide banks with 50 billion in new capital the equivalent , relative to the size of the economy , of a $ 500 billion program here together with extensive guarantees for financial transactions between banks
And U.S. Treasury officials now say that they plan to do something similar , using the authority they did n't want but Congress gave them anyway
The question now is whether these moves are too little , too late
I do n't think so , but it will be very alarming if this weekend rolls by without a credible announcement of a new financial rescue plan , involving not just the United States but all the major players
Why do we need international cooperation
Because we have a globalized financial system in which a crisis that began with a bubble in Florida condos and California McMansions has caused monetary catastrophe in Iceland
We 're all in this together , and need a shared solution
Why this weekend
Because there happen to be two big meetings taking place in Washington : a meeting of top financial officials from the major advanced nations on Friday , then the annual International Monetary Fund\/World Bank meeting Saturday and Sunday
If these meetings end without at least an agreement in principle on a global rescue plan if everyone goes home with nothing more than vague assertions that they intend to stay on top of the situation a golden opportunity will have been missed , and the downward spiral could easily get even worse
What should be done
The United States and Europe should just say `` Yes , prime minister .
The British plan is n't perfect , but there 's widespread agreement among economists that it offers by far the best available template for a broader rescue effort
And the time to act is now
You may think that things ca n't get any worse but they can , and if nothing is done in the next few days , they will
Here 's the narrative you hear everywhere : President Obama has presided over a huge expansion of government , but unemployment has remained high
And this proves that government spending ca n't create jobs
Here 's what you need to know : The whole story is a myth
There never was a big expansion of government spending
In fact , that has been the key problem with economic policy in the Obama years : we never had the kind of fiscal expansion that might have created the millions of jobs we need
Ask yourself : What major new federal programs have started up since Mr. Obama took office
Health care reform , for the most part , has n't kicked in yet , so that ca n't be it
So are there giant infrastructure projects under way
Are there huge new benefits for low-income workers or the poor
Where 's all that spending we keep hearing about
It never happened
To be fair , spending on safety-net programs , mainly unemployment insurance and Medicaid , has risen - because , in case you have n't noticed , there has been a surge in the number of Americans without jobs and badly in need of help
And there were also substantial outlays to rescue troubled financial institutions , although it appears that the government will get most of its money back
But when people denounce big government , they usually have in mind the creation of big bureaucracies and major new programs
And that just has n't taken place
Consider , in particular , one fact that might surprise you : The total number of government workers in America has been falling , not rising , under Mr. Obama
A small increase in federal employment was swamped by sharp declines at the state and local level - most notably , by layoffs of schoolteachers
Total government payrolls have fallen by more than 350,000 since January 2009
Now , direct employment is n't a perfect measure of the government 's size , since the government also employs workers indirectly when it buys goods and services from the private sector
And government purchases of goods and services have gone up
But adjusted for inflation , they rose only 3 percent over the last two years - a pace slower than that of the previous two years , and slower than the economy 's normal rate of growth
So as I said , the big government expansion everyone talks about never happened
This fact , however , raises two questions
First , we know that Congress enacted a stimulus bill in early 2009 ; why did n't that translate into a big rise in government spending
Second , if the expansion never happened , why does everyone think it did
Part of the answer to the first question is that the stimulus was n't actually all that big compared with the size of the economy
Furthermore , it was n't mainly focused on increasing government spending
Of the roughly $ 600 billion cost of the Recovery Act in 2009 and 2010 , more than 40 percent came from tax cuts , while another large chunk consisted of aid to state and local governments
Only the remainder involved direct federal spending
And federal aid to state and local governments was n't enough to make up for plunging tax receipts in the face of the economic slump
So states and cities , which ca n't run large deficits , were forced into drastic spending cuts , more than offsetting the modest increase at the federal level
The answer to the second question - why there 's a widespread perception that government spending has surged , when it has n't - is that there has been a disinformation campaign from the right , based on the usual combination of fact-free assertions and cooked numbers
And this campaign has been effective in part because the Obama administration has n't offered an effective reply
Actually , the administration has had a messaging problem on economic policy ever since its first months in office , when it went for a stimulus plan that many of us warned from the beginning was inadequate given the size of the economy 's troubles
You can argue that Mr. Obama got all he could - that a larger plan would n't have made it through Congress -LRB- which is questionable -RRB- , and that an inadequate stimulus was much better than none at all -LRB- which it was -RRB-
But that 's not an argument the administration ever made
Instead , it has insisted throughout that its original plan was just right , a position that has become increasingly awkward as the recovery stalls
And a side consequence of this awkward positioning is that officials ca n't easily offer the obvious rebuttal to claims that big spending failed to fix the economy - namely , that thanks to the inadequate scale of the Recovery Act , big spending never happened in the first place
But if they wo n't say it , I will : if job-creating government spending has failed to bring down unemployment in the Obama era , it 's not because it does n't work ; it 's because it was n't tried
Two weeks ago , the Democratic response to President Bush s weekly radio address was delivered by a 12-year-old , Graeme Frost
Graeme , who along with his sister received severe brain injuries in a 2004 car crash and continues to need physical therapy , is a beneficiary of the State Children s Health Insurance Program
Mr. Bush has vetoed a bipartisan bill that would have expanded that program to cover millions of children who would otherwise have been uninsured
First , some background
The Frosts and their four children are exactly the kind of people S-chip was intended to help : working Americans who can t afford private health insurance
The parents have a combined income of about $ 45,000 , and don t receive health insurance from employers
When they looked into buying insurance on their own before the accident , they found that it would cost $ 1,200 a month a prohibitive sum given their income
After the accident , when their children needed expensive care , they couldn t get insurance at any price
Fortunately , they received help from Maryland s S-chip program
The state has relatively restrictive rules for eligibility : children must come from a family with an income under 200 percent of the poverty line
For families with four children that s $ 55,220 , so the Frosts clearly qualified
Graeme Frost , then , is exactly the kind of child the program is intended to help
But that didn t stop the right from mounting an all-out smear campaign against him and his family
Soon after the radio address , right-wing bloggers began insisting that the Frosts must be affluent because Graeme and his sister attend private schools -LRB- they re on scholarship -RRB- , because they have a house in a neighborhood where some houses are now expensive -LRB- the Frosts bought their house for $ 55,000 in 1990 when the neighborhood was rundown and considered dangerous -RRB- and because Mr. Frost owns a business -LRB- it was dissolved in 1999 -RRB-
You might be tempted to say that bloggers make unfounded accusations all the time
But we re not talking about some obscure fringe
The charge was led by Michelle Malkin , who according to Technorati has the most-trafficked right-wing blog on the Internet , and in addition to blogging has a nationally syndicated column , writes for National Review and is a frequent guest on Fox News
The attack on Graeme s family was also quickly picked up by Rush Limbaugh , who is so important a player in the right-wing universe that he has had multiple exclusive interviews with Vice President Dick Cheney
And G.O.P. politicians were eager to join in the smear
The New York Times reported that Republicans in Congress were gearing up to use Graeme as evidence that Democrats have overexpanded the health program to include families wealthy enough to afford private insurance but had backed off as the case fell apart
In fact , however , Republicans had already made their first move : an e-mail message from the office of Mitch McConnell , the Senate minority leader , sent to reporters and obtained by the Web site Think Progress , repeated the smears against the Frosts and asked : Could the Dems really have done that bad of a job vetting this family
And the attempt to spin the media worked , to some extent : despite reporting that has thoroughly debunked the smears , a CNN report yesterday suggested that the Democrats had made a tactical error in holding up Graeme as their poster child , and closely echoed the language of the e-mail from Mr. McConnell s office
All in all , the Graeme Frost case is a perfect illustration of the modern right-wing political machine at work , and in particular its routine reliance on character assassination in place of honest debate
If service members oppose a Republican war , they re phony soldiers ; if Michael J. Fox opposes Bush policy on stem cells , he s faking his Parkinson s symptoms ; if an injured 12-year-old child makes the case for a government health insurance program , he s a fraud
Meanwhile , leading conservative politicians , far from trying to distance themselves from these smears , rush to embrace them
And some people in the news media are still willing to be used as patsies
Politics aside , the Graeme Frost case demonstrates the true depth of the health care crisis : every other advanced country has universal health insurance , but in America , insurance is now out of reach for many hard-working families , even if they have incomes some might call middle-class
And there s one more point that should not be forgotten : ultimately , this isn t about the Frost parents
It s about Graeme Frost and his sister
I don t know about you , but I think American children who need medical care should get it , period
Even if you think adults have made bad choices a baseless smear in the case of the Frosts , but put that on one side only a truly vicious political movement would respond by punishing their injured children
Related Searches State Children 's Health Insurance Program -LRB- S-CHIP -RRB- Health Insurance and Managed Care United States Politics and
One lesson from the Great Depression is that you should never underestimate the destructive power of bad ideas
And some of the bad ideas that helped cause the Depression have , alas , proved all too durable : in modified form , they continue to influence economic debate today
What ideas am I talking about
The economic historian Peter Temin has argued that a key cause of the Depression was what he calls the `` gold-standard mentality .
By this he means not just belief in the sacred importance of maintaining the gold value of one 's currency , but a set of associated attitudes : obsessive fear of inflation even in the face of deflation ; opposition to easy credit , even when the economy desperately needs it , on the grounds that it would be somehow corrupting ; assertions that even if the government can create jobs it should n't , because this would only be an `` artificial '' recovery
In the early 1930s this mentality led governments to raise interest rates and slash spending , despite mass unemployment , in an attempt to defend their gold reserves
And even when countries went off gold , the prevailing mentality made them reluctant to cut rates and create jobs
But we 're past all that now
Or are we
America is n't about to go back on the gold standard
But a modern version of the gold standard mentality is nonetheless exerting a growing influence on our economic discourse
And this new version of a bad old idea could undermine our chances for full recovery
Consider first the current uproar over the declining international value of the dollar
The truth is that the falling dollar is good news
For one thing , it 's mainly the result of rising confidence : the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America , and it 's falling again now that the fear is subsiding
And a lower dollar is good for U.S. exporters , helping us make the transition away from huge trade deficits to a more sustainable international position
But if you get your opinions from , say , The Wall Street Journal 's editorial page , you 're told that the falling dollar is a terrible thing , a sign that the world is losing faith in America -LRB- and especially , of course , in President Obama -RRB-
Something , you believe , must be done to stop the dollar 's slide
And in practice the dollar 's decline has become a stick with which conservative members of Congress beat the Federal Reserve , pressuring the Fed to scale back its efforts to support the economy
We can only hope that the Fed stands up to this pressure
But there are worrying signs of a misguided monetary mentality within the Federal Reserve system itself
In recent weeks there have been a number of statements from Fed officials , mainly but not only presidents of regional Federal Reserve banks , calling for an early return to tighter money , including higher interest rates
Now , people in the Federal Reserve system are normally extremely circumspect when making statements about future monetary policy , so as not to step on the efforts of the Fed 's Open Market Committee , which actually sets those rates , to shape expectations
So it 's extraordinary to see all these officials suddenly breaking the implicit rules , in effect lecturing the Open Market Committee about what it should do
What 's even more extraordinary , however , is the idea that raising rates would make sense any time soon
After all , the unemployment rate is a horrifying 9.8 percent and still rising , while inflation is running well below the Fed 's long-term target
This suggests that the Fed should be in no hurry to tighten in fact , standard policy rules of thumb suggest that interest rates should be left on hold for the next two years or more , or until the unemployment rate has fallen to around 7 percent
Yet some Fed officials want to pull the trigger on rates much sooner
To avoid a `` Great Inflation , '' says Charles Plosser of the Philadelphia Fed , `` we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels .
Jeffrey Lacker of the Richmond Fed says that rates may need to rise even if `` the unemployment rate has n't started falling yet .
I do n't know what analysis lies behind these itchy trigger fingers
But it probably is n't about analysis , anyway it 's about mentality , the sense that central banks are supposed to act tough , not provide easy credit
And it 's crucial that we do n't let this mentality guide policy
We do seem to have avoided a second Great Depression
But giving in to a modern version of our grandfathers ' prejudices would be a very good way to ensure the next worst thing : a prolonged era of sluggish growth and very high unemployment
O.K. , the question is premature we still do n't know the exact shape of the planned financial rescues in Europe or for that matter the United States , let alone whether they 'll really work
What we do know , however , is that Mr. Brown and Alistair Darling , the chancellor of the Exchequer -LRB- equivalent to our Treasury secretary -RRB- , have defined the character of the worldwide rescue effort , with other wealthy nations playing catch-up
This is an unexpected turn of events
The British government is , after all , very much a junior partner when it comes to world economic affairs
It 's true that London is one of the world 's great financial centers , but the British economy is far smaller than the U.S. economy , and the Bank of England does n't have anything like the influence either of the Federal Reserve or of the European Central Bank
So you do n't expect to see Britain playing a leadership role
But the Brown government has shown itself willing to think clearly about the financial crisis , and act quickly on its conclusions
And this combination of clarity and decisiveness has n't been matched by any other Western government , least of all our own
What is the nature of the crisis
The details can be insanely complex , but the basics are fairly simple
The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments ; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs ; troubled financial institutions have tried to meet their debts and increase their capital by selling assets , but this has driven asset prices down , reducing their capital even further
What can be done to stem the crisis
Aid to homeowners , though desirable , ca n't prevent large losses on bad loans , and in any case will take effect too slowly to help in the current panic
The natural thing to do , then and the solution adopted in many previous financial crises is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership
This sort of temporary part-nationalization , which is often referred to as an `` equity injection , '' is the crisis solution advocated by many economists and sources told The Times that it was also the solution privately favored by Ben Bernanke , the Federal Reserve chairman
But when Henry Paulson , the U.S. Treasury secretary , announced his plan for a $ 700 billion financial bailout , he rejected this obvious path , saying , `` That 's what you do when you have failure .
Instead , he called for government purchases of toxic mortgage-backed securities , based on the theory that ... actually , it never was clear what his theory was
Meanwhile , the British government went straight to the heart of the problem and moved to address it with stunning speed
On Wednesday , Mr. Brown 's officials announced a plan for major equity injections into British banks , backed up by guarantees on bank debt that should get lending among banks , a crucial part of the financial mechanism , running again
And the first major commitment of funds will come on Monday five days after the plan 's announcement
At a special European summit meeting on Sunday , the major economies of continental Europe in effect declared themselves ready to follow Britain 's lead , injecting hundreds of billions of dollars into banks while guaranteeing their debts
And whaddya know , Mr. Paulson after arguably wasting several precious weeks has also reversed course , and now plans to buy equity stakes rather than bad mortgage securities -LRB- although he still seems to be moving with painful slowness -RRB-
As I said , we still do n't know whether these moves will work
But policy is , finally , being driven by a clear view of what needs to be done
Which raises the question , why did that clear view have to come from London rather than Washington
It 's hard to avoid the sense that Mr. Paulson 's initial response was distorted by ideology
Remember , he works for an administration whose philosophy of government can be summed up as `` private good , public bad , '' which must have made it hard to face up to the need for partial government ownership of the financial sector
I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson 's fumble
All across the executive branch , knowledgeable professionals have been driven out ; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he was n't making sense
Luckily for the world economy , however , Gordon Brown and his officials are making sense
And they may have shown us the way through this crisis
On the day after Al Gore shared the Nobel Peace Prize , The Wall Street Journal s editors couldn t even bring themselves to mention Mr. Gore s name
Instead , they devoted their editorial to a long list of people they thought deserved the prize more
And at National Review Online , Iain Murray suggested that the prize should have been shared with that well-known peace campaigner Osama bin Laden , who implicitly endorsed Gore s stance
You see , bin Laden once said something about climate change therefore , anyone who talks about climate change is a friend of the terrorists
What is it about Mr. Gore that drives right-wingers insane
Partly it s a reaction to what happened in 2000 , when the American people chose Mr. Gore but his opponent somehow ended up in the White House
Both the personality cult the right tried to build around President Bush and the often hysterical denigration of Mr. Gore were , I believe , largely motivated by the desire to expunge the stain of illegitimacy from the Bush administration
And now that Mr. Bush has proved himself utterly the wrong man for the job to be , in fact , the best president Al Qaeda s recruiters could have hoped for the symptoms of Gore derangement syndrome have grown even more extreme
The worst thing about Mr. Gore , from the conservative point of view , is that he keeps being right
In 1992 , George H. W. Bush mocked him as the ozone man , but three years later the scientists who discovered the threat to the ozone layer won the Nobel Prize in Chemistry
In 2002 he warned that if we invaded Iraq , the resulting chaos could easily pose a far greater danger to the United States than we presently face from Saddam
And so it has proved
But Gore hatred is more than personal
When National Review decided to name its anti-environmental blog Planet Gore , it was trying to discredit the message as well as the messenger
For the truth Mr. Gore has been telling about how human activities are changing the climate isn t just inconvenient
For conservatives , it s deeply threatening
Consider the policy implications of taking climate change seriously
We have always known that heedless self-interest was bad morals , said F.D.R.
We know now that it is bad economics
These words apply perfectly to climate change
It s in the interest of most people -LRB- and especially their descendants -RRB- that somebody do something to reduce emissions of carbon dioxide and other greenhouse gases , but each individual would like that somebody to be somebody else
Leave it up to the free market , and in a few generations Florida will be underwater
The solution to such conflicts between self-interest and the common good is to provide individuals with an incentive to do the right thing
In this case , people have to be given a reason to cut back on greenhouse gas emissions , either by requiring that they pay a tax on emissions or by requiring that they buy emission permits , which has pretty much the same effects as an emissions tax
We know that such policies work : the U.S. cap and trade system of emission permits on sulfur dioxide has been highly successful at reducing acid rain
Climate change is , however , harder to deal with than acid rain , because the causes are global
The sulfuric acid in America s lakes mainly comes from coal burned in U.S. power plants , but the carbon dioxide in America s air comes from coal and oil burned around the planet and a ton of coal burned in China has the same effect on the future climate as a ton of coal burned here
So dealing with climate change not only requires new taxes or their equivalent ; it also requires international negotiations in which the United States will have to give as well as get
Everything I ve just said should be uncontroversial but imagine the reception a Republican candidate for president would receive if he acknowledged these truths at the next debate
Today , being a good Republican means believing that taxes should always be cut , never raised
It also means believing that we should bomb and bully foreigners , not negotiate with them
So if science says that we have a big problem that can t be solved with tax cuts or bombs well , the science must be rejected , and the scientists must be slimed
For example , Investor s Business Daily recently declared that the prominence of James Hansen , the NASA researcher who first made climate change a national issue two decades ago , is actually due to the nefarious schemes of who else
George Soros
Which brings us to the biggest reason the right hates Mr. Gore : in his case the smear campaign has failed
He s taken everything they could throw at him , and emerged more respected , and more credible , than ever
And it drives them crazy
American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model
The Asian financial crisis of the late 1990s , in particular , led to a lot of self-satisfied moralizing
Thus , in 2000 , Lawrence Summers , then the Treasury secretary , declared that the keys to avoiding financial crisis were `` well-capitalized and supervised banks , effective corporate governance and bankruptcy codes , and credible means of contract enforcement .
By implication , these were things the Asians lacked but we had
Enlarge This Image Fred R. Conrad\/The New York Times The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance
These days , the idea that our banks were well capitalized and supervised sounds like a sick joke
And now the mortgage mess is making nonsense of claims that we have effective contract enforcement - in fact , the question is whether our economy is governed by any kind of rule of law
The story so far : An epic housing bust and sustained high unemployment have led to an epidemic of default , with millions of homeowners falling behind on mortgage payments
So servicers - the companies that collect payments on behalf of mortgage owners - have been foreclosing on many mortgages , seizing many homes
But do they actually have the right to seize these homes
Horror stories have been proliferating , like the case of the Florida man whose home was taken even though he had no mortgage
More significantly , certain players have been ignoring the law
Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation ; instead , they have relied on affidavits asserting that the papers are in order
And these affidavits were often produced by `` robo-signers , '' or low-level employees who had no idea whether their assertions were true
Now an awful truth is becoming apparent : In many cases , the documentation does n't exist
In the frenzy of the bubble , much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible
These loans were sold off to mortgage `` trusts , '' which , in turn , sliced and diced them into mortgage-backed securities
The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers ' obligations
But it 's now apparent that such niceties were frequently neglected
And this means that many of the foreclosures now taking place are , in fact , illegal
This is very , very bad
For one thing , it 's a near certainty that significant numbers of borrowers are being defrauded - charged fees they do n't actually owe , declared in default when , by the terms of their loan agreements , they are n't
Beyond that , if trusts ca n't produce proof that they actually own the mortgages against which they have been selling claims , the sponsors of these trusts will face lawsuits from investors who bought these claims - claims that are now , in many cases , worth only a small fraction of their face value
And who are these sponsors
Major financial institutions - the same institutions supposedly rescued by government programs last year
So the mortgage mess threatens to produce another financial crisis
What can be done
True to form , the Obama administration 's response has been to oppose any action that might upset the banks , like a temporary moratorium on foreclosures while some of the issues are resolved
Instead , it is asking the banks , very nicely , to behave better and clean up their act
I mean , that 's worked so well in the past , right
The response from the right is , however , even worse
Republicans in Congress are lying low , but conservative commentators like those at The Wall Street Journal 's editorial page have come out dismissing the lack of proper documents as a triviality
In effect , they 're saying that if a bank says it owns your house , we should just take its word
To me , this evokes the days when noblemen felt free to take whatever they wanted , knowing that peasants had no standing in the courts
But then , I suspect that some people regard those as the good old days
What should be happening
The excesses of the bubble years have created a legal morass , in which property rights are ill defined because nobody has proper documentation
And where no clear property rights exist , it 's the government 's job to create them
That wo n't be easy , but there are good ideas out there
For example , the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly , with their judgment standing unless appealed by the mortgage servicer
This would do a lot to clarify matters and help extract us from the morass
One thing is for sure : What we 're doing now is n't working
And pretending that things are O.K. wo n't convince anyone
In the past , the insurance industry 's power has been a major barrier to health-care reform
Most notably , the industry paid for the infamous `` Harry and Louise '' ads that helped kill the Clinton plan
But times have changed
Last weekend , the lobbying organization America 's Health Insurance Plans , or AHIP , released a report attacking the reform plan just passed by the Senate Finance Committee
Some news organizations gave the report prominent , uncritical coverage
But health-care experts quickly , and correctly , dismissed it as a hatchet job
And the end result of AHIP 's blunder may be a better bill than we would otherwise have had
For 2009 , it turns out , is not 1993
Once again , Republicans have tried to kill reform with smears and scare stories
But all they seem to have killed with their cries of `` socialism '' and warnings about `` death panels '' is their own credibility
Some form of health-care reform is highly likely to pass
So it 's a different game than it was 16 years ago
And it 's a game that the insurance industry apparently does n't know how to play
The motivation for the AHIP report seems to have been the decision by the Finance Committee to weaken the penalties for individuals who do n't sign up for insurance , even as it retains regulations requiring that insurers offer the same policies to everyone , regardless of medical history
The industry worries that some people will game the system , remaining uninsured as long as they 're healthy , then signing up when they get sick
This is , believe it or not , a valid concern
Many health-care economists believe that a strong individual mandate , requiring that almost everyone sign up , will be needed to make health reform work
And the Finance Committee probably did weaken the mandate too much
But AHIP , apparently unable to help itself , did n't stop there
Instead , the report threw every anti-reform argument the authors could think of at the wall , hoping that something would stick
One argument was particularly striking : the claim that attempts to limit Medicare spending would lead to higher insurance premiums
In fact , the report assumes that 100 percent of any reduction in Medicare payments to hospitals will translate into higher costs for patients with private insurance
The only way to justify this claim is to assume that all hospitals are purely charitable institutions , charging as little as they possibly can
Now , some hospitals may fit this description
But all of them
What 's more , this argument stands the usual logic of markets on its head : if you believe AHIP 's story , competition raises prices instead of reducing them
And it does n't matter where the competition comes from : anyone who gets a better deal , whether it 's Medicare or a private insurer , makes life worse for everyone else
I do n't believe that , and neither should you
Of course , the report does n't mention these implications
The only bad competition it talks about is competition from the government
Specifically , it claims that a public insurance option would be a bad thing not because it would be inefficient , but because the public plan would negotiate better prices
Is n't that an argument for , not against , such a plan
Which brings us to the ways in which AHIP may have done health reform a favor
As I said , the individual mandate probably should be stronger than it is in the Finance Committee 's bill
But there 's a reason the mandate was weakened : fear that too many people would balk at the cost of insurance , even with the subsidies provided to lower-income individuals and families
So why not address that cost
Aside from making the subsidies larger , which they should be , there are at least two changes to the legislation that would help limit costs
First , health exchanges special , regulated markets in which individuals and small businesses can buy insurance can be made stronger , in effect giving small buyers a better bargaining position
Second , the public option missing from the Finance Committee 's bill can be brought back in , giving private insurers some real competition
The insurance industry wo n't like these changes , but that matters less than it did a week ago
There 's also another point , which House Speaker Nancy Pelosi has stressed
Part of the opposition to a strong individual mandate comes from the sense that Americans will be forced to buy policies from a greedy insurance industry
Giving people , literally , another option the right to buy into a public plan instead would defuse that opposition
Even with stronger exchanges and a public option , health reform would probably increase , not reduce , insurance industry profits
But the insurers wanted it all
The good news is that by overreaching , they may have ensured that they wo n't get it
While the manic-depressive stock market is dominating the headlines , the more important story is the grim news coming in about the real economy
It 's now clear that rescuing the banks is just the beginning : the nonfinancial economy is also in desperate need of help
And to provide that help , we 're going to have to put some prejudices aside
It 's politically fashionable to rant against government spending and demand fiscal responsibility
But right now , increased government spending is just what the doctor ordered , and concerns about the budget deficit should be put on hold
Before I get there , let 's talk about the economic situation
Just this week , we learned that retail sales have fallen off a cliff , and so has industrial production
Unemployment claims are at steep-recession levels , and the Philadelphia Fed 's manufacturing index is falling at the fastest pace in almost 20 years
All signs point to an economic slump that will be nasty , brutish and long
How nasty
The unemployment rate is already above 6 percent -LRB- and broader measures of underemployment are in double digits -RRB-
It 's now virtually certain that the unemployment rate will go above 7 percent , and quite possibly above 8 percent , making this the worst recession in a quarter-century
And how long
It could be very long indeed
Think about what happened in the last recession , which followed the bursting of the late-1990s technology bubble
On the surface , the policy response to that recession looks like a success story
Although there were widespread fears that the United States would experience a Japanese-style `` lost decade , '' that did n't happen : the Federal Reserve was able to engineer a recovery from that recession by cutting interest rates
But the truth is that we were looking Japanese for quite a while : the Fed had a hard time getting traction
Despite repeated interest rate cuts , which eventually brought the federal funds rate down to just 1 percent , the unemployment rate just kept on rising ; it was more than two years before the job picture started to improve
And when a convincing recovery finally did come , it was only because Alan Greenspan had managed to replace the technology bubble with a housing bubble
Now the housing bubble has burst in turn , leaving the financial landscape strewn with wreckage
Even if the ongoing efforts to rescue the banking system and unfreeze the credit markets work and while it 's early days yet , the initial results have been disappointing it 's hard to see housing making a comeback any time soon
And if there 's another bubble waiting to happen , it 's not obvious
So the Fed will find it even harder to get traction this time
In other words , there 's not much Ben Bernanke can do for the economy
He can and should cut interest rates even more but nobody expects this to do more than provide a slight economic boost
On the other hand , there 's a lot the federal government can do for the economy
It can provide extended benefits to the unemployed , which will both help distressed families cope and put money in the hands of people likely to spend it
It can provide emergency aid to state and local governments , so that they are n't forced into steep spending cuts that both degrade public services and destroy jobs
It can buy up mortgages -LRB- but not at face value , as John McCain has proposed -RRB- and restructure the terms to help families stay in their homes
And this is also a good time to engage in some serious infrastructure spending , which the country badly needs in any case
The usual argument against public works as economic stimulus is that they take too long : by the time you get around to repairing that bridge and upgrading that rail line , the slump is over and the stimulus is n't needed
Well , that argument has no force now , since the chances that this slump will be over anytime soon are virtually nil
So let 's get those projects rolling
Will the next administration do what 's needed to deal with the economic slump
Not if Mr. McCain pulls off an upset
What we need right now is more government spending but when Mr. McCain was asked in one of the debates how he would deal with the economic crisis , he answered : `` Well , the first thing we have to do is get spending under control .
If Barack Obama becomes president , he wo n't have the same knee-jerk opposition to spending
But he will face a chorus of inside-the-Beltway types telling him that he has to be responsible , that the big deficits the government will run next year if it does the right thing are unacceptable
He should ignore that chorus
The responsible thing , right now , is to give the economy the help it needs
Now is not the time to worry about the deficit
Last month a Chinese trawler operating in Japanese-controlled waters collided with two vessels of Japan 's Coast Guard
Japan detained the trawler 's captain ; China responded by cutting off Japan 's access to crucial raw materials
And there was nowhere else to turn : China accounts for 97 percent of the world 's supply of rare earths , minerals that play an essential role in many high-technology products , including military equipment
Sure enough , Japan soon let the captain go
I do n't know about you , but I find this story deeply disturbing , both for what it says about China and what it says about us
On one side , the affair highlights the fecklessness of U.S. policy makers , who did nothing while an unreliable regime acquired a stranglehold on key materials
On the other side , the incident shows a Chinese government that is dangerously trigger-happy , willing to wage economic warfare on the slightest provocation
Some background : The rare earths are elements whose unique properties play a crucial role in applications ranging from hybrid motors to fiber optics
Until the mid-1980s the United States dominated production , but then China moved in
`` There is oil in the Middle East ; there is rare earth in China , '' declared Deng Xiaoping , the architect of China 's economic transformation , in 1992
Indeed , China has about a third of the world 's rare earth deposits
This relative abundance , combined with low extraction and processing costs - reflecting both low wages and weak environmental standards - allowed China 's producers to undercut the U.S. industry
You really have to wonder why nobody raised an alarm while this was happening , if only on national security grounds
But policy makers simply stood by as the U.S. rare earth industry shut down
In at least one case , in 2003 - a time when , if you believed the Bush administration , considerations of national security governed every aspect of U.S. policy - the Chinese literally packed up all the equipment in a U.S. production facility and shipped it to China
The result was a monopoly position exceeding the wildest dreams of Middle Eastern oil-fueled tyrants
And even before the trawler incident , China showed itself willing to exploit that monopoly to the fullest
The United Steelworkers recently filed a complaint against Chinese trade practices , stepping in where U.S. businesses fear to tread because they fear Chinese retaliation
The union put China 's imposition of export restrictions and taxes on rare earths - restrictions that give Chinese production in a number of industries an important competitive advantage - at the top of the list
Then came the trawler event
Chinese restrictions on rare earth exports were already in violation of agreements China made before joining the World Trade Organization
But the embargo on rare earth exports to Japan was an even more blatant violation of international trade law
Oh , and Chinese officials have not improved matters by insulting our intelligence , claiming that there was no official embargo
All of China 's rare earth exporters , they say - some of them foreign-owned - simultaneously decided to halt shipments because of their personal feelings toward Japan
So what are the lessons of the rare earth fracas
First , and most obviously , the world needs to develop non-Chinese sources of these materials
There are extensive rare earth deposits in the United States and elsewhere
However , developing these deposits and the facilities to process the raw materials will take both time and financial support
So will a prominent alternative : `` urban mining , '' a k a recycling of rare earths and other materials from used electronic devices
Second , China 's response to the trawler incident is , I 'm sorry to say , further evidence that the world 's newest economic superpower is n't prepared to assume the responsibilities that go with that status
Major economic powers , realizing that they have an important stake in the international system , are normally very hesitant about resorting to economic warfare , even in the face of severe provocation - witness the way U.S. policy makers have agonized and temporized over what to do about China 's grossly protectionist exchange-rate policy
China , however , showed no hesitation at all about using its trade muscle to get its way in a political dispute , in clear - if denied - violation of international trade law
Couple the rare earth story with China 's behavior on other fronts - the state subsidies that help firms gain key contracts , the pressure on foreign companies to move production to China and , above all , that exchange-rate policy - and what you have is a portrait of a rogue economic superpower , unwilling to play by the rules
And the question is what the rest of us are going to do about it
There are two things that are important in politics
The first is money , and I can t remember what the second one is
So declared Mark Hanna , the great Gilded Age political boss
Karl Rove has often described Hanna as his role model
And predictions that Mr. Rove and his disciples would succeed in creating a permanent Republican majority I have a whole bookshelf of volumes with titles like One Party Nation and Building Red America depended crucially on the assumption that the G.O.P. would have vastly more money than its opponents
It might even , some thought , match the 10-to-1 advantage Hanna gave William McKinley when he ran against William Jennings Bryan
According to data collected by the Center for Responsive Politics , in the current election cycle every one of the top 10 industries making political donations is giving more money to Democrats
Even industries that have in the past been overwhelmingly Republican , like insurance and pharmaceuticals , are now splitting their donations more or less evenly
Oil and gas is the only major industry that the G.O.P. can still call its own
The sudden burst of corporate affection for Democrats is good news for the party s campaign committees , but not necessarily good news for progressives
Before I get to the down side , however , let s talk about why business seems to be giving up on the G.O.P. To some extent it s a matter of cold political calculation
Polls , plus a wave of G.O.P. retirements , suggest that next year the Democrats will expand their majority in the House , which is already bigger than anything the Republicans ever had during their 12-year reign
Of the 34 Senate seats up for election , 22 are held by Republicans , and major Democratic gains seem all but inevitable
Add to this the weakness of the Republican presidential field , and it s not surprising that lobbyists are casting in their lot with the likely winners
But that s not the whole story
There s also disgust , even in the corporate world , with the corruption and incompetence of the Bush years
People on the left often describe the Bush administration as an agent of corporate America ; that s giving it too much credit
The truth is that while the administration has lavished favors on some powerful , established corporations , the biggest scandals have involved companies that were small or didn t exist at all until they started getting huge contracts thanks to their political connections
Thus , Blackwater USA was a tiny business until it somehow became the leading supplier of mercenaries for the War on Terror
And the lethal amateurishness of these loyal Bushies on the make horrifies the corporate elite almost as much as it horrifies ordinary Americans
Last but not least , even corporations are relieved to see the end of what amounted to a protection racket
In a classic 2003 article in The Washington Monthly , Nicholas Confessore -LRB- now at The New York Times -RRB- described the efforts of people like former Senator Rick Santorum to turn K Street into an appendage of the Republican Party not the other way around
The corporate lobbyists who once ran the show , loyal only to the parochial interests of their employer , wrote Mr. Confessore , are being replaced by party activists who are loyal first and foremost to the G.O.P. But corporations weren t happy
According to The Politico , many C.E.O. s used the term extortion to describe the annual shakedowns by committee chairmen with jurisdiction over their industries
And now that Mr. Santorum is out of office , heading the America s Enemies program at a right-wing think tank , the faint sound you hear from K Street is that of lobbyists singing : Ding , dong , the witch is dead
All of this greatly increases the odds that the Republicans , far from establishing a permanent majority , will be out of power for quite a while
But it also raises the question of what Democratic rule will really mean
Right now all the leading contenders for the Democratic nomination are running on strongly progressive platforms especially on health care
But there remain real concerns about what they would actually do in office
Here s an example of the sort of thing that makes you wonder : yesterday ABC News reported on its Web site that the Clinton campaign is holding a Rural Americans for Hillary lunch and campaign briefing at the offices of the Troutman Sanders Public Affairs Group , which lobbies for the agribusiness and biotech giant Monsanto
You don t have to be a Naderite to feel uncomfortable about the implied closeness
I d put it this way : many progressives , myself included , hope that the next president will be another F.D.R.
But we worry that he or she will turn out to be another Grover Cleveland instead better-intentioned and much more competent than the current occupant of the White House , but too dependent on lobbyists money to seriously confront the excesses of our new Gilded Age
It was the best of times , it was the worst of times
O.K. , maybe not literally the worst , but definitely bad
And the contrast between the immense good fortune of a few and the continuing suffering of all too many boded ill for the future
The lucky few garnered most of the headlines , as many reacted with fury to the spectacle of Goldman Sachs making record profits and paying huge bonuses even as the rest of America , the victim of a slump made on Wall Street , continues to bleed jobs
But it 's not a simple case of flourishing banks versus ailing workers : banks that are actually in the business of lending , as opposed to trading , are still in trouble
Most notably , Citigroup and Bank of America , which silenced talk of nationalization earlier this year by claiming that they had returned to profitability , are now you guessed it back to reporting losses
Ask the people at Goldman , and they 'll tell you that it 's nobody 's business but their own how much they earn
But as one critic recently put it : `` There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system .
Indeed : Goldman has made a lot of money in its trading operations , but it was only able to stay in that game thanks to policies that put vast amounts of public money at risk , from the bailout of A.I.G. to the guarantees extended to many of Goldman 's bonds
So who was this thundering bank critic
None other than Lawrence Summers , the Obama administration 's chief economist and one of the architects of the administration 's bank policy , which up until now has been to go easy on financial institutions and hope that they mend themselves
Why the change in tone
Administration officials are furious at the way the financial industry , just months after receiving a gigantic taxpayer bailout , is lobbying fiercely against serious reform
But you have to wonder what they expected to happen
They followed a softly , softly policy , providing aid with few strings , back when all of Wall Street was on the ropes ; this left them with very little leverage over firms like Goldman that are now , once again , making a lot of money
But there 's an even bigger problem : while the wheeler-dealer side of the financial industry , a k a trading operations , is highly profitable again , the part of banking that really matters lending , which fuels investment and job creation is not
Key banks remain financially weak , and their weakness is hurting the economy as a whole
You may recall that earlier this year there was a big debate about how to get the banks lending again
Some analysts , myself included , argued that at least some major banks needed a large injection of capital from taxpayers , and that the only way to do this was to temporarily nationalize the most troubled banks
The debate faded out , however , after Citigroup and Bank of America , the banking system 's weakest links , announced surprise profits
All was well , we were told , now that the banks were profitable again
But a funny thing happened on the way back to a sound banking system : last week both Citi and BofA announced losses in the third quarter
What happened
Part of the answer is that those earlier profits were in part a figment of the accountants ' imaginations
More broadly , however , we 're looking at payback from the real economy
In the first phase of the crisis , Main Street was punished for Wall Street 's misdeeds ; now broad economic distress , especially persistent high unemployment , is leading to big losses on mortgage loans and credit cards
And here 's the thing : The continuing weakness of many banks is helping to perpetuate that economic distress
Banks remain reluctant to lend , and tight credit , especially for small businesses , stands in the way of the strong recovery we need
So now what
Mr. Summers still insists that the administration did the right thing : more government provision of capital , he says , would not `` have been an availing strategy for solving problems .
In any case , as a political matter the moment for radical action on banks has clearly passed
The main thing for the time being is probably to do as much as possible to support job growth
With luck , this will produce a virtuous circle in which an improving economy strengthens the banks , which then become more willing to lend
Beyond that , we desperately need to pass effective financial reform
For if we do n't , bankers will soon be taking even bigger risks than they did in the run-up to this crisis
After all , the lesson from the last few months has been very clear : When bankers gamble with other people 's money , it 's heads they win , tails the rest of us lose
In May 2005 NYSE Magazine featured an article titled American Dream Builder a glowing profile of Angelo Mozilo , the chairman and C.E.O. of Countrywide Financial , the nation s largest mortgage lender
The article portrayed Mr. Mozilo as a heckuva guy a man from a humble background determined to help other people , especially members of minority groups , achieve the American dream of homeownership
The article didn t mention one of Mr. Mozilo s other distinguishing characteristics : the extraordinary size of his paychecks
Last year Mr. Mozilo was paid $ 142 million , making him the seventh-highest-paid chief executive in America
These days , of course , Mr. Mozilo doesn t look like such a wonderful guy , after all
Instead , he s starting to bring back memories of other people who used to be praised not just as great businessmen but as great human beings people like Enron s Ken Lay and WorldCom s Bernie Ebbers
So far , nobody has accused Mr. Mozilo of breaking the law
Still , what we re learning from the housing mess is that the crisis of corporate governance , which made headlines in the early years of this decade , never went away
At this point it appears that Mr. Mozilo achieved the rare feat of victimizing three distinct groups
First were the borrowers
As The Times s Gretchen Morgenson reported in August , Countrywide often led customers to high-cost and sometimes unfavorable loans that , among other things , generated outsize fees to company affiliates providing services on the loans
Then there are the investors who bought those Countrywide mortgages directly or indirectly , in the form of financial instruments created by slicing and dicing claims on borrowers
You can t especially single out Countrywide for the failure of investors to realize how much risk they were taking on that s a failure with many fathers , including everyone from Moody s and Standard & Poor s , which were far too free with their AAA ratings , to Alan Greenspan , who assured us that while there might be a bit of froth , there was no national housing bubble
But Countrywide made more questionable loans than anyone else and its postbubble behavior does stand out
As Ms. Morgenson reported in yesterday s Times , Countrywide seems peculiarly unwilling to work out deals that might let borrowers hold on to their homes even when such a deal , by avoiding the costs of foreclosure , would actually work to the benefit of both sides
Why block mutually beneficial deals
As the article points out , Countrywide can make money from the fees it charges on foreclosures , while the losses from mortgages that could have been saved , but weren t , are borne by others
Last but not least , since it may be the key to the whole story , is the victimization of Countrywide s own stockholders
Last year Mr. Mozilo s huge compensation drew a protest from a group of shareholders including the American Federation of State , County and Municipal Employees Pension Plan
But the worst was yet to come
In late 2006 , even as Countrywide began using shareholders money to buy back its own stock at more than $ 40 a share it s now worth only $ 19 Mr. Mozilo was selling
Between November 2006 and August 2007 that is , during the months before investors fully realized the extent to which his company would be hurt by the subprime mortgage crisis he unloaded $ 138 million worth of Countrywide s stock
Again , unless the stock sales lead to insider-trading charges , there s nothing in this story that involves illegality
Still , how can it be that so soon after Enron , WorldCom and other scandals rocked the business world , we re once again hearing about executives cashing in just before their companies are revealed as less successful than advertised
The answer , of course , is that we never dealt properly with those scandals
Here s what I wrote back in May 2003 : Last summer it seemed , briefly , as if the torrent of scandals and the revelations about how closely some of our politicians were tied to scandal-ridden companies would bring about a public backlash against corporate malfeasance
But then the topic largely vanished from the news , driven out by reports about Iraq s nuclear weapons program and all that
And after the midterm elections , which put apologists for corporate insiders back in control of all the relevant Congressional committees , we might as well have had the sirens sound the all-clear
Sure enough , C.E.O. paychecks , which came partway back to earth in 2002 , more than doubled between 2003 and 2006
And with those huge paychecks came renewed incentives for malfeasance
Once again , executives could become richer than Croesus by creating the illusion of success , even for a little while
There is one big difference this time : the number of victims misled borrowers , homeowners whose neighborhoods are being destroyed by foreclosures , investors who thought they were buying safe assets is even larger
Related Searches Countrywide Financial Corp Mozilo , Angelo
Serious people were appalled by Wednesday 's vote in the House of Representatives , where a huge bipartisan majority approved legislation , sponsored by Representative Sander Levin , that would potentially pave the way for sanctions against China over its currency policy
As a substantive matter , the bill was very mild ; nonetheless , there were dire warnings of trade war and global economic disruption
Better , said respectable opinion , to pursue quiet diplomacy
But serious people , who have been wrong about so many things since this crisis began - remember how budget deficits were going to lead to skyrocketing interest rates and soaring inflation
#NAME?
Diplomacy on China 's currency has gone nowhere , and will continue going nowhere unless backed by the threat of retaliation
The hype about trade war is unjustified - and , anyway , there are worse things than trade conflict
In a time of mass unemployment , made worse by China 's predatory currency policy , the possibility of a few new tariffs should be way down on our list of worries
Let 's step back and look at the current state of the world
Major advanced economies are still reeling from the effects of a burst housing bubble and the financial crisis that followed
Consumer spending is depressed , and firms see no point in expanding when they are n't selling enough to use the capacity they have
The recession may be officially over , but unemployment is extremely high and shows no sign of returning to normal levels
The situation is quite different , however , in emerging economies
These economies have weathered the economic storm , they are fighting inflation rather than deflation , and they offer abundant investment opportunities
Naturally , capital from wealthier but depressed nations is flowing in their direction
And emerging nations could and should play an important role in helping the world economy as a whole pull out of its slump
But China , the largest of these emerging economies , is n't allowing this natural process to unfold
Restrictions on foreign investment limit the flow of private funds into China ; meanwhile , the Chinese government is keeping the value of its currency , the renminbi , artificially low by buying huge amounts of foreign currency , in effect subsidizing its exports
And these subsidized exports are hurting employment in the rest of the world
Chinese officials defend this policy with arguments that are both implausible and wildly inconsistent
They deny that they are deliberately manipulating their exchange rate ; I guess the tooth fairy purchased $ 2.4 trillion in foreign currency and put it on their pillows while they were sleeping
Anyway , say prominent Chinese figures , it does n't matter ; the renminbi has nothing to do with China 's trade surplus
Yet this week China 's premier cried woe over the prospect of a stronger currency , declaring , `` We can not imagine how many Chinese factories will go bankrupt , how many Chinese workers will lose their jobs .
Well , either the renminbi 's value matters , or it does n't - they ca n't have it both ways
Meanwhile , about diplomacy : China 's government has shown no hint of helpfulness and seems to go out of its way to flaunt its contempt for U.S. negotiators
In June , the Chinese supposedly agreed to allow their currency to move toward a market-determined rate - which , if the example of economies like Brazil is any indication , would have meant a sharp rise in the renminbi 's value
But , as of Thursday , China 's currency had risen about only 2 percent against the dollar - with most of that rise taking place in just the past few weeks , clearly in anticipation of the vote on the Levin bill
So what will the bill accomplish
It empowers U.S. officials to impose tariffs against Chinese exports subsidized by the artificially low renminbi , but it does n't require these officials to take action
And judging from past experience , U.S. officials will not , in fact , take action - they 'll continue to make excuses , to tout imaginary diplomatic progress , and , in general , to confirm China 's belief that they are paper tigers
The Levin bill is , then , a signal at best - and it 's at least as much a shot across the bow of U.S. officials as it is a signal to the Chinese
But it 's a step in the right direction
For the truth is that U.S. policy makers have been incredibly , infuriatingly passive in the face of China 's bad behavior - especially because taking on China is one of the few policy options for tackling unemployment available to the Obama administration , given Republican obstructionism on everything else
The Levin bill probably wo n't change that passivity
But it will , at least , start to build a fire under policy makers , bringing us closer to the day when , at long last , they are ready to act
Forty years ago , Richard Nixon made a remarkable marketing discovery
By exploiting America 's divisions -- divisions over Vietnam , divisions over cultural change and , above all , racial divisions -- he was able to reinvent the Republican brand
The party of plutocrats was repackaged as the party of the '' silent majority , '' the regular guys -- white guys , it went without saying -- who did n't like the social changes taking place
It was a winning formula
And the great thing was that the new packaging did n't require any change in the product 's actual contents -- in fact , the G.O.P. was able to keep winning elections even as its actual policies became more pro-plutocrat , and less favorable to working Americans , than ever
John McCain 's strategy , in this final stretch , is based on the belief that the old formula still has life in it
Thus we have Sarah Palin expressing her joy at visiting the '' pro-America '' parts of the country -- yep , we 're all traitors here in central New Jersey
Meanwhile we 've got Mr. McCain making Samuel J. Wurzelbacher , a k a Joe the Plumber -- who had confronted Barack Obama on the campaign trail , alleging that the Democratic candidate would raise his taxes -- the centerpiece of his attack on Mr. Obama 's economic proposals
And when it turned out that the right 's new icon had a few issues , like not being licensed and comparing Mr. Obama to Sammy Davis Jr. , conservatives played victim : see how much those snooty elitists hate the common man
But what 's really happening to the plumbers of Ohio , and to working Americans in general
First of all , they are n't making a lot of money
You may recall that in one of the early Democratic debates Charles Gibson of ABC suggested that $ 200,000 a year was a middle-class income
Tell that to Ohio plumbers : according to the May 2007 occupational earnings report from the Bureau of Labor Statistics , the average annual income of '' plumbers , pipefitters and steamfitters '' in Ohio was $ 47,930
Second , their real incomes have stagnated or fallen , even in supposedly good years
The Bush administration assured us that the economy was booming in 2007 -- but the average Ohio plumber 's income in that 2007 report was only 15.5 percent higher than in the 2000 report , not enough to keep up with the 17.7 percent rise in consumer prices in the Midwest
As Ohio plumbers went , so went the nation : median household income , adjusted for inflation , was lower in 2007 than it had been in 2000
Third , Ohio plumbers have been having growing trouble getting health insurance , especially if , like many craftsmen , they work for small firms
According to the Kaiser Family Foundation , in 2007 only 45 percent of companies with fewer than 10 employees offered health benefits , down from 57 percent in 2000
And bear in mind that all these data pertain to 2007 -- which was as good as it got in recent years
Now that the '' Bush boom , '' such as it was , is over , we can see that it achieved a dismal distinction : for the first time on record , an economic expansion failed to raise most Americans ' incomes above their previous peak
Since then , of course , things have gone rapidly downhill , as millions of working Americans have lost their jobs and their homes
And all indicators suggest that things will get much worse in the months and years ahead
So what does all this say about the candidates
Who 's really standing up for Ohio 's plumbers
Mr. McCain claims that Mr. Obama 's policies would lead to economic disaster
But President Bush 's policies have already led to disaster -- and whatever he may say , Mr. McCain proposes continuing Mr. Bush 's policies in all essential respects , and he shares Mr. Bush 's anti-government , anti-regulation philosophy
What about the claim , based on Joe the Plumber 's complaint , that ordinary working Americans would face higher taxes under Mr. Obama
Well , Mr. Obama proposes raising rates on only the top two income tax brackets -- and the second-highest bracket for a head of household starts at an income , after deductions , of $ 182,400 a year
Maybe there are plumbers out there who earn that much , or who would end up suffering from Mr. Obama 's proposed modest increases in taxes on dividends and capital gains -- America is a big country , and there 's probably a high-income plumber with a huge stock market portfolio out there somewhere
But the typical plumber would pay lower , not higher , taxes under an Obama administration , and would have a much better chance of getting health insurance
I do n't want to suggest that everyone would be better off under the Obama tax plan
Joe the plumber would almost certainly be better off , but Richie the hedge fund manager would take a serious hit
But that 's the point
Whatever today 's G.O.P. is , it is n't the party of working Americans
Mr. Greenspan was wrong in 2004 , when he sang the praises of adjustable-rate mortgages
He was wrong in 2005 , when he dismissed the idea that there was a national housing bubble , suggesting that at most there was some `` froth '' in the market
He was wrong last fall , when he suggested that the worst of the housing slump was behind us
-LRB- Housing starts have fallen 30 percent since then .
But his latest pronouncement that the market rescue plan being pushed by Henry Paulson , the Treasury secretary , is likely to make things worse rather than better looks all too accurate
To understand why , we need to talk about the nature of the mess
First of all , as I could have told you actually , I did there was indeed a huge national housing bubble
What even those of us who realized that there was a bubble did n't appreciate , however , was how much of a threat the bursting of that bubble would pose to financial markets
Today , when a bank makes a home loan , it does n't hold on to it
Instead , it quickly sells the mortgage off to financial engineers , who chop up , repackage and resell home loans pretty much the way supermarkets chop up , repackage and resell meat
It 's a business model that depends on trust
You do n't know anything about the cows that contributed body parts to your package of ground beef , so you have to trust the supermarket when it assures you that the beef is U.S.D.A. prime
You do n't know anything about the subprime mortgage loans that were sliced , diced and pureed to produce that mortgage-backed security , so you have to trust the seller and the rating agency when it assures you that it 's a AAA investment
But in the case of housing-related investments , investors ' trust was betrayed
Supposedly safe investments suddenly turned into junk bonds when the housing bubble burst
High profits reported by hedge funds profits that were reflected in huge payments to the fund managers turn out to have been based on wishful thinking
Thus , when two hedge funds run by Ralph Cioffi of Bear Stearns imploded last summer , it came as a huge shock to many investors , and helped trigger a market panic
But a recent BusinessWeek report shows that the funds were a disaster waiting to happen
The funds borrowed huge amounts , and invested the proceeds in questionable mortgage-backed securities
Even worse , `` more than 60 percent of their net worth was tied up in exotic securities whose reported value was estimated by Cioffi 's own team .
We 're profitable because we say we are just trust us
That has n't ever caused problems , has it
Stories like this have led to a crisis of confidence
The current yield on one-month U.S. government bills is only 3.41 percent , an amazingly low number , and a sign that people are parking their money in government debt because they do n't trust private borrowers
And the result is a shortage of liquidity the ability to raise cash that is greatly damaging the economy
Which brings us to the rescue plan proposed by a group of large banks , with Mr. Paulson 's backing
Right now the bleeding edge of the crisis in confidence involves worries that there may be large losses hidden inside so-called `` structured investment vehicles '' basically hedge funds that borrow from the public and invest the proceeds in mortgage-backed securities
The new plan would create a `` super-fund , '' the Master Liquidity Enhancement Conduit , which would seek to restore confidence by , um , borrowing from the public and investing the proceeds in mortgage-backed securities
The plan , in other words , looks like an attempt to solve the problem with smoke and mirrors
That might work if there were no good reason for investors to be worried
But in this case , investors have very good reasons to worry : the bursting of the housing bubble means that someone , somewhere , has to accept several trillion dollars in losses
A significant part of these losses will fall on mortgage-backed securities
And given this reality , the `` conduit '' looks like a really bad idea
I 'd put it like this : Investors are n't putting their money to work because they do n't know where the bad debts are
And when investors need clarity , the last thing you want to be doing is pumping out more smoke
Mr. Greenspan 's take , expressed in an interview with the magazine Emerging Markets , seems broadly similar
`` If you believe some form of artificial non-market force is propping up the market , '' he said , `` you do n't believe the market price has exhausted itself .
Translated : this rescue scheme could be seen as an attempt to hide the bad debts everyone knows are out there , and as a result could delay any return of trust to the markets
Alan Greenspan is making sense
In the spring of 2010 , fiscal austerity became fashionable
I use the term advisedly : the sudden consensus among Very Serious People that everyone must balance budgets now now now was n't based on any kind of careful analysis
It was more like a fad , something everyone professed to believe because that was what the in-crowd was saying
And it 's a fad that has been fading lately , as evidence has accumulated that the lessons of the past remain relevant , that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea
Most notably , the confidence fairy has been exposed as a myth
There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses ; but multiple studies of historical record , including one by the International Monetary Fund , have shown that this claim has no basis in reality
No widespread fad ever passes , however , without leaving some fashion victims in its wake
In this case , the victims are the people of Britain , who have the misfortune to be ruled by a government that took office at the height of the austerity fad and wo n't admit that it was wrong
Britain , like America , is suffering from the aftermath of a housing and debt bubble
Its problems are compounded by London 's role as an international financial center : Britain came to rely too much on profits from wheeling and dealing to drive its economy - and on financial-industry tax payments to pay for government programs
Over-reliance on the financial industry largely explains why Britain , which came into the crisis with relatively low public debt , has seen its budget deficit soar to 11 percent of G.D.P. - slightly worse than the U.S. deficit
And there 's no question that Britain will eventually need to balance its books with spending cuts and tax increases
The operative word here should , however , be `` eventually .
Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates
Right now , interest rates in Britain , as in America , are already very low , with little room to fall further
The sensible thing , then , is to devise a plan for putting the nation 's fiscal house in order , while waiting until a solid economic recovery is under way before wielding the ax
But trendy fashion , almost by definition , is n't sensible - and the British government seems determined to ignore the lessons of history
Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon , the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers , liquidating the workers , and driving down wages
Or if you prefer more British precedents , it echoes the Snowden budget of 1931 , which tried to restore confidence but ended up deepening the economic crisis
The British government 's plan is bold , say the pundits - and so it is
But it boldly goes in exactly the wrong direction
It would cut government employment by 490,000 workers - the equivalent of almost three million layoffs in the United States - at a time when the private sector is in no position to provide alternative employment
It would slash spending at a time when private demand is n't at all ready to take up the slack
Why is the British government doing this
The real reason has a lot to do with ideology : the Tories are using the deficit as an excuse to downsize the welfare state
But the official rationale is that there is no alternative
Indeed , there has been a noticeable change in the rhetoric of the government of Prime Minister David Cameron over the past few weeks - a shift from hope to fear
In his speech announcing the budget plan , George Osborne , the chancellor of the Exchequer , seemed to have given up on the confidence fairy - that is , on claims that the plan would have positive effects on employment and growth
Instead , it was all about the apocalypse looming if Britain failed to go down this route
Never mind that British debt as a percentage of national income is actually below its historical average ; never mind that British interest rates stayed low even as the nation 's budget deficit soared , reflecting the belief of investors that the country can and will get its finances under control
Britain , declared Mr. Osborne , was on the `` brink of bankruptcy .
What happens now
Maybe Britain will get lucky , and something will come along to rescue the economy
But the best guess is that Britain in 2011 will look like Britain in 1931 , or the United States in 1937 , or Japan in 1997
That is , premature fiscal austerity will lead to a renewed economic slump
As always , those who refuse to learn from the past are doomed to repeat it
Senior monetary officials usually talk in code
So when Ben Bernanke , the Federal Reserve chairman , spoke recently about Asia , international imbalances and the financial crisis , he did n't specifically criticize China 's outrageous currency policy
But he did n't have to : everyone got the subtext
China 's bad behavior is posing a growing threat to the rest of the world economy
The only question now is what the world and , in particular , the United States will do about it
Some background : The value of China 's currency , unlike , say , the value of the British pound , is n't determined by supply and demand
Instead , Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country
There 's nothing necessarily wrong with such a policy , especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money
In fact , the system served China well during the Asian financial crisis of the late 1990s
The crucial question , however , is whether the target value of the yuan is reasonable
Until around 2001 , you could argue that it was : China 's overall trade position was n't too far out of balance
From then onward , however , the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre
First of all , the dollar slid in value , especially against the euro , so that by keeping the yuan\/dollar rate fixed , Chinese officials were , in effect , devaluing their currency against everyone else 's
Meanwhile , productivity in China 's export industries soared ; combined with the de facto devaluation , this made Chinese goods extremely cheap on world markets
The result was a huge Chinese trade surplus
If supply and demand had been allowed to prevail , the value of China 's currency would have risen sharply
But Chinese authorities did n't let it rise
They kept it down by selling vast quantities of the currency , acquiring in return an enormous hoard of foreign assets , mostly in dollars , currently worth about $ 2.1 trillion
Many economists , myself included , believe that China 's asset-buying spree helped inflate the housing bubble , setting the stage for the global financial crisis
But China 's insistence on keeping the yuan\/dollar rate fixed , even when the dollar declines , may be doing even more harm now
Although there has been a lot of doomsaying about the falling dollar , that decline is actually both natural and desirable
America needs a weaker dollar to help reduce its trade deficit , and it 's getting that weaker dollar as nervous investors , who flocked into the presumed safety of U.S. debt at the peak of the crisis , have started putting their money to work elsewhere
But China has been keeping its currency pegged to the dollar which means that a country with a huge trade surplus and a rapidly recovering economy , a country whose currency should be rising in value , is in effect engineering a large devaluation instead
And that 's a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand
By pursuing a weak-currency policy , China is siphoning some of that inadequate demand away from other nations , which is hurting growth almost everywhere
The biggest victims , by the way , are probably workers in other poor countries
In normal times , I 'd be among the first to reject claims that China is stealing other peoples ' jobs , but right now it 's the simple truth
So what are we going to do
U.S. officials have been extremely cautious about confronting the China problem , to such an extent that last week the Treasury Department , while expressing `` concerns , '' certified in a required report to Congress that China is not repeat not manipulating its currency
They 're kidding , right
The thing is , right now this caution makes little sense
Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard
Under current conditions , this would actually help the U.S. economy by making our exports more competitive
In fact , some countries , most notably Switzerland , have been trying to support their economies by selling their own currencies on the foreign exchange market
The United States , mainly for diplomatic reasons , ca n't do this ; but if the Chinese decide to do it on our behalf , we should send them a thank-you note
The point is that with the world economy still in a precarious state , beggar-thy-neighbor policies by major players ca n't be tolerated
Something must be done about China 's currency
This is what happens when you need to leap over an economic chasm - but either ca n't or wo n't jump far enough , so that you only get part of the way across
If Democrats do as badly as expected in next week 's elections , pundits will rush to interpret the results as a referendum on ideology
President Obama moved too far to the left , most will say , even though his actual program - a health care plan very similar to past Republican proposals , a fiscal stimulus that consisted mainly of tax cuts , help for the unemployed and aid to hard-pressed states - was more conservative than his election platform
A few commentators will point out , with much more justice , that Mr. Obama never made a full-throated case for progressive policies , that he consistently stepped on his own message , that he was so worried about making bankers nervous that he ended up ceding populist anger to the right
But the truth is that if the economic situation were better - if unemployment had fallen substantially over the past year - we would n't be having this discussion
We would , instead , be talking about modest Democratic losses , no more than is usual in midterm elections
The real story of this election , then , is that of an economic policy that failed to deliver
Because it was greatly inadequate to the task
When Mr. Obama took office , he inherited an economy in dire straits - more dire , it seems , than he or his top economic advisers realized
They knew that America was in the midst of a severe financial crisis
But they do n't seem to have taken on board the lesson of history , which is that major financial crises are normally followed by a protracted period of very high unemployment
If you look back now at the economic forecast originally used to justify the Obama economic plan , what 's striking is that forecast 's optimism about the economy 's ability to heal itself
Even without their plan , Obama economists predicted , the unemployment rate would peak at 9 percent , then fall rapidly
Fiscal stimulus was needed only to mitigate the worst - as an `` insurance package against catastrophic failure , '' as Lawrence Summers , later the administration 's top economist , reportedly said in a memo to the president-elect
But economies that have experienced a severe financial crisis generally do n't heal quickly
From the Panic of 1893 , to the Swedish crisis of 1992 , to Japan 's lost decade , financial crises have consistently been followed by long periods of economic distress
And that has been true even when , as in the case of Sweden , the government moved quickly and decisively to fix the banking system
To avoid this fate , America needed a much stronger program than what it actually got - a modest rise in federal spending that was barely enough to offset cutbacks at the state and local level
This is n't 20-20 hindsight : the inadequacy of the stimulus was obvious from the beginning
Could the administration have gotten a bigger stimulus through Congress
Even if it could n't , would it have been better off making the case for a bigger plan , rather than pretending that what it got was just right
We 'll never know
What we do know is that the inadequacy of the stimulus has been a political catastrophe
Yes , things are better than they would have been without the American Recovery and Reinvestment Act : the unemployment rate would probably be close to 12 percent right now if the administration had n't passed its plan
But voters respond to facts , not counterfactuals , and the perception is that the administration 's policies have failed
The tragedy here is that if voters do turn on Democrats , they will in effect be voting to make things even worse
The resurgent Republicans have learned nothing from the economic crisis , except that doing everything they can to undermine Mr. Obama is a winning political strategy
Tax cuts and deregulation are still the alpha and omega of their economic vision
And if they take one or both houses of Congress , complete policy paralysis - which will mean , among other things , a cutoff of desperately needed aid to the unemployed and a freeze on further help for state and local governments - is a given
The only question is whether we 'll have political chaos as well , with Republicans ' shutting down the government at some point over the next two years
And the odds are that we will
Is there any hope for a better outcome
Maybe , just maybe , voters will have second thoughts about handing power back to the people who got us into this mess , and a weaker-than-expected Republican showing at the polls will give Mr. Obama a second chance to turn the economy around
But right now it looks as if the too-cautious attempt to jump across that economic chasm has fallen short - and we 're about to hit rock bottom
Increased subprime lending has been associated with higher levels of delinquency , foreclosure and , in some cases , abusive lending practices
So declared Edward M. Gramlich , a Federal Reserve official
These days a lot of people are saying things like that about subprime loans mortgages issued to buyers who don t meet the normal financial criteria for a home loan
But here s the thing : Mr. Gramlich said those words in May 2004
And it wasn t his first warning
In his last book , Mr. Gramlich , who recently died of cancer , revealed that he tried to get Alan Greenspan to increase oversight of subprime lending as early as 2000 , but got nowhere
So why was nothing done to avert the subprime fiasco
Before I try to answer that question , there are a few things you should know
First , the situation for both borrowers and investors looks increasingly dire
A new report from Congress s Joint Economic Committee predicts that there will be two million foreclosures on subprime mortgages by the end of next year
That s two million American families facing the humiliation and financial pain of losing their homes
At the same time , investors who bought assets backed by subprime loans are continuing to suffer severe losses
Everything suggests that there will be many more stories like that of Merrill Lynch , which has just announced an $ 8.4 billion write-down because of bad loans $ 3 billion more than it had announced just a few weeks earlier
Second , much if not most of the subprime lending that is now going so catastrophically bad took place after it was clear to many of us that there was a serious housing bubble , and after people like Mr. Gramlich had issued public warnings about the subprime situation
As late as 2003 , subprime loans accounted for only 8.5 percent of the value of mortgages issued in this country
In 2005 and 2006 , the peak years of the housing bubble , subprime was 20 percent of the total and the delinquency rates on recent subprime loans are much higher than those on older loans
So , once again , why was nothing done to head off this disaster
The answer is ideology
In a paper presented just before his death , Mr. Gramlich wrote that the subprime market was the Wild West
Over half the mortgage loans were made by independent lenders without any federal supervision
What he didn t mention was that this was the way the laissez-faire ideologues ruling Washington a group that very much included Mr. Greenspan wanted it
They were and are men who believe that government is always the problem , never the solution , that regulation is always a bad thing
Unfortunately , assertions that unregulated financial markets would take care of themselves have proved as wrong as claims that deregulation would reduce electricity prices
As Barney Frank , the chairman of the House Financial Services Committee , put it in a recent op-ed article in The Boston Globe , the surge of subprime lending was a sort of natural experiment testing the theories of those who favor radical deregulation of financial markets
And the lessons , as Mr. Frank said , are clear : To the extent that the system did work , it is because of prudential regulation and oversight
Where it was absent , the result was tragedy
In fact , both borrowers and investors got scammed
I ve written before about the way investors in securities backed by subprime loans were assured that they were buying AAA assets , only to suddenly find that what they really owned were junk bonds
This shock has produced a crisis of confidence in financial markets , which poses a serious threat to the economy
But the greater tragedy is the one facing borrowers who were offered what they were told were good deals , only to find themselves in a debt trap
In his final paper , Mr. Gramlich stressed the extent to which unregulated lending is prone to the abusive lending practices he mentioned in his 2004 warning
The fact is that many borrowers are ill-equipped to make judgments about exotic loans , like subprime loans that offer a low initial teaser rate that suddenly jumps after two years , and that include prepayment penalties preventing the borrowers from undoing their mistakes
Yet such loans were primarily offered to those least able to evaluate them
Why are the most risky loan products sold to the least sophisticated borrowers
Mr. Gramlich asked
The question answers itself the least sophisticated borrowers are probably duped into taking these products
And the predictable result was carnage
Mr. Frank is now trying to push through legislation that extends moderate regulation to the subprime market
Despite the scale of the disaster , he s facing an uphill fight : money still talks in Washington , and the mortgage industry is a huge source of campaign finance
But maybe the subprime catastrophe will be enough to remind us why financial regulation was introduced in the first place
Maybe the polls and the conventional wisdom are all wrong , and John McCain will pull off a stunning upset
But right now the election looks like a blue sweep : a solid victory , maybe even a landslide , for Barack Obama ; large Democratic gains in the Senate , possibly even enough to produce a filibuster-proof majority ; and big Democratic gains in the House , too
Yet just six weeks ago the presidential race seemed close , with Mr. McCain if anything a bit ahead
The turning point was the middle of September , coinciding precisely with the sudden intensification of the financial crisis after the failure of Lehman Brothers
But why has the growing financial and economic crisis worked so overwhelmingly to the Democrats ' advantage
As someone who 's spent a lot of time arguing against conservative economic dogma , I 'd like to believe that the bad news convinced many Americans , once and for all , that the right 's economic ideas are wrong and progressive ideas are right
And there 's certainly something to that
These days , with even Alan Greenspan admitting that he was wrong to believe that the financial industry could regulate itself , Reaganesque rhetoric about the magic of the marketplace and the evils of government intervention sounds ridiculous
In addition , Mr. McCain seems spectacularly unable to talk about economics as if it matters
He has attempted to pin the blame for the crisis on his pet grievance , Congressional budget earmarks which leaves economists scratching their heads in puzzlement
In the immediate aftermath of the Lehman failure , he declared that `` the fundamentals of our economy are strong , '' seemingly unaware that he was closely echoing what Herbert Hoover said after the 1929 crash
But I suspect that the main reason for the dramatic swing in the polls is something less concrete and more meta than the fact that events have discredited free-market fundamentalism
As the economic scene has darkened , I 'd argue , Americans have rediscovered the virtue of seriousness
And this has worked to Mr. Obama 's advantage , because his opponent has run a deeply unserious campaign
Think about the themes of the McCain campaign so far
Mr. McCain reminds us , again and again , that he 's a maverick but what does that mean
His maverickness seems to be defined as a free-floating personality trait , rather than being tied to any specific objections on his part to the way the country has been run for the last eight years
Conversely , he has attacked Mr. Obama as a `` celebrity , '' but without any specific explanation of what 's wrong with that it 's just a given that we 're supposed to hate Hollywood types
And the selection of Sarah Palin as the Republican vice-presidential candidate clearly had nothing to do with what she knew or the positions she 'd taken it was about who she was , or seemed to be
Americans were supposed to identify with a hockey mom who was just like them
In a way , you ca n't blame Mr. McCain for campaigning on trivia after all , it 's worked in the past
Most notably , President Bush got within hanging-chads-and-butterfly-ballot range of the White House only because much of the news media , rather than focusing on the candidates ' policy proposals , focused on their personas : Mr. Bush was an amiable guy you 'd like to have a beer with , Al Gore was a stiff know-it-all , and never mind all that hard stuff about taxes and Social Security
And let 's face it : six weeks ago Mr. McCain 's focus on trivia seemed to be paying off handsomely
But that was before the prospect of a second Great Depression concentrated the public 's mind
The Obama campaign has hardly been fluff-free in its early stages it was full of vague uplift
But the Barack Obama voters see now is cool , calm , intellectual and knowledgeable , able to talk coherently about the financial crisis in a way Mr. McCain ca n't
And when the world seems to be falling apart , you do n't turn to a guy you 'd like to have a beer with , you turn to someone who might actually know how to fix the situation
The McCain campaign 's response to its falling chances of victory has been telling : rather than trying to make the case that Mr. McCain really is better qualified to deal with the economic crisis , the campaign has been doing all it can to trivialize things again
Mr. Obama consorts with '60s radicals
He 's a socialist
He does n't love America
Judging from the polls , it does n't seem to be working
Will the nation 's new demand for seriousness last
Maybe not remember how 9\/11 was supposed to end the focus on trivialities
For now , however , voters seem to be focused on real issues
And that 's bad for Mr. McCain and conservatives in general : right now , to paraphrase Rob Corddry , reality has a clear liberal bias
There 's a part of me that ca n't believe I 'm asking that question
After all , serious health reform has long seemed like an impossible dream
And it could yet go all wrong
But the teabaggers have come and gone , as have the cries of `` death panels '' and the demonstrations by Medicare recipients demanding that the government stay out of health care
And reform is still on track
Right now it looks highly likely that Congress will , indeed , send a health care bill to the president 's desk
Then what
Conservatives insist -LRB- and hope -RRB- that reform will fail , and that there will be a huge popular backlash
Some progressives worry that they might be right , that the imperfections of reform what we 're about to get will be far from ideal will be so severe as to undermine public support
And many critics complain , with some justice , that the planned reform wo n't do much to contain rising costs
But the experience in Massachusetts , which passed major health reform back in 2006 , should dampen conservative hopes and soothe progressive fears
Like the bill that will probably emerge from Congress , the Massachusetts reform mainly relies on a combination of regulation and subsidies to chivy a mostly private system into providing near-universal coverage
It is , to be frank , a bit of a Rube Goldberg device a complicated way of achieving something that could have been done much more simply with a Medicare-type program
Yet it has gone a long way toward achieving the goal of health insurance for all , although it 's not quite there : according to state estimates , only 2.6 percent of residents remain uninsured
This expansion of coverage has tremendous significance in human terms
The Kaiser Commission on Medicaid and the Uninsured recently did a focus-group study of Massachusetts residents and reported that `` Health reform enabled many of these individuals to take care of their medical needs , to start seeing a doctor , and in some cases to regain their health and control over their lives .
Even those who probably would have been insured without reform felt `` peace of mind knowing they could obtain health coverage if they lost access to their employer-sponsored coverage .
And reform remains popular
Earlier this year , many conservatives , citing misleading poll results , claimed that public support for the Massachusetts reform had plunged
Newer , more careful polling paints a very different picture
The key finding : an overwhelming 79 percent of the public think the reform should be continued , while only 11 percent think it should be repealed
Interestingly , another recent poll shows similar support among the state 's physicians : 75 percent want to continue the policies ; only 7 percent want to see them reversed
There are , of course , major problems remaining in Massachusetts
In particular , while employers are required to provide a minimum standard of coverage , in a number of cases this standard seems to be too low , with lower-income workers still unable to afford necessary care
And the Massachusetts plan has n't yet done anything significant to contain costs
But just as reform advocates predicted , the move to more or less universal care seems to have helped prepare the ground for further reform , with a special state commission recommending changes in the payment system that could contain costs by reducing the incentives for excessive care
And it should be noted that Hawaii , which does n't have universal coverage but does have a long-standing employer mandate , has been far more successful than the rest of the nation at cost control
So what does this say about national health reform
To be sure , Massachusetts is n't fully representative of America as a whole
Even before reform , it had relatively broad insurance coverage , in part because of a large union movement
And the state has a tradition of strong insurance regulation , which has probably made it easier to run a system that depends crucially on having regulators ride herd on insurers
So national reform 's chances will be better if it contains elements lacking in Massachusetts in particular , a real public option to keep insurers honest -LRB- and fend off charges that the individual mandate is just an insurance-industry profit grab -RRB-
We can only hope that reports that the Obama administration is trying to block a public option are overblown
Still , if the Massachusetts experience is any guide , health care reform will have broad public support once it 's in place and the scare stories are proved false
The new health care system will be criticized ; people will demand changes and improvements ; but only a small minority will want reform reversed
This thing is going to work
Economic data rarely inspire poetic thoughts
But as I was contemplating the latest set of numbers , I realized that I had William Butler Yeats running through my head : `` Turning and turning in the widening gyre \/ The falcon can not hear the falconer ; \/ Things fall apart ; the center can not hold .
The widening gyre , in this case , would be the feedback loops -LRB- so much for poetry -RRB- causing the financial crisis to spin ever further out of control
The hapless falconer would , I guess , be Henry Paulson , the Treasury secretary
And the gyre continues to widen in new and scary ways
Even as Mr. Paulson and his counterparts in other countries moved to rescue the banks , fresh disasters mounted on other fronts
Some of these disasters were more or less anticipated
Economists have wondered for some time why hedge funds were n't suffering more amid the financial carnage
They need wonder no longer : investors are pulling their money out of these funds , forcing fund managers to raise cash with fire sales of stocks and other assets
The really shocking thing , however , is the way the crisis is spreading to emerging markets countries like Russia , Korea and Brazil
These countries were at the core of the last global financial crisis , in the late 1990s -LRB- which seemed like a big deal at the time , but was a day at the beach compared with what we 're going through now -RRB-
They responded to that experience by building up huge war chests of dollars and euros , which were supposed to protect them in the event of any future emergency
And not long ago everyone was talking about `` decoupling , '' the supposed ability of emerging market economies to keep growing even if the United States fell into recession
`` Decoupling is no myth , '' The Economist assured its readers back in March
`` Indeed , it may yet save the world economy .
That was then
Now the emerging markets are in big trouble
In fact , says Stephen Jen , the chief currency economist at Morgan Stanley , the `` hard landing '' in emerging markets may become the `` second epicenter '' of the global crisis
-LRB- U.S. financial markets were the first .
What happened
In the 1990s , emerging market governments were vulnerable because they had made a habit of borrowing abroad ; when the inflow of dollars dried up , they were pushed to the brink
Since then they have been careful to borrow mainly in domestic markets , while building up lots of dollar reserves
But all their caution was undone by the private sector 's obliviousness to risk
In Russia , for example , banks and corporations rushed to borrow abroad , because dollar interest rates were lower than ruble rates
So while the Russian government was accumulating an impressive hoard of foreign exchange , Russian corporations and banks were running up equally impressive foreign debts
Now their credit lines have been cut off , and they 're in desperate straits
Needless to say , the existing troubles in the banking system , plus the new troubles at hedge funds and in emerging markets , are all mutually reinforcing
Bad news begets bad news , and the circle of pain just keeps getting wider
Meanwhile , U.S. policy makers are still balking when it comes to doing what 's necessary to contain the crisis
It was good news when Mr. Paulson finally agreed to funnel capital into the banking system in return for partial ownership
But last week Joe Nocera of The Times pointed out a key weakness in the U.S. Treasury 's bank rescue plan : it contains no safeguards against the possibility that banks will simply sit on the money
`` Unlike the British government , which is mandating lending requirements in return for capital injections , our government seems afraid to do anything except plead .
And sure enough , the banks seem to be hoarding the cash
There 's also bizarre stuff going on with regard to the mortgage market
I thought that the whole point of the federal takeover of Fannie Mae and Freddie Mac , the lending agencies , was to remove fears about their solvency and thereby lower mortgage rates
But top officials have made a point of denying that Fannie and Freddie debt is backed by the `` full faith and credit '' of the U.S. government and as a result , markets are still treating the agencies ' debt as a risky asset , driving mortgage rates up at a time when they should be going down
What 's happening , I suspect , is that the Bush administration 's anti-government ideology still stands in the way of effective action
Events have forced Mr. Paulson into a partial nationalization of the financial system but he refuses to use the power that comes with ownership
Whatever the reasons for the continuing weakness of policy , the situation is manifestly not coming under control
Things continue to fall apart
Today , many of the men who hope to be the next president including all of the candidates with a significant chance of receiving the Republican nomination have made unreasoning , unjustified terror the centerpiece of their campaigns
Consider , for a moment , the implications of the fact that Rudy Giuliani is taking foreign policy advice from Norman Podhoretz , who wants us to start bombing Iran as soon as it is logistically possible
Mr. Podhoretz , the editor of Commentary and a founding neoconservative , tells us that Iran is the main center of the Islamofascist ideology against which we have been fighting since 9\/11
The Islamofascists , he tells us , are well on their way toward creating a world shaped by their will and tailored to their wishes
Indeed , Already , some observers are warning that by the end of the 21st century the whole of Europe will be transformed into a place to which they give the name Eurabia
Do I have to point out that none of this makes a bit of sense
For one thing , there isn t actually any such thing as Islamofascism it s not an ideology ; it s a figment of the neocon imagination
The term came into vogue only because it was a way for Iraq hawks to gloss over the awkward transition from pursuing Osama bin Laden , who attacked America , to Saddam Hussein , who didn t. And Iran had nothing whatsoever to do with 9\/11 in fact , the Iranian regime was quite helpful to the United States when it went after Al Qaeda and its Taliban allies in Afghanistan
Beyond that , the claim that Iran is on the path to global domination is beyond ludicrous
Yes , the Iranian regime is a nasty piece of work in many ways , and it would be a bad thing if that regime acquired nuclear weapons
But let s have some perspective , please : we re talking about a country with roughly the G.D.P. of Connecticut , and a government whose military budget is roughly the same as Sweden s. Meanwhile , the idea that bombing will bring the Iranian regime to its knees and bombing is the only option , since we ve run out of troops is pure wishful thinking
Last year Israel tried to cripple Hezbollah with an air campaign , and ended up strengthening it instead
There s every reason to believe that an attack on Iran would produce the same result , with the added effects of endangering U.S. forces in Iraq and driving oil prices well into triple digits
Mr. Podhoretz , in short , is engaging in what my relatives call crazy talk
Yet he is being treated with respect by the front-runner for the G.O.P. nomination
And Mr. Podhoretz s rants are , if anything , saner than some of what we ve been hearing from some of Mr. Giuliani s rivals
Thus , in a recent campaign ad Mitt Romney asserted that America is in a struggle with people who aim to unite the world under a single jihadist Caliphate
To do that they must collapse freedom-loving nations
Like us
He doesn t say exactly who these jihadists are , but presumably he s referring to Al Qaeda an organization that has certainly demonstrated its willingness and ability to kill innocent people , but has no chance of collapsing the United States , let alone taking over the world
And Mike Huckabee , whom reporters like to portray as a nice , reasonable guy , says that if Hillary Clinton is elected , I m not sure we ll have the courage and the will and the resolve to fight the greatest threat this country s ever faced in Islamofascism
Yep , a bunch of lightly armed terrorists and a fourth-rate military power which aren t even allies pose a greater danger than Hitler s panzers or the Soviet nuclear arsenal ever did
All of this would be funny if it weren t so serious
In the wake of 9\/11 , the Bush administration adopted fear-mongering as a political strategy
Instead of treating the attack as what it was an atrocity committed by a fundamentally weak , though ruthless adversary the administration portrayed America as a nation under threat from every direction
Most Americans have now regained their balance
But the Republican base , which lapped up the administration s rhetoric about the axis of evil and the war on terror , remains infected by the fear the Bushies stirred up perhaps because fear of terrorists maps so easily into the base s older fears , including fear of dark-skinned people in general
And the base is looking for a candidate who shares this fear
Just to be clear , Al Qaeda is a real threat , and so is the Iranian nuclear program
But neither of these threats frightens me as much as fear itself the unreasoning fear that has taken over one of America s two great political parties
Barring a huge upset , Republicans will take control of at least one house of Congress next week
How worried should we be by that prospect
Not very , say some pundits
After all , the last time Republicans controlled Congress while a Democrat lived in the White House was the period from the beginning of 1995 to the end of 2000
And people remember that era as a good time , a time of rapid job creation and responsible budgets
Can we hope for a similar experience now
No , we ca n't
This is going to be terrible
In fact , future historians will probably look back at the 2010 election as a catastrophe for America , one that condemned the nation to years of political chaos and economic weakness
Start with the politics
In the late-1990s , Republicans and Democrats were able to work together on some issues
President Obama seems to believe that the same thing can happen again today
In a recent interview with National Journal , he sounded a conciliatory note , saying that Democrats need to have an `` appropriate sense of humility , '' and that he would `` spend more time building consensus .
Good luck with that
After all , that era of partial cooperation in the 1990s came only after Republicans had tried all-out confrontation , actually shutting down the federal government in an effort to force President Bill Clinton to give in to their demands for big cuts in Medicare
Now , the government shutdown ended up hurting Republicans politically , and some observers seem to assume that memories of that experience will deter the G.O.P. from being too confrontational this time around
But the lesson current Republicans seem to have drawn from 1995 is n't that they were too confrontational , it 's that they were n't confrontational enough
Another recent interview by National Journal , this one with Mitch McConnell , the Senate minority leader , has received a lot of attention thanks to a headline-grabbing quote : `` The single most important thing we want to achieve is for President Obama to be a one-term president .
If you read the full interview , what Mr. McConnell was saying was that , in 1995 , Republicans erred by focusing too much on their policy agenda and not enough on destroying the president : `` We suffered from some degree of hubris and acted as if the president was irrelevant and we would roll over him
By the summer of 1995 , he was already on the way to being re-elected , and we were hanging on for our lives .
So this time around , he implied , they 'll stay focused on bringing down Mr. Obama
True , Mr. McConnell did say that he might be willing to work with Mr. Obama in certain circumstances - namely , if he 's willing to do a `` Clintonian back flip , '' taking positions that would find more support among Republicans than in his own party
Of course , this would actually hurt Mr. Obama 's chances of re-election - but that 's the point
We might add that should any Republicans in Congress find themselves considering the possibility of acting in a statesmanlike , bipartisan manner , they 'll surely reconsider after looking over their shoulder at the Tea Party-types , who will jump on them if they show any signs of being reasonable
The role of the Tea Party is one reason smart observers expect another government shutdown , probably as early as next spring
Beyond the politics , the crucial difference between the 1990s and now is the state of the economy
When Republicans took control of Congress in 1994 , the U.S. economy had strong fundamentals
Household debt was much lower than it is today
Business investment was surging , in large part thanks to the new opportunities created by information technology - opportunities that were much broader than the follies of the dot-com bubble
In this favorable environment , economic management was mainly a matter of putting the brakes on the boom , so as to keep the economy from overheating and head off potential inflation
And this was a job the Federal Reserve could do on its own by raising interest rates , without any help from Congress
Today 's situation is completely different
The economy , weighed down by the debt that households ran up during the Bush-era bubble , is in dire straits ; deflation , not inflation , is the clear and present danger
And it 's not at all clear that the Fed has the tools to head off this danger
Right now we very much need active policies on the part of the federal government to get us out of our economic trap
But we wo n't get those policies if Republicans control the House
In fact , if they get their way , we 'll get the worst of both worlds : They 'll refuse to do anything to boost the economy now , claiming to be worried about the deficit , while simultaneously increasing long-run deficits with irresponsible tax cuts - cuts they have already announced wo n't have to be offset with spending cuts
So if the elections go as expected next week , here 's my advice : Be afraid
Be very afraid
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 is n't
And the complacency now setting in over the state of the economy is both foolish and dangerous
Yes , the Federal Reserve and the Obama administration have pulled us `` back from the brink '' the title of a new paper by Christina Romer , who leads the Council of Economic Advisers
She argues convincingly that expansionary policy saved us from a possible replay of the Great Depression
But while not having another depression is a good thing , all indications are that unless the government does much more than is currently planned to help the economy recover , the job market a market in which there are currently six times as many people seeking work as there are jobs on offer will remain terrible for years to come
Indeed , the administration 's own economic projection a projection that takes into account the extra jobs the administration says its policies will create is that the unemployment rate , which was below 5 percent just two years ago , will average 9.8 percent in 2010 , 8.6 percent in 2011 , and 7.7 percent in 2012
This should not be considered an acceptable outlook
For one thing , it implies an enormous amount of suffering over the next few years
Moreover , unemployment that remains that high , that long , will cast long shadows over America 's future
Anyone who thinks that we 're doing enough to create jobs should read a new report from John Irons of the Economic Policy Institute , which describes the `` scarring '' that 's likely to result from sustained high unemployment
Among other things , Mr. Irons points out that sustained unemployment on the scale now being predicted would lead to a huge rise in child poverty and that there 's overwhelming evidence that children who grow up in poverty are alarmingly likely to lead blighted lives
These human costs should be our main concern , but the dollars and cents implications are also dire
Projections by the Congressional Budget Office , for example , imply that over the period from 2010 to 2013 that is , not counting the losses we 've already suffered the `` output gap , '' the difference between the amount the economy could have produced and the amount it actually produces , will be more than $ 2 trillion
That 's trillions of dollars of productive potential going to waste
It gets worse
A new report from the International Monetary Fund shows that the kind of recession we 've had , a recession caused by a financial crisis , often leads to long-term damage to a country 's growth prospects
`` The path of output tends to be depressed substantially and persistently following banking crises .
The same report , however , suggests that this is n't inevitable : `` We find that a stronger short-term fiscal policy response '' by which they mean a temporary increase in government spending `` is significantly associated with smaller medium-term output losses .
So we should be doing much more than we are to promote economic recovery , not just because it would reduce our current pain , but also because it would improve our long-run prospects
But can we afford to do more to provide more aid to beleaguered state governments and the unemployed , to spend more on infrastructure , to provide tax credits to employers who create jobs
Yes , we can
The conventional wisdom is that trying to help the economy now produces short-term gain at the expense of long-term pain
But as I 've just pointed out , from the point of view of the nation as a whole that 's not at all how it works
The slump is doing long-term damage to our economy and society , and mitigating that slump will lead to a better future
What is true is that spending more on recovery and reconstruction would worsen the government 's own fiscal position
But even there , conventional wisdom greatly overstates the case
The true fiscal costs of supporting the economy are surprisingly small
You see , spending money now means a stronger economy , both in the short run and in the long run
And a stronger economy means more revenues , which offset a large fraction of the upfront cost
Back-of-the-envelope calculations suggest that the offset falls short of 100 percent , so that fiscal stimulus is n't a complete free lunch
But it costs far less than you 'd think from listening to what passes for informed discussion
Look , I know more stimulus is a hard sell politically
But it 's urgently needed
The question should n't be whether we can afford to do more to promote recovery
It should be whether we can afford not to
And the answer is no.
Past efforts to give Americans what citizens of every other advanced nation already have guaranteed access to essential care have ended not with a bang , but with a whimper , usually dying in committee without ever making it to a vote
But this time , broadly similar health-care bills have made it through multiple committees in both houses of Congress
And on Thursday , Nancy Pelosi , the speaker of the House , unveiled the legislation that she will send to the House floor , where it will almost surely pass
It 's not a perfect bill , by a long shot , but it 's a much stronger bill than almost anyone expected to emerge even a few weeks ago
And it would lead to near-universal coverage
As a result , everyone in the political class by which I mean politicians , people in the news media , and so on , basically whoever is in a position to influence the final stage of this legislative marathon now has to make a choice
The seemingly impossible dream of fundamental health reform is just a few steps away from becoming reality , and each player has to decide whether he or she is going to help it across the finish line or stand in its way
For conservatives , of course , it 's an easy decision : They do n't want Americans to have universal coverage , and they do n't want President Obama to succeed
For progressives , it 's a slightly more difficult decision : They want universal care , and they want the president to succeed but the proposed legislation falls far short of their ideal
There are still some reform advocates who wo n't accept anything short of a full transition to Medicare for all as opposed to a hybrid , compromise system that relies heavily on private insurers
And even those who have reconciled themselves to the political realities are disappointed that the bill does n't include a `` strong '' public option , with payment rates linked to those set by Medicare
But the bill does include a `` medium-strength '' public option , in which the public plan would negotiate payment rates defying the predictions of pundits who have repeatedly declared any kind of public-option plan dead
It also includes more generous subsidies than expected , making it easier for lower-income families to afford coverage
And according to Congressional Budget Office estimates , almost everyone 96 percent of legal residents too young to receive Medicare would get health insurance
So should progressives get behind this plan
And they probably will
The people who really have to make up their minds , then , are those in between , the self-proclaimed centrists
The odd thing about this group is that while its members are clearly uncomfortable with the idea of passing health care reform , they 're having a hard time explaining exactly what their problem is
Or to be more precise and less polite , they have been attacking proposed legislation for doing things it does n't and for not doing things it does
Thus , Senator Joseph Lieberman of Connecticut says , `` I want to be able to vote for a health bill , but my top concern is the deficit .
That would be a serious objection to the proposals currently on the table if they would , in fact , increase the deficit
But they would n't , at least according to the Congressional Budget Office , which estimates that the House bill , in particular , would actually reduce the deficit by $ 100 billion over the next decade
Or consider the remarkable exchange that took place this week between Peter Orszag , the White House budget director , and Fred Hiatt , The Washington Post 's opinion editor
Mr. Hiatt had criticized Congress for not taking what he considers the necessary steps to control health-care costs namely , taxing high-cost insurance plans and establishing an independent Medicare commission
Writing on the budget office blog yes , there is one , and it 's essential reading Mr. Orszag pointed out , not too gently , that the Senate Finance Committee 's bill actually includes both of the allegedly missing measures
I wo n't try to psychoanalyze the `` naysayers , '' as Mr. Orszag describes them
I 'd just urge them to take a good hard look in the mirror
If they really want to align themselves with the hard-line conservatives , if they just want to kill health reform , so be it
But they should n't hide behind claims that they really , truly would support health care reform if only it were better designed
For this is the moment of truth
The political environment is as favorable for reform as it 's likely to get
The legislation on the table is n't perfect , but it 's as good as anyone could reasonably have expected
History is about to be made and everyone has to decide which side they 're on
The long-feared capitulation of American consumers has arrived
According to Thursday 's G.D.P. report , real consumer spending fell at an annual rate of 3.1 percent in the third quarter ; real spending on durable goods -LRB- stuff like cars and TVs -RRB- fell at an annual rate of 14 percent
To appreciate the significance of these numbers , you need to know that American consumers almost never cut spending
Consumer demand kept rising right through the 2001 recession ; the last time it fell even for a single quarter was in 1991 , and there has n't been a decline this steep since 1980 , when the economy was suffering from a severe recession combined with double-digit inflation
Also , these numbers are from the third quarter the months of July , August , and September
So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September , not to mention before the Dow plunged below 10,000
Nor do the data show the full effects of the sharp cutback in the availability of consumer credit , which is still under way
So this looks like the beginning of a very big change in consumer behavior
And it could n't have come at a worse time
It 's true that American consumers have long been living beyond their means
In the mid-1980s Americans saved about 10 percent of their income
Lately , however , the savings rate has generally been below 2 percent sometimes it has even been negative and consumer debt has risen to 98 percent of G.D.P. , twice its level a quarter-century ago
Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios
Somehow , though , we 're not hearing that argument much lately
Sooner or later , then , consumers were going to have to pull in their belts
But the timing of the new sobriety is deeply unfortunate
One is tempted to echo St. Augustine 's plea : `` Grant me chastity and continence , but not yet .
For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap a situation in which the Federal Reserve has lost its grip on the economy
Some background : one of the high points of the semester , if you 're a teacher of introductory macroeconomics , comes when you explain how individual virtue can be public vice , how attempts by consumers to do the right thing by saving more can leave everyone worse off
The point is that if consumers cut their spending , and nothing else takes the place of that spending , the economy will slide into a recession , reducing everyone 's income
In fact , consumers ' income may actually fall more than their spending , so that their attempt to save more backfires a possibility known as the paradox of thrift
At this point , however , the instructor hastens to explain that virtue is n't really vice : in practice , if consumers were to cut back , the Fed would respond by slashing interest rates , which would help the economy avoid recession and lead to a rise in investment
So virtue is virtue after all , unless for some reason the Fed ca n't offset the fall in consumer spending
I 'll bet you can guess what 's coming next
For the fact is that we are in a liquidity trap right now : Fed policy has lost most of its traction
It 's true that Ben Bernanke has n't yet reduced interest rates all the way to zero , as the Japanese did in the 1990s
But it 's hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy
In particular , the financial crisis has made Fed policy largely irrelevant for much of the private sector : The Fed has been steadily cutting away , yet mortgage rates and the interest rates many businesses pay are higher than they were early this year
The capitulation of the American consumer , then , is coming at a particularly bad time
But it 's no use whining
What we need is a policy response
The ongoing efforts to bail out the financial system , even if they work , wo n't do more than slightly mitigate the problem
Maybe some consumers will be able to keep their credit cards , but as we 've seen , Americans were overextended even before banks started cutting them off
No , what the economy needs now is something to take the place of retrenching consumers
That means a major fiscal stimulus
And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably would n't spend
Let 's hope , then , that Congress gets to work on a package to rescue the economy as soon as the election is behind us
And let 's also hope that the lame-duck Bush administration does n't get in the way
As recently as three weeks ago it was still possible to argue that the state of the U.S. economy , while clearly not good , was n't disastrous that the financial system , while under stress , was n't in full meltdown and that Wall Street 's troubles were n't having that much impact on Main Street
The financial and economic news since the middle of last month has been really , really bad
And what 's truly scary is that we 're entering a period of severe crisis with weak , confused leadership
The wave of bad news began on Sept. 14
Henry Paulson , the Treasury secretary , thought he could get away with letting Lehman Brothers , the investment bank , fail ; he was wrong
The plight of investors trapped by Lehman 's collapse as an article in The Times put it , Lehman became `` the Roach Motel of Wall Street : They checked in , but they ca n't check out '' created panic in the financial markets , which has only grown worse as the days go by
Indicators of financial stress have soared to the equivalent of a 107-degree fever , and large parts of the financial system have simply shut down
There 's growing evidence that the financial crunch is spreading to Main Street , with small businesses having trouble raising money and seeing their credit lines cut
And leading indicators for both employment and industrial production have turned sharply worse , suggesting that even before Lehman 's fall , the economy , which has been sagging since last year , was falling off a cliff
How bad is it
Normally sober people are sounding apocalyptic
On Thursday , the bond trader and blogger John Jansen declared that current conditions are `` the financial equivalent of the Reign of Terror during the French Revolution , '' while Joel Prakken of Macroeconomic Advisers says that the economy seems to be on `` the edge of the abyss .
And the people who should be steering us away from that abyss are out to lunch
The House will probably vote on Friday on the latest version of the $ 700 billion bailout plan originally the Paulson plan , then the Paulson-Dodd-Frank plan , and now , I guess , the Paulson-Dodd-Frank-Pork plan -LRB- it 's been larded up since the House rejected it on Monday -RRB-
I hope that it passes , simply because we 're in the middle of a financial panic , and another no vote would make the panic even worse
But that 's just another way of saying that the economy is now hostage to the Treasury Department 's blunders
For the fact is that the plan on offer is a stinker and inexcusably so
The financial system has been under severe stress for more than a year , and there should have been carefully thought-out contingency plans ready to roll out in case the markets melted down
Obviously , there were n't : the Paulson plan was clearly drawn up in haste and confusion
And Treasury officials have yet to offer any clear explanation of how the plan is supposed to work , probably because they themselves have no idea what they 're doing
Despite this , as I said , I hope the plan passes , because otherwise we 'll probably see even worse panic in the markets
But at best , the plan will buy some time to seek a real solution to the crisis
And that raises the question : Do we have that time
A solution to our economic woes will have to start with a much better-conceived rescue of the financial system one that will almost surely involve the U.S. government taking partial , temporary ownership of that system , the way Sweden 's government did in the early 1990s
Yet it 's hard to imagine the Bush administration taking that step
We also desperately need an economic stimulus plan to push back against the slump in spending and employment
And this time it had better be a serious plan that does n't rely on the magic of tax cuts , but instead spends money where it 's needed
-LRB- Aid to cash-strapped state and local governments , which are slashing spending at precisely the worst moment , is also a priority .
Yet it 's hard to imagine the Bush administration , in its final months , overseeing the creation of a new Works Progress Administration
So we probably have to wait for the next administration , which should be much more inclined to do the right thing although even that 's by no means a sure thing , given the uncertainty of the election outcome
-LRB- I 'm not a fan of Mr. Paulson 's , but I 'd rather have him at the Treasury than , say , Phil `` nation of whiners '' Gramm .
And while the election is only 32 days away , it will be almost four months until the next administration takes office
A lot can and probably will go wrong in those four months
One thing 's for sure : The next administration 's economic team had better be ready to hit the ground running , because from day one it will find itself dealing with the worst financial and economic crisis since the Great Depression
A note to Tea Party activists : This is not the movie you think it is
You probably imagine that you 're starring in `` The Birth of a Nation , '' but you 're actually just extras in a remake of `` Citizen Kane .
True , there have been some changes in the plot
In the original , Kane tried to buy high political office for himself
In the new version , he just puts politicians on his payroll
I mean that literally
As Politico recently pointed out , every major contender for the 2012 Republican presidential nomination who is n't currently holding office and is n't named Mitt Romney is now a paid contributor to Fox News
Now , media moguls have often promoted the careers and campaigns of politicians they believe will serve their interests
But directly cutting checks to political favorites takes it to a whole new level of blatancy
Arguably , this should n't be surprising
Modern American conservatism is , in large part , a movement shaped by billionaires and their bank accounts , and assured paychecks for the ideologically loyal are an important part of the system
Scientists willing to deny the existence of man-made climate change , economists willing to declare that tax cuts for the rich are essential to growth , strategic thinkers willing to provide rationales for wars of choice , lawyers willing to provide defenses of torture , all can count on support from a network of organizations that may seem independent on the surface but are largely financed by a handful of ultrawealthy families
And these organizations have long provided havens for conservative political figures not currently in office
Thus when Senator Rick Santorum was defeated in 2006 , he got a new job as head of the America 's Enemies program at the Ethics and Public Policy Center , a think tank that has received funding from the usual sources : the Koch brothers , the Coors family , and so on
Now Mr. Santorum is one of those paid Fox contributors contemplating a presidential run
What 's the difference
Well , for one thing , Fox News seems to have decided that it no longer needs to maintain even the pretense of being nonpartisan
Nobody who was paying attention has ever doubted that Fox is , in reality , a part of the Republican political machine ; but the network - with its Orwellian slogan , `` fair and balanced '' - has always denied the obvious
Officially , it still does
But by hiring those G.O.P. candidates , while at the same time making million-dollar contributions to the Republican Governors Association and the rabidly anti-Obama United States Chamber of Commerce , Rupert Murdoch 's News Corporation , which owns Fox , is signaling that it no longer feels the need to make any effort to keep up appearances
Something else has changed , too : increasingly , Fox News has gone from merely supporting Republican candidates to anointing them
Christine O'Donnell , the upset winner of the G.O.P. Senate primary in Delaware , is often described as the Tea Party candidate , but given the publicity the network gave her , she could equally well be described as the Fox News candidate
Anyway , there 's not much difference : the Tea Party movement owes much of its rise to enthusiastic Fox coverage
As the Republican political analyst David Frum put it , `` Republicans originally thought that Fox worked for us , and now we are discovering we work for Fox '' - literally , in the case of all those non-Mitt-Romney presidential hopefuls
It was days later , by the way , that Mr. Frum was fired by the American Enterprise Institute
Conservatives criticize Fox at their peril
So the Ministry of Propaganda has , in effect , seized control of the Politburo
What are the implications
Perhaps the most important thing to realize is that when billionaires put their might behind `` grass roots '' right-wing action , it 's not just about ideology : it 's also about business
What the Koch brothers have bought with their huge political outlays is , above all , freedom to pollute
What Mr. Murdoch is acquiring with his expanded political role is the kind of influence that lets his media empire make its own rules
Thus in Britain , a reporter at one of Mr. Murdoch 's papers , News of the World , was caught hacking into the voice mail of prominent citizens , including members of the royal family
But Scotland Yard showed little interest in getting to the bottom of the story
Now the editor who ran the paper when the hacking was taking place is chief of communications for the Conservative government - and that government is talking about slashing the budget of the BBC , which competes with the News Corporation
So think of those paychecks to Sarah Palin and others as smart investments
After all , if you 're a media mogul , it 's always good to have friends in high places
And the most reliable friends are the ones who know they owe it all to you
In 1960 , John F. Kennedy , who had been shocked by the hunger he saw in West Virginia , made the fight against hunger a theme of his presidential campaign
After his election he created the modern food stamp program , which today helps millions of Americans get enough to eat
But Ronald Reagan thought the issue of hunger in the world s richest nation was nothing but a big joke
Here s what Reagan said in his famous 1964 speech A Time for Choosing , which made him a national political figure : We were told four years ago that 17 million people went to bed hungry each night
Well , that was probably true
They were all on a diet
Today s leading conservatives are Reagan s heirs
If you re poor , if you don t have health insurance , if you re sick well , they don t think it s a serious issue
In fact , they think it s funny
On Wednesday , President Bush vetoed legislation that would have expanded S-chip , the State Children s Health Insurance Program , providing health insurance to an estimated 3.8 million children who would otherwise lack coverage
In anticipation of the veto , William Kristol , the editor of The Weekly Standard , had this to say : First of all , whenever I hear anything described as a heartless assault on our children , I tend to think it s a good idea
I m happy that the president s willing to do something bad for the kids
Most conservatives are more careful than Mr. Kristol
They try to preserve the appearance that they really do care about those less fortunate than themselves
But the truth is that they aren t bothered by the fact that almost nine million children in America lack health insurance
They don t think it s a problem
I mean , people have access to health care in America , said Mr. Bush in July
After all , you just go to an emergency room
And on the day of the veto , Mr. Bush dismissed the whole issue of uninsured children as a media myth
Referring to Medicaid spending which fails to reach many children he declared that when they say , well , poor children aren t being covered in America , if that s what you re hearing on your TV screens , I m telling you there s $ 35.5 billion worth of reasons not to believe that
It s not just the poor who find their travails belittled and mocked
The sick receive the same treatment
Before the last election , the actor Michael J. Fox , who suffers from Parkinson s and has become an advocate for stem cell research that might lead to a cure , made an ad in support of Claire McCaskill , the Democratic candidate for Senator in Missouri
It was an effective ad , in part because Mr. Fox s affliction was obvious
And Rush Limbaugh displaying the same style he exhibited in his recent claim that members of the military who oppose the Iraq war are phony soldiers and his later comparison of a wounded vet who criticized him for that remark to a suicide bomber immediately accused Mr. Fox of faking it
In this commercial , he is exaggerating the effects of the disease
He is moving all around and shaking
And it s purely an act
Of course , minimizing and mocking the suffering of others is a natural strategy for political figures who advocate lower taxes on the rich and less help for the poor and unlucky
But I believe that the lack of empathy shown by Mr. Limbaugh , Mr. Kristol , and , yes , Mr. Bush is genuine , not feigned
Mark Crispin Miller , the author of The Bush Dyslexicon , once made a striking observation : all of the famous Bush malapropisms I know how hard it is for you to put food on your family , and so on have involved occasions when Mr. Bush was trying to sound caring and compassionate
By contrast , Mr. Bush is articulate and even grammatical when he talks about punishing people ; that s when he s speaking from the heart
The only animation Mr. Bush showed during the flooding of New Orleans was when he declared zero tolerance of people breaking the law , even those breaking into abandoned stores in search of the food and water they weren t getting from his administration
What s happening , presumably , is that modern movement conservatism attracts a certain personality type
If you identify with the downtrodden , even a little , you don t belong
If you think ridicule is an appropriate response to other peoples woes , you fit right in
And Republican disillusionment with Mr. Bush does not appear to signal any change in that regard
On the contrary , the leading candidates for the Republican nomination have gone out of their way to condemn socialism , which is G.O.P.-speak for any attempt to help the less fortunate
So once again , if you re poor or you re sick or you don t have health insurance , remember this : these people think your problems are funny
There was what President Obama likes to call a teachable moment last week , when the International Olympic Committee rejected Chicago 's bid to be host of the 2016 Summer Games
The columnist addresses a selection of your questions about the economy on his blog
`` Cheers erupted '' at the headquarters of the conservative Weekly Standard , according to a blog post by a member of the magazine 's staff , with the headline `` Obama loses
Obama loses !
Rush Limbaugh declared himself `` gleeful .
`` World Rejects Obama , '' gloated the Drudge Report
And so on
So what did we learn from this moment
For one thing , we learned that the modern conservative movement , which dominates the modern Republican Party , has the emotional maturity of a bratty 13-year-old
But more important , the episode illustrated an essential truth about the state of American politics : at this point , the guiding principle of one of our nation 's two great political parties is spite pure and simple
If Republicans think something might be good for the president , they 're against it whether or not it 's good for America
To be sure , while celebrating America 's rebuff by the Olympic Committee was puerile , it did n't do any real harm
But the same principle of spite has determined Republican positions on more serious matters , with potentially serious consequences in particular , in the debate over health care reform
Now , it 's understandable that many Republicans oppose Democratic plans to extend insurance coverage just as most Democrats opposed President Bush 's attempt to convert Social Security into a sort of giant 401 -LRB- k -RRB-
The two parties do , after all , have different philosophies about the appropriate role of government
But the tactics of the two parties have been different
In 2005 , when Democrats campaigned against Social Security privatization , their arguments were consistent with their underlying ideology : they argued that replacing guaranteed benefits with private accounts would expose retirees to too much risk
The Republican campaign against health care reform , by contrast , has shown no such consistency
For the main G.O.P. line of attack is the claim based mainly on lies about death panels and so on that reform will undermine Medicare
And this line of attack is utterly at odds both with the party 's traditions and with what conservatives claim to believe
Think about just how bizarre it is for Republicans to position themselves as the defenders of unrestricted Medicare spending
First of all , the modern G.O.P. considers itself the party of Ronald Reagan and Reagan was a fierce opponent of Medicare 's creation , warning that it would destroy American freedom
-LRB- Honest .
In the 1990s , Newt Gingrich tried to force drastic cuts in Medicare financing
And in recent years , Republicans have repeatedly decried the growth in entitlement spending growth that is largely driven by rising health care costs
But the Obama administration 's plan to expand coverage relies in part on savings from Medicare
And since the G.O.P. opposes anything that might be good for Mr. Obama , it has become the passionate defender of ineffective medical procedures and overpayments to insurance companies
How did one of our great political parties become so ruthless , so willing to embrace scorched-earth tactics even if so doing undermines the ability of any future administration to govern
The key point is that ever since the Reagan years , the Republican Party has been dominated by radicals ideologues and\/or apparatchiks who , at a fundamental level , do not accept anyone else 's right to govern
Anyone surprised by the venomous , over-the-top opposition to Mr. Obama must have forgotten the Clinton years
Remember when Rush Limbaugh suggested that Hillary Clinton was a party to murder
When Newt Gingrich shut down the federal government in an attempt to bully Bill Clinton into accepting those Medicare cuts
And let 's not even talk about the impeachment saga
The only difference now is that the G.O.P. is in a weaker position , having lost control not just of Congress but , to a large extent , of the terms of debate
The public no longer buys conservative ideology the way it used to ; the old attacks on Big Government and paeans to the magic of the marketplace have lost their resonance
Yet conservatives retain their belief that they , and only they , should govern
The result has been a cynical , ends-justify-the-means approach
Hastening the day when the rightful governing party returns to power is all that matters , so the G.O.P. will seize any club at hand with which to beat the current administration
It 's an ugly picture
But it 's the truth
And it 's a truth anyone trying to find solutions to America 's real problems has to understand
Sarah Palin ended her debate performance last Thursday with a slightly garbled quote from Ronald Reagan about how , if we are n't vigilant , we 'll end up `` telling our children and our children 's children '' about the days when America was free
It was a revealing choice
You see , when Reagan said this he was n't warning about Soviet aggression
He was warning against legislation that would guarantee health care for older Americans the program now known as Medicare
Conservative Republicans still hate Medicare , and would kill it if they could in fact , they tried to gut it during the Clinton years -LRB- that 's what the 1995 shutdown of the government was all about -RRB-
But so far they have n't been able to pull that off
So John McCain wants to destroy the health insurance of nonelderly Americans instead
Most Americans under 65 currently get health insurance through their employers
That 's largely because the tax code favors such insurance : your employer 's contribution to insurance premiums is n't considered taxable income , as long as the employer 's health plan follows certain rules
In particular , the same plan has to be available to all employees , regardless of the size of their paycheck or the state of their health
This system does a fairly effective job of protecting those it reaches , but it leaves many Americans out in the cold
Workers whose employers do n't offer coverage are forced to seek individual health insurance , often in vain
For one thing , insurance companies offering `` nongroup '' coverage generally refuse to cover anyone with a pre-existing medical condition
And individual insurance is very expensive , because insurers spend large sums weeding out `` high-risk '' applicants that is , anyone who seems likely to actually need the insurance
So what should be done
Barack Obama offers incremental reform : regulation of insurers to prevent discrimination against the less healthy , subsidies to help lower-income families buy insurance , and public insurance plans that compete with the private sector
His plan falls short of universal coverage , but it would sharply reduce the number of uninsured
Mr. McCain , on the other hand , wants to blow up the current system , by eliminating the tax break for employer-provided insurance
And he does n't offer a workable alternative
Without the tax break , many employers would drop their current health plans
Several recent nonpartisan studies estimate that under the McCain plan around 20 million Americans currently covered by their employers would lose their health insurance
As compensation , the McCain plan would give people a tax credit $ 2,500 for an individual , $ 5,000 for a family that could be used to buy health insurance in the individual market
At the same time , Mr. McCain would deregulate insurance , leaving insurance companies free to deny coverage to those with health problems and his proposal for a `` high-risk pool '' for hard cases would provide little help
So what would happen
The good news , such as it is , is that more people would buy individual insurance
Indeed , the total number of uninsured Americans might decline marginally under the McCain plan although many more Americans would be without insurance than under the Obama plan
But the people gaining insurance would be those who need it least : relatively healthy Americans with high incomes
Because insurance companies want to cover only healthy people , and even among the healthy only those able to pay a lot in addition to their tax credit would be able to afford coverage -LRB- remember , it 's a $ 5,000 credit , but the average family policy actually costs more than $ 12,000 -RRB-
Meanwhile , the people losing insurance would be those who need it most : lower-income workers who would n't be able to afford individual insurance even with the tax credit , and Americans with health problems whom insurance companies wo n't cover
And in the process of comforting the comfortable while afflicting the afflicted , the McCain plan would also lead to a huge , expensive increase in bureaucracy : insurers selling individual health plans spend 29 percent of the premiums they receive on administration , largely because they employ so many people to screen applicants
This compares with costs of 12 percent for group plans and just 3 percent for Medicare
In short , the McCain plan makes no sense at all , unless you have faith that the magic of the marketplace can solve all problems
And Mr. McCain does : a much-quoted article published under his name declares that `` Opening up the health insurance market to more vigorous nationwide competition , as we have done over the last decade in banking , would provide more choices of innovative products less burdened by the worst excesses of state-based regulation .
I agree : the McCain plan would do for health care what deregulation has done for banking
And I 'm terrified
There have been a number of articles recently that portray President Bush as someone who strayed from the path of true conservatism
Republicans , these articles say , need to return to their roots
Well , I don t know what true conservatism is , but while doing research for my forthcoming book I spent a lot of time studying the history of the American political movement that calls itself conservatism and Mr. Bush hasn t strayed from the path at all
On the contrary , he s the very model of a modern movement conservative
For example , people claim to be shocked that Mr. Bush cut taxes while waging an expensive war
But Ronald Reagan also cut taxes while embarking on a huge military buildup
People claim to be shocked by Mr. Bush s general fiscal irresponsibility
But conservative intellectuals , by their own account , abandoned fiscal responsibility 30 years ago
Here s how Irving Kristol , then the editor of The Public Interest , explained his embrace of supply-side economics in the 1970s : He had a rather cavalier attitude toward the budget deficit and other monetary or fiscal problems because the task , as I saw it , was to create a new majority , which evidently would mean a conservative majority , which came to mean , in turn , a Republican majority so political effectiveness was the priority , not the accounting deficiencies of government
People claim to be shocked by the way the Bush administration outsourced key government functions to private contractors yet refused to exert effective oversight over these contractors , a process exemplified by the failed reconstruction of Iraq and the Blackwater affair
But back in 1993 , Jonathan Cohn , writing in The American Prospect , explained that under Reagan and Bush , the ranks of public officials necessary to supervise contractors have been so thinned that the putative gains of contracting out have evaporated
Agencies have been left with the worst of both worlds demoralized and disorganized public officials and unaccountable private contractors
People claim to be shocked by the Bush administration s general incompetence
But disinterest in good government has long been a principle of modern conservatism
In The Conscience of a Conservative , published in 1960 , Barry Goldwater wrote that I have little interest in streamlining government or making it more efficient , for I mean to reduce its size
People claim to be shocked that the Bush Justice Department , making a mockery of the Constitution , issued a secret opinion authorizing torture despite instructions by Congress and the courts that the practice should stop
But remember Iran-Contra
The Reagan administration secretly sold weapons to Iran , violating a legal embargo , and used the proceeds to support the Nicaraguan contras , defying an explicit Congressional ban on such support
Oh , and if you think Iran-Contra was a rogue operation , rather than something done with the full knowledge and approval of people at the top who were then protected by a careful cover-up , including convenient presidential pardons I ve got a letter from Niger you might want to buy
People claim to be shocked at the Bush administration s efforts to disenfranchise minority groups , under the pretense of combating voting fraud
But Reagan opposed the Voting Rights Act , and as late as 1980 he described it as humiliating to the South
People claim to be shocked at the Bush administration s attempts which , for a time , were all too successful to intimidate the press
But this administration s media tactics , and to a large extent the people implementing those tactics , come straight out of the Nixon administration
Dick Cheney wanted to search Seymour Hersh s apartment , not last week , but in 1975
Roger Ailes , the president of Fox News , was Nixon s media adviser
People claim to be shocked at the Bush administration s attempts to equate dissent with treason
But Goldwater who , like Reagan , has been reinvented as an icon of conservative purity but was a much less attractive figure in real life staunchly supported Joseph McCarthy , and was one of only 22 senators who voted against a motion censuring the demagogue
Above all , people claim to be shocked by the Bush administration s authoritarianism , its disdain for the rule of law
But a full half-century has passed since The National Review proclaimed that the White community in the South is entitled to take such measures as are necessary to prevail , and dismissed as irrelevant objections that might be raised after consulting a catalogue of the rights of American citizens , born Equal presumably a reference to the document known as the Constitution of the United States
Now , as they survey the wreckage of their cause , conservatives may ask themselves : Well , how did we get here
They may tell themselves : This is not my beautiful Right
They may ask themselves : My God , what have we done
But their movement is the same as it ever was
And Mr. Bush is movement conservatism s true , loyal heir
The Erie Canal
Hoover Dam
The Interstate Highway System
Visionary public projects are part of the American tradition , and have been a major driver of our economic development
And right now , by any rational calculation , would be an especially good time to improve the nation 's infrastructure
We have the need : our roads , our rail lines , our water and sewer systems are antiquated and increasingly inadequate
We have the resources : a million-and-a-half construction workers are sitting idle , and putting them to work would help the economy as a whole recover from its slump
And the price is right : with interest rates on federal debt at near-record lows , there has never been a better time to borrow for long-term investment
But American politics these days is anything but rational
Republicans bitterly opposed even the modest infrastructure spending contained in the Obama stimulus plan
And , on Thursday , Chris Christie , the governor of New Jersey , canceled America 's most important current public works project , the long-planned and much-needed second rail tunnel under the Hudson River
It was a destructive and incredibly foolish decision on multiple levels
But it should n't have been all that surprising
We are no longer the nation that used to amaze the world with its visionary projects
We have become , instead , a nation whose politicians seem to compete over who can show the least vision , the least concern about the future and the greatest willingness to pander to short-term , narrow-minded selfishness
So , about that tunnel : with almost 1,200 people per square mile , New Jersey is the most densely populated state in America , more densely populated than any major European nation
Add in the fact that many residents work in New York , and you have a state that ca n't function without adequate public transportation
There just is n't enough space for everyone to drive to work
But right now there 's just one century-old rail tunnel linking New Jersey and New York - and it 's running close to capacity
The need for another tunnel could n't be more obvious
So last year the project began
Of the $ 8.7 billion in planned funding , less than a third was to come from the State of New Jersey ; the rest would come , in roughly equal amounts , from the independent Port Authority of New York and New Jersey and from the federal government
Even if costs were to rise substantially , as they often do on big projects , it was a very good deal for the state
But Mr. Christie killed it anyway
News reports suggest that his immediate goal was to shift funds to local road projects and existing rail repairs
There were , however , much better ways to raise those funds , such as an increase in the state 's relatively low gasoline taxes - and bear in mind that whatever motorists gain from low gas taxes will be at least partly undone by pain from the canceled project in the form of growing congestion and traffic delays
But , no , in modern America , no tax increase can ever be justified , for any reason
So this was a terrible , shortsighted move from New Jersey 's point of view
But that 's not the whole cost
Canceling the tunnel was also a blow to national hopes of recovery , part of a pattern of penny-pinching that has played a large role in our continuing economic stagnation
When people ask why the Obama stimulus did n't accomplish more , one good response is to ask , what stimulus
Leaving aside the cost of financial rescues and safety-net programs like unemployment insurance , federal spending has risen only modestly - and this rise has been largely offset by cutbacks at the state and local level
Many of these cuts were forced by Congress , which has refused to approve adequate aid to the states
But as Mr. Christie is demonstrating , local politicians are also doing their part
And the ideology that has led Mr. Christie to undermine his state 's future is , of course , the same ideology that has led almost all Republicans and some Democrats to stand in the way of any meaningful action to revive the nation 's economy
Worse yet , next month 's election seems likely to reward Republicans for their obstructionism
So here 's how you should think about the decision to kill the tunnel : It 's a terrible thing in itself , but , beyond that , it 's a perfect symbol of how America has lost its way
By refusing to pay for essential investment , politicians are both perpetuating unemployment and sacrificing long-run growth
And why not
After all , this seems to be a winning electoral strategy
All vision of a better future seems to have been lost , replaced with a refusal to look beyond the narrowest , most shortsighted notion of self-interest
I wish I could say something optimistic at this point
But at least for now , I do n't see any light at the end of this tunnel
If you had to explain America 's economic success with one word , that word would be `` education .
In the 19th century , America led the way in universal basic education
Then , as other nations followed suit , the `` high school revolution '' of the early 20th century took us to a whole new level
And in the years after World War II , America established a commanding position in higher education
The columnist addresses a selection of your questions about the economy on his blog earlier this week
But that was then
The rise of American education was , overwhelmingly , the rise of public education and for the past 30 years our political scene has been dominated by the view that any and all government spending is a waste of taxpayer dollars
Education , as one of the largest components of public spending , has inevitably suffered
Until now , the results of educational neglect have been gradual a slow-motion erosion of America 's relative position
But things are about to get much worse , as the economic crisis its effects exacerbated by the penny-wise , pound-foolish behavior that passes for `` fiscal responsibility '' in Washington deals a severe blow to education across the board
About that erosion : there has been a flurry of reporting recently about threats to the dominance of America 's elite universities
What has n't been reported to the same extent , at least as far as I 've seen , is our relative decline in more mundane measures
America , which used to take the lead in educating its young , has been gradually falling behind other advanced countries
Most people , I suspect , still have in their minds an image of America as the great land of college education , unique in the extent to which higher learning is offered to the population at large
That image used to correspond to reality
But these days young Americans are considerably less likely than young people in many other countries to graduate from college
In fact , we have a college graduation rate that 's slightly below the average across all advanced economies
Even without the effects of the current crisis , there would be every reason to expect us to fall further in these rankings , if only because we make it so hard for those with limited financial means to stay in school
In America , with its weak social safety net and limited student aid , students are far more likely than their counterparts in , say , France to hold part-time jobs while still attending classes
Not surprisingly , given the financial pressures , young Americans are also less likely to stay in school and more likely to become full-time workers instead
But the crisis has placed huge additional stress on our creaking educational system
According to the Bureau of Labor Statistics , the United States economy lost 273,000 jobs last month
Of those lost jobs , 29,000 were in state and local education , bringing the total losses in that category over the past five months to 143,000
That may not sound like much , but education is one of those areas that should , and normally does , keep growing even during a recession
Markets may be troubled , but that 's no reason to stop teaching our children
Yet that 's exactly what we 're doing
There 's no mystery about what 's going on : education is mainly the responsibility of state and local governments , which are in dire fiscal straits
Adequate federal aid could have made a big difference
But while some aid has been provided , it has made up only a fraction of the shortfall
In part , that 's because back in February centrist senators insisted on stripping much of that aid from the American Recovery and Reinvestment Act , a k a the stimulus bill
As a result , education is on the chopping block
And laid-off teachers are only part of the story
Even more important is the way that we 're shutting off opportunities
For example , the Chronicle of Higher Education recently reported on the plight of California 's community college students
For generations , talented students from less affluent families have used those colleges as a stepping stone to the state 's public universities
But in the face of the state 's budget crisis those universities have been forced to slam the door on this year 's potential transfer students
One result , almost surely , will be lifetime damage to many students ' prospects and a large , gratuitous waste of human potential
So what should be done
First of all , Congress needs to undo the sins of February , and approve another big round of aid to state governments
We do n't have to call it a stimulus , but it would be a very effective way to create or save thousands of jobs
And it would , at the same time , be an investment in our future
Beyond that , we need to wake up and realize that one of the keys to our nation 's historic success is now a wasting asset
Education made America great ; neglect of education can reverse the process
`` Japan 's problems now are the same as they were in the 1990s , when you were writing about them
It 's depressing .
So declared one economist I spoke to here
`` But the Japanese do n't seem all that depressed , '' objected another
Both were right - and the conversation crystallized some thoughts I 've been having about Japan 's situation , and ours
A decade ago , Japan was a byword for failed economic policies : years after its real estate bubble burst , it was still suffering from chronic deflation and slow growth
Then America had its own bubble , bust and crisis
And these days , Japan 's record does n't look that bad to an American eye
Why not
For all its flaws , Japanese policy limited and contained the damage from a financial bust
And the question in America now is whether we 'll do the same - or whether we will take a hard right turn into economic disaster
In the 1990s , Japan conducted a dress rehearsal for the crisis that struck much of the world in 2008
Runaway banks fueled a bubble in land prices ; when the bubble burst , these banks were severely weakened , as were the balance sheets of everyone who had borrowed in the belief that land prices would stay high
The result was protracted economic weakness
And the policy response was too little , too late
The Bank of Japan cut interest rates and took other steps to pump up spending , but it was always behind the curve and persistent deflation took hold
The government propped up employment with public works programs , but its efforts were never focused enough to start a self-sustaining recovery
Banks were kept afloat , but were slow to face up to bad debts and resume lending
The result of inadequate policy was an economy that remains depressed to this day
Yet the picture is grayish rather than pitch black
Japan 's economy may be depressed , but it 's not in a depression
The employment picture has been troubled , with a growing number of `` freeters '' living from temporary job to temporary job
But thanks to those government job-creation plans , the country is n't suffering mass unemployment
Debt has risen , but despite constant warnings of imminent crisis - and even downgrades from rating agencies back in 2002 - the government is still able to borrow , long term , at an interest rate of only 1.1 percent
In short , Japan 's performance has been disappointing but not disastrous
And given the policy agenda of America 's right , that 's a performance we may wish we 'd managed to match
Like their Japanese counterparts , American policy makers initially responded to a burst bubble and a financial crisis with half-measures
I 've lamented that fact , but at this point it 's water under the bridge
The question is : What happens now
Republican obstruction means that the best we can hope for in the near future are palliative measures - modest additional spending like the infrastructure program President Obama proposed this week , aid to state and local governments to help them avoid severe further cutbacks , aid to the unemployed to reduce hardship and maintain spending power
Even with such measures , we 'll be lucky to do as well as Japan did at limiting the human and economic cost of the economy 's financial woes
But it 's by no means certain that we 'll do even that much
If the Republicans go beyond obstruction to actually setting policy - which they might if they win big in November - we 'll be on our way to economic performance that makes Japan look like the promised land
It 's hard to overstate how destructive the economic ideas offered earlier this week by John Boehner , the House minority leader , would be if put into practice
Basically , he proposes two things : large tax cuts for the wealthy that would increase the budget deficit while doing little to support the economy , and sharp spending cuts that would depress the economy while doing little to improve budget prospects
Fewer jobs and bigger deficits - the perfect combination
More broadly , if Republicans regain power , they will surely do what they did during the Bush years : they wo n't seriously try to address the economy 's troubles ; they 'll just use those troubles as an excuse to push the usual agenda , including Social Security privatization
They 'll also surely try to repeal health reform , which would be another twofer , reducing economic security even as it increases long-term deficits
So I find myself almost envying the Japanese
Yes , their performance has been disappointing
But things could have been worse
And the case Democrats now need to make - the case the president finally began to make in Cleveland this week - is that if Republicans regain power , things will indeed be worse
Americans , understandably , are disappointed over , frustrated with and angry about the state of the economy ; but disappointment is better than disaster
Did you hear about how Barack Obama wants to have sex education in kindergarten , and called Sarah Palin a pig
Did you hear about how Ms. Palin told Congress , `` Thanks , but no thanks '' when it wanted to buy Alaska a Bridge to Nowhere
These stories have two things in common : they 're all claims recently made by the McCain campaign and they 're all out-and-out lies
Dishonesty is nothing new in politics
I spent much of 2000 my first year at The Times trying to alert readers to the blatant dishonesty of the Bush campaign 's claims about taxes , spending and Social Security
But I ca n't think of any precedent , at least in America , for the blizzard of lies since the Republican convention
The Bush campaign 's lies in 2000 were artful you needed some grasp of arithmetic to realize that you were being conned
This year , however , the McCain campaign keeps making assertions that anyone with an Internet connection can disprove in a minute , and repeating these assertions over and over again
Take the case of the Bridge to Nowhere , which supposedly gives Ms. Palin credentials as a reformer
Well , when campaigning for governor , Ms. Palin did n't say `` no thanks '' she was all for the bridge , even though it had already become a national scandal , insisting that she would `` not allow the spinmeisters to turn this project or any other into something that 's so negative .
Oh , and when she finally did decide to cancel the project , she did n't righteously reject a handout from Washington : she accepted the handout , but spent it on something else
You see , long before she decided to cancel the bridge , Congress had told Alaska that it could keep the federal money originally earmarked for that project and use it elsewhere
So the whole story of Ms. Palin 's alleged heroic stand against wasteful spending is fiction
Or take the story of Mr. Obama 's alleged advocacy of kindergarten sex-ed
In reality , he supported legislation calling for `` age and developmentally appropriate education '' ; in the case of young children , that would have meant guidance to help them avoid sexual predators
And then there 's the claim that Mr. Obama 's use of the ordinary metaphor `` putting lipstick on a pig '' was a sexist smear , and on and on
Why do the McCain people think they can get away with this stuff
Well , they 're probably counting on the common practice in the news media of being `` balanced '' at all costs
You know how it goes : If a politician says that black is white , the news report does n't say that he 's wrong , it reports that `` some Democrats say '' that he 's wrong
Or a grotesque lie from one side is paired with a trivial misstatement from the other , conveying the impression that both sides are equally dirty
They 're probably also counting on the prevalence of horse-race reporting , so that instead of the story being `` McCain campaign lies , '' it becomes `` Obama on defensive in face of attacks .
Still , how upset should we be about the McCain campaign 's lies
I mean , politics ai n't beanbag , and all that
One answer is that the muck being hurled by the McCain campaign is preventing a debate on real issues on whether the country really wants , for example , to continue the economic policies of the last eight years
But there 's another answer , which may be even more important : how a politician campaigns tells you a lot about how he or she would govern
I 'm not talking about the theory , often advanced as a defense of horse-race political reporting , that the skills needed to run a winning campaign are the same as those needed to run the country
The contrast between the Bush political team 's ruthless effectiveness and the heckuva job done by the Bush administration is living , breathing , bumbling , and , in the case of the emerging Interior Department scandal , coke-snorting and bed-hopping proof to the contrary
I 'm talking , instead , about the relationship between the character of a campaign and that of the administration that follows
Thus , the deceptive and dishonest 2000 Bush-Cheney campaign provided an all-too-revealing preview of things to come
In fact , my early suspicion that we were being misled about the threat from Iraq came from the way the political tactics being used to sell the war resembled the tactics that had earlier been used to sell the Bush tax cuts
And now the team that hopes to form the next administration is running a campaign that makes Bush-Cheney 2000 look like something out of a civics class
What does that say about how that team would run the country
What it says , I 'd argue , is that the Obama campaign is wrong to suggest that a McCain-Palin administration would just be a continuation of Bush-Cheney
If the way John McCain and Sarah Palin are campaigning is any indication , it would be much , much worse
Last week Japan 's minister of finance declared that he and his colleagues wanted a discussion with China about the latter 's purchases of Japanese bonds , to `` examine its intention '' - diplomat-speak for `` Stop it right now .
The news made me want to bang my head against the wall in frustration
You see , senior American policy figures have repeatedly balked at doing anything about Chinese currency manipulation , at least in part out of fear that the Chinese would stop buying our bonds
Yet in the current environment , Chinese purchases of our bonds do n't help us - they hurt us
The Japanese understand that
Why do n't we
Some background : If discussion of Chinese currency policy seems confusing , it 's only because many people do n't want to face up to the stark , simple reality - namely , that China is deliberately keeping its currency artificially weak
The consequences of this policy are also stark and simple : in effect , China is taxing imports while subsidizing exports , feeding a huge trade surplus
You may see claims that China 's trade surplus has nothing to do with its currency policy ; if so , that would be a first in world economic history
An undervalued currency always promotes trade surpluses , and China is no different
And in a depressed world economy , any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs
Again , anyone who asserts otherwise is claiming that China is somehow exempt from the economic logic that has always applied to everyone else
So what should we be doing
U.S. officials have tried to reason with their Chinese counterparts , arguing that a stronger currency would be in China 's own interest
They 're right about that : an undervalued currency promotes inflation , erodes the real wages of Chinese workers and squanders Chinese resources
But while currency manipulation is bad for China as a whole , it 's good for politically influential Chinese companies - many of them state-owned
And so the currency manipulation goes on
Time and again , U.S. officials have announced progress on the currency issue ; each time , it turns out that they 've been had
Back in June , Timothy Geithner , the Treasury secretary , praised China 's announcement that it would move to a more flexible exchange rate
Since then , the renminbi has risen a grand total of 1 , that 's right , 1 percent against the dollar - with much of the rise taking place in just the past few days , ahead of planned Congressional hearings on the currency issue
And since the dollar has fallen against other major currencies , China 's artificial cost advantage has actually increased
Clearly , nothing will happen until or unless the United States shows that it 's willing to do what it normally does when another country subsidizes its exports : impose a temporary tariff that offsets the subsidy
So why has such action never been on the table
One answer , as I 've already suggested , is fear of what would happen if the Chinese stopped buying American bonds
But this fear is completely misplaced : in a world awash with excess savings , we do n't need China 's money - especially because the Federal Reserve could and should buy up any bonds the Chinese sell
It 's true that the dollar would fall if China decided to dump some American holdings
But this would actually help the U.S. economy , making our exports more competitive
Ask the Japanese , who want China to stop buying their bonds because those purchases are driving up the yen
Aside from unjustified financial fears , there 's a more sinister cause of U.S. passivity : business fear of Chinese retaliation
Consider a related issue : the clearly illegal subsidies China provides to its clean-energy industry
These subsidies should have led to a formal complaint from American businesses ; in fact , the only organization willing to file a complaint was the steelworkers union
As The Times reported , `` multinational companies and trade associations in the clean energy business , as in many other industries , have been wary of filing trade cases , fearing Chinese officials ' reputation for retaliating against joint ventures in their country and potentially denying market access to any company that takes sides against China .
Similar intimidation has surely helped discourage action on the currency front
So this is a good time to remember that what 's good for multinational companies is often bad for America , especially its workers
So here 's the question : Will U.S. policy makers let themselves be spooked by financial phantoms and bullied by business intimidation
Will they continue to do nothing in the face of policies that benefit Chinese special interests at the expense of both Chinese and American workers
Or will they finally , finally act
Stay tuned
Ross Douthat is off today
Will the U.S. financial system collapse today , or maybe over the next few days
I do n't think so but I 'm nowhere near certain
You see , Lehman Brothers , a major investment bank , is apparently about to go under
And nobody knows what will happen next
To understand the problem , you need to know that the old world of banking , in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients , has largely vanished , replaced by what is widely called the `` shadow banking system .
Depository banks , the guys in the marble buildings , now play only a minor role in channeling funds from savers to borrowers ; most of the business of finance is carried out through complex deals arranged by `` nondepository '' institutions , institutions like the late lamented Bear Stearns and Lehman
The new system was supposed to do a better job of spreading and reducing risk
But in the aftermath of the housing bust and the resulting mortgage crisis , it seems apparent that risk was n't so much reduced as hidden : all too many investors had no idea how exposed they were
And as the unknown unknowns have turned into known unknowns , the system has been experiencing postmodern bank runs
These do n't look like the old-fashioned version : with few exceptions , we 're not talking about mobs of distraught depositors pounding on closed bank doors
Instead , we 're talking about frantic phone calls and mouse clicks , as financial players pull credit lines and try to unwind counterparty risk
But the economic effects a freezing up of credit , a downward spiral in asset values are the same as those of the great bank runs of the 1930s
And here 's the thing : The defenses set up to prevent a return of those bank runs , mainly deposit insurance and access to credit lines with the Federal Reserve , only protect the guys in the marble buildings , who are n't at the heart of the current crisis
That creates the real possibility that 2008 could be 1931 revisited
Now , policy makers are aware of the risks before he was given responsibility for saving the world , Ben Bernanke was one of our leading experts on the economics of the Great Depression
So over the past year the Fed and the Treasury have orchestrated a series of ad hoc rescue plans
Special credit lines with unpronounceable acronyms were made available to nondepository institutions
The Fed and the Treasury brokered a deal that protected Bear 's counterparties those on the other side of its deals though not its stockholders
And just last week the Treasury seized control of Fannie Mae and Freddie Mac , the giant government-sponsored mortgage lenders
But the consequences of those rescues are making officials nervous
For one thing , they 're taking big risks with taxpayer money
For example , today much of the Fed 's portfolio is tied up in loans backed by dubious collateral
Also , officials are worried that their rescue efforts will encourage even more risky behavior in the future
After all , it 's starting to look as if the rule is heads you win , tails the taxpayers lose
Which brings us to Lehman , which has suffered large real-estate-related losses , and faces a crisis of confidence
Like many financial institutions , Lehman has a huge balance sheet it owes vast sums , and is owed vast sums in return
Trying to liquidate that balance sheet quickly could lead to panic across the financial system
That 's why government officials and private bankers have spent the weekend huddled at the New York Fed , trying to put together a deal that would save Lehman , or at least let it fail more slowly
But Henry Paulson , the Treasury secretary , was adamant that he would n't sweeten the deal by putting more public funds on the line
Many people thought he was bluffing
I was all ready to start today 's column , `` When life hands you Lehman , make Lehman aid .
But there was no aid , and apparently no deal
Mr. Paulson seems to be betting that the financial system bolstered , it must be said , by those special credit lines can handle the shock of a Lehman failure
We 'll find out soon whether he was brave or foolish
The real answer to the current problem would , of course , have been to take preventive action before we reached this point
Even leaving aside the obvious need to regulate the shadow banking system if institutions need to be rescued like banks , they should be regulated like banks why were we so unprepared for this latest shock
When Bear went under , many people talked about the need for a mechanism for `` orderly liquidation '' of failing investment banks
Well , that was six months ago
Where 's the mechanism
And so here we are , with Mr. Paulson apparently feeling that playing Russian roulette with the U.S. financial system was his best option
`` Nice middle class you got here , '' said Mitch McConnell , the Senate minority leader
`` It would be a shame if something happened to it .
O.K. , he did n't actually say that
But he might as well have , because that 's what the current confrontation over taxes amounts to
Mr. McConnell , who was self-righteously denouncing the budget deficit just the other day , now wants to blow that deficit up with big tax cuts for the rich
But he does n't have the votes
So he 's trying to get what he wants by pointing a gun at the heads of middle-class families , threatening to force a jump in their taxes unless he gets paid off with hugely expensive tax breaks for the wealthy
Most discussion of the tax fight focuses either on the economics or on the politics - both of which suggest that Democrats should hang tough , for their own sakes as well as that of the country
But there 's an even bigger issue here - namely , the question of what constitutes acceptable behavior in American political life
Politics ai n't beanbag , but there 's a difference between playing hardball and engaging in outright extortion , which is what Mr. McConnell is now doing
And if he succeeds , it will set a disastrous precedent
How did we get to this point
The proximate answer lies in the tactics the Bush administration used to push through tax cuts
The deeper answer lies in the radicalization of the Republican Party , its transformation into a movement willing to put the economy and the nation at risk for the sake of partisan victory
So , about those tax cuts : back in 2001 , the Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class , then pretended that it was mainly offering tax breaks to ordinary families
Meanwhile , it circumvented Senate rules intended to prevent irresponsible fiscal actions - rules that would have forced it to find spending cuts to offset its $ 1.3 trillion tax cut - by putting an expiration date of Dec. 31 , 2010 , on the whole bill
And the witching hour is now upon us
If Congress does n't act , the Bush tax cuts will turn into a pumpkin at the end of this year , with tax rates reverting to Clinton-era levels
In response , President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise
But Republicans are threatening to block that legislation , effectively raising taxes on the middle class , unless they get tax breaks for their wealthy friends
That 's an extraordinary step
Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea , unless the effects are offset by other job-creation programs - and Republicans are blocking those , too
So the G.O.P. is , in effect , threatening to plunge the U.S. economy back into recession unless Democrats pay up
What kind of political party would engage in that kind of brinksmanship
The answer is the same kind of party that shut down the federal government in 1995 in an attempt to force President Bill Clinton to accept steep cuts in Medicare , and is actively discussing doing the same to Mr. Obama
So , as I said , the deeper explanation of the tax-cut fight is that it 's ultimately about a radicalized Republican Party , which accepts no limits on partisanship
So should Democrats give in
On the economics , the answer is a clear no.
Right now , fears about budget deficits are overblown - but that does n't mean that we should completely ignore deficit concerns
And the G.O.P. plan would add hugely to the deficit - about $ 700 billion over the next decade - while doing little to help the economy
On any kind of cost-benefit analysis , this is an idea not worth considering
And , by the way , a compromise solution - temporary tax breaks for the rich - is no better ; it would cost less , but it would also do even less for the economy
On the politics , the answer is also a clear no.
Polls show that a majority of Americans are opposed to maintaining tax breaks for the rich
Beyond that , this is no time for Democrats to play it safe : if the midterm election were held today , they would lose badly
They need to highlight their differences with the G.O.P. - and it 's hard to think of a better place for them to take a stand than on the issue of big giveaways to Wall Street and corporate C.E.O. 's
But what 's even more important is the principle of the thing
Threats to punish innocent bystanders unless your political rivals give you what you want have no legitimate place in democratic politics
Giving in to such threats would be an economic and political mistake , but more important , it would be morally wrong - and it would encourage more such threats in the future
It 's time for Democrats to take a stand , and say no to G.O.P. blackmail
So Senator Max Baucus , the chairman of the Senate Finance Committee , has released his `` mark '' on proposed legislation which would normally be the basis for the bill that eventually emerges from his committee
And serious supporters of health care reform will soon face their long-dreaded moment of truth
A blog from The New York Times that tracks the health care debate as it unfolds
More Health Care Overhaul News You see , it has been clear for months that whatever health-care bill finally emerges will fall far short of reformers ' hopes
Yet even a bad bill could be much better than nothing
The question is where to draw the line
How bad does a bill have to be to make it too bad to vote for
Now , the moment of truth is n't here quite yet : There 's enough wrong with the Baucus proposal as it stands to make it unworkable and unacceptable
But that said , Senator Baucus 's mark is better than many of us expected
If it serves as a basis for negotiation , and the result of those negotiations is a plan that 's stronger , not weaker , reformers are going to have to make some hard choices about the degree of disappointment they 're willing to live with
Of course , those who insist that we must have a single-payer system Medicare for all wo n't accept any plan that tries , instead , to cajole and coerce private health insurers into covering everyone
But while many reformers , myself included , would prefer a single-payer system if we were starting from scratch , international experience shows that it 's not the only way to go
Several European countries , including Switzerland and the Netherlands , have managed to achieve universal coverage with a mainly private insurance system
And right here in America , we have the example of the Massachusetts health reform , many of whose features are echoed in the Baucus plan
The Massachusetts system , introduced three years ago , has many problems
But as a new report from the Urban Institute puts it , it `` has accomplished much of what it set out to do : Nearly all adults in the state have health insurance .
If we could accomplish the same thing for the nation as a whole , even with a less than ideal plan , it would be a vast improvement over what we have now
So something along the general lines of the Baucus plan might be acceptable
But details matter
And the bad news is that the plan , as it stands , is inadequate or badly conceived in three major ways
First , it bungles the so-called `` employer mandate .
Most reform plans include a provision requiring that large employers either provide their workers with health coverage or pay into a fund that would help workers who do n't get insurance through their job buy coverage on their own
Mr. Baucus , however , gets too clever , trying to tie each employer 's fees to the subsidies its own employees end up getting
That 's a terrible idea
As the Center on Budget and Policy Priorities points out , it would make companies reluctant to hire workers from lower-income families and it would also create a bureaucratic nightmare
This provision has to go and be replaced with a simple pay-or-play rule
Second , the plan is too stingy when it comes to financial aid
Lower-middle-class families , in particular , would end up paying much more in premiums than they do under the Massachusetts plan , suggesting that for many people insurance would not , in fact , be affordable
Fixing this means spending more than Mr. Baucus proposes
Third , the plan does n't create real competition in the insurance market
The right way to create competition is to offer a public option , a government-run insurance plan individuals can buy into as an alternative to private insurance
The Baucus plan instead proposes a fake alternative , nonprofit insurance cooperatives and it places so many restrictions on these cooperatives that , according to the Congressional Budget Office , they `` seem unlikely to establish a significant market presence in many areas of the country .
The insurance industry , of course , loves the Baucus plan
Need we say more
So this plan has to change
What matters now is the direction in which it changes
It would be disastrous if health care goes the way of the economic stimulus plan , earlier this year
As you may recall , that plan which was clearly too weak even as originally proposed was made even weaker to win the support of three Republican senators
If the same thing happens to health reform , progressives should and will walk away
But maybe things will go the other way , and Mr. Baucus -LRB- and the White House -RRB- will , for once , actually listen to progressive concerns , making the bill stronger
Even if the Baucus plan gets better , rather than worse , what emerges wo n't be legislation reformers can love
Will it nonetheless be legislation that passes the threshold of acceptability , legislation they can vote for
We 'll see
On Sunday , Henry Paulson , the Treasury secretary , tried to draw a line in the sand against further bailouts of failing financial institutions ; four days later , faced with a crisis spinning out of control , much of Washington appears to have decided that government is n't the problem , it 's the solution
The unthinkable a government buyout of much of the private sector 's bad debt has become the inevitable
The story so far : the real shock after the feds failed to bail out Lehman Brothers was n't the plunge in the Dow , it was the reaction of the credit markets
Basically , lenders went on strike : U.S. government debt , which is still perceived as the safest of all investments if the government goes bust , what is anything else worth
was snapped up even though it paid essentially nothing , while would-be private borrowers were frozen out
Thus , banks are normally able to borrow from each other at rates just slightly above the interest rate on U.S. Treasury bills
But Thursday morning , the average interest rate on three-month interbank borrowing was 3.2 percent , while the interest rate on the corresponding Treasuries was 0.05 percent
No , that 's not a misprint
This flight to safety has cut off credit to many businesses , including major players in the financial industry and that , in turn , is setting us up for more big failures and further panic
It 's also depressing business spending , a bad thing as signs gather that the economic slump is deepening
And the Federal Reserve , which normally takes the lead in fighting recessions , ca n't do much this time because the standard tools of monetary policy have lost their grip
Usually the Fed responds to economic weakness by buying up Treasury bills , in order to drive interest rates down
But the interest rate on Treasuries is already zero , for all practical purposes ; what more can the Fed do
Well , it can lend money to the private sector and it 's been doing that on an awesome scale
But this lending has n't kept the situation from deteriorating
There 's only one bright spot in the picture : interest rates on mortgages have come down sharply since the federal government took over Fannie Mae and Freddie Mac , and guaranteed their debt
And there 's a lesson there for those ready to hear it : government takeovers may be the only way to get the financial system working again
Some people have been making that argument for some time
Most recently , Paul Volcker , the former Fed chairman , and two other veterans of past financial crises published an op-ed in The Wall Street Journal declaring that the only way to avoid `` the mother of all credit contractions '' is to create a new government agency to `` buy up the troubled paper '' that is , to have taxpayers take over the bad assets created by the bursting of the housing and credit bubbles
Coming from Mr. Volcker , that proposal has serious credibility
Influential members of Congress , including Hillary Clinton and Barney Frank , the chairman of the House Financial Services Committee , have been making similar arguments
And on Thursday , Charles Schumer , the chairman of the Joint Economic Committee -LRB- and an advocate of creating a new agency to resolve the financial crisis -RRB- told reporters that `` the Federal Reserve and the Treasury are realizing that we need a more comprehensive solution .
Sure enough , Thursday night Ben Bernanke and Mr. Paulson met with Congressional leaders to discuss a `` comprehensive approach '' to the problem
We do n't know yet what that `` comprehensive approach '' will look like
There have been hopeful comparisons to the financial rescue the Swedish government carried out in the early 1990s , a rescue that involved a temporary public takeover of a large part of the country 's financial system
It 's not clear , however , whether policy makers in Washington are prepared to exert a comparable degree of control
And if they are n't , this could turn into the wrong kind of rescue a bailout of stockholders as well as the market , in effect rescuing the financial industry from the consequences of its own greed
Furthermore , even a well-designed rescue would cost a lot of money
The Swedish government laid out 4 percent of G.D.P. , which in our case would be a cool $ 600 billion although the final burden to Swedish taxpayers was much less , because the government was eventually able to sell off the assets it had acquired , in some cases at a handsome profit
But it 's no use whining -LRB- sorry , Senator Gramm -RRB- about the prospect of a financial rescue plan
Today 's U.S. political system is n't going to follow Andrew Mellon 's infamous advice to Herbert Hoover : `` Liquidate labor , liquidate stocks , liquidate the farmers , liquidate real estate .
The big buyout is coming ; the only question is whether it will be done right
This article has been revised to reflect the following correction : A column by Paul Krugman in Friday 's paper incorrectly identified Senator Charles Schumer as the chairman of the Senate Finance Committee
Mr. Schumer is the chairman of the Joint Economic Committee
Senator Max Baucus is the chairman of the Finance Committee
It 's an ill wind that blows nobody good
Three years after Hurricane Katrina , another storm is heading for the Gulf Coast and this has given Republicans a reason to cancel President Bush 's scheduled appearance at their national convention
The party can thus avoid reminding voters that the last man they placed in the White House did such a heckuva job that he scored the highest disapproval ratings ever recorded
Instead , Mr. Bush is playing Commander in Chief
On Sunday morning the White House Web site featured photos of the president talking to Gulf state governors about Hurricane Gustav while ostentatiously clutching a red folder labeled `` Classified .
On Monday , instead of speaking at the convention , reports suggest that Mr. Bush will address the nation about the storm
And a report on Politico.com suggested that John McCain might give a speech `` from the devastation zone if the storm hits the U.S. coast with the ferocity feared by forecasters .
What 's wrong with this picture
Let 's start with that red folder
Assuming that the folder contained something other than scrap paper , is the planned response to a hurricane a state secret
Are we worried that tropical storm systems will discover our weak points
Are we fighting a Global War on Weather
Actually , that 's not quite as funny as it sounds
Some observers have pointed out that daily briefings on preparations for Gustav , which should be coming from the Federal Emergency Management Agency which is , you know , supposed to manage emergencies have been coming , instead , from the U.S. military 's Northern Command
It 's not hard to see why
Top positions at FEMA are no longer held by obviously unqualified political hacks and cronies
But a recent report by the inspector general of the Department of Homeland Security said that the agency has made only `` limited progress '' in the area of `` mission assignments '' that is , in its ability to coordinate the response to a crisis
So FEMA still is n't up to carrying out its principal task
That 's no accident
FEMA 's degradation , from one of the government 's most admired agencies to a laughingstock , was n't an isolated event ; it was the result of the G.O.P. 's underlying philosophy
Simply put , when the government is run by a political party committed to the belief that government is always the problem , never the solution , that belief tends to become a self-fulfilling prophecy
Key priorities are neglected ; key functions are privatized ; and key people , the competent public servants who make government work , either leave or are driven out
The political cost of Katrina shocked the Bush administration into trying to undo some of the damage at FEMA , and it 's a good bet that the initial response to Gustav will be better -LRB- it could hardly be worse -RRB-
But because the political philosophy responsible for FEMA 's decline has n't changed , the administration has n't been able to reverse the agency 's learned incompetence
Three years after Katrina , and a year past a Congressional deadline , FEMA still does n't have a strategy for housing disaster victims
Which brings us back to the politics of the current storm
Earlier this year Mr. McCain , as part of his strategy of distancing himself from the current administration , condemned Mr. Bush 's response to Katrina
If he 'd been president at the time , he says , `` I would 've landed my airplane at the nearest Air Force base and come over personally .
Um , that completely misses the point
The problem with the Bush administration 's response to Katrina was n't the president 's failure to show up promptly for his photo op
It was the failure of FEMA and other degraded agencies to show up promptly with food , water and first aid
And let 's hope that Mr. McCain does n't jet into the disaster area in Gustav 's aftermath
The candidate 's presence would n't do anything to help the area recover
It would , however , tie up air traffic and disrupt relief efforts , just as Mr. Bush did when he flew into New Orleans to congratulate Brownie on the work he was doing
Remember the firefighters who volunteered to help Katrina 's victims , only to find that their first job was to stand next to Mr. Bush while the cameras rolled
To be fair , Republican plans to deal with Gustav by turning their convention into a `` service event , '' perhaps a telethon to raise funds for victims , are a good idea
So is the Obama campaign 's plan to mobilize its e-mail list to send aid and volunteers
But personal , voluntary aid is no substitute for an effective public response to disaster
What we really need is a government that works , because it 's run by people who understand that sometimes government is the solution , after all
And that seems to be something undreamed of in either Mr. Bush 's or Mr. McCain 's philosophy
Anger is sweeping America
True , this white-hot rage is a minority phenomenon , not something that characterizes most of our fellow citizens
But the angry minority is angry indeed , consisting of people who feel that things to which they are entitled are being taken away
And they 're out for revenge
No , I 'm not talking about the Tea Partiers
I 'm talking about the rich
These are terrible times for many people in this country
Poverty , especially acute poverty , has soared in the economic slump ; millions of people have lost their homes
Young people ca n't find jobs ; laid-off 50-somethings fear that they 'll never work again
Yet if you want to find real political rage - the kind of rage that makes people compare President Obama to Hitler , or accuse him of treason - you wo n't find it among these suffering Americans
You 'll find it instead among the very privileged , people who do n't have to worry about losing their jobs , their homes , or their health insurance , but who are outraged , outraged , at the thought of paying modestly higher taxes
The rage of the rich has been building ever since Mr. Obama took office
At first , however , it was largely confined to Wall Street
Thus when New York magazine published an article titled `` The Wail Of the 1 % , '' it was talking about financial wheeler-dealers whose firms had been bailed out with taxpayer funds , but were furious at suggestions that the price of these bailouts should include temporary limits on bonuses
When the billionaire Stephen Schwarzman compared an Obama proposal to the Nazi invasion of Poland , the proposal in question would have closed a tax loophole that specifically benefits fund managers like him
Now , however , as decision time looms for the fate of the Bush tax cuts - will top tax rates go back to Clinton-era levels
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For one thing , craziness has gone mainstream
It 's one thing when a billionaire rants at a dinner event
It 's another when Forbes magazine runs a cover story alleging that the president of the United States is deliberately trying to bring America down as part of his Kenyan , `` anticolonialist '' agenda , that `` the U.S. is being ruled according to the dreams of a Luo tribesman of the 1950s .
When it comes to defending the interests of the rich , it seems , the normal rules of civilized -LRB- and rational -RRB- discourse no longer apply
At the same time , self-pity among the privileged has become acceptable , even fashionable
Tax-cut advocates used to pretend that they were mainly concerned about helping typical American families
Even tax breaks for the rich were justified in terms of trickle-down economics , the claim that lower taxes at the top would make the economy stronger for everyone
These days , however , tax-cutters are hardly even trying to make the trickle-down case
Yes , Republicans are pushing the line that raising taxes at the top would hurt small businesses , but their hearts do n't really seem in it
Instead , it has become common to hear vehement denials that people making $ 400,000 or $ 500,000 a year are rich
I mean , look at the expenses of people in that income class - the property taxes they have to pay on their expensive houses , the cost of sending their kids to elite private schools , and so on
Why , they can barely make ends meet
And among the undeniably rich , a belligerent sense of entitlement has taken hold : it 's their money , and they have the right to keep it
`` Taxes are what we pay for civilized society , '' said Oliver Wendell Holmes - but that was a long time ago
The spectacle of high-income Americans , the world 's luckiest people , wallowing in self-pity and self-righteousness would be funny , except for one thing : they may well get their way
Never mind the $ 700 billion price tag for extending the high-end tax breaks : virtually all Republicans and some Democrats are rushing to the aid of the oppressed affluent
You see , the rich are different from you and me : they have more influence
It 's partly a matter of campaign contributions , but it 's also a matter of social pressure , since politicians spend a lot of time hanging out with the wealthy
So when the rich face the prospect of paying an extra 3 or 4 percent of their income in taxes , politicians feel their pain - feel it much more acutely , it 's clear , than they feel the pain of families who are losing their jobs , their houses , and their hopes
And when the tax fight is over , one way or another , you can be sure that the people currently defending the incomes of the elite will go back to demanding cuts in Social Security and aid to the unemployed
America must make hard choices , they 'll say ; we all have to be willing to make sacrifices
But when they say `` we , '' they mean `` you .
Sacrifice is for the little people
In the grim period that followed Lehman 's failure , it seemed inconceivable that bankers would , just a few months later , be going right back to the practices that brought the world 's financial system to the edge of collapse
At the very least , one might have thought , they would show some restraint for fear of creating a public backlash
But now that we 've stepped back a few paces from the brink thanks , let 's not forget , to immense , taxpayer-financed rescue packages the financial sector is rapidly returning to business as usual
Even as the rest of the nation continues to suffer from rising unemployment and severe hardship , Wall Street paychecks are heading back to pre-crisis levels
And the industry is deploying its political clout to block even the most minimal reforms
The good news is that senior officials in the Obama administration and at the Federal Reserve seem to be losing patience with the industry 's selfishness
The bad news is that it 's not clear whether President Obama himself is ready , even now , to take on the bankers
Credit where credit is due : I was delighted when Lawrence Summers , the administration 's ranking economist , lashed out at the campaign the U.S. Chamber of Commerce , in cooperation with financial-industry lobbyists , is running against the proposed creation of an agency to protect consumers against financial abuses , such as loans whose terms they do n't understand
The chamber 's ads , declared Mr. Summers , are `` the financial-regulatory equivalent of the death-panel ads that are being run with respect to health care .
Yet protecting consumers from financial abuse should be only the beginning of reform
If we really want to stop Wall Street from creating another bubble , followed by another bust , we need to change the industry 's incentives which means , in particular , changing the way bankers are paid
What 's wrong with financial-industry compensation
In a nutshell , bank executives are lavishly rewarded if they deliver big short-term profits but are n't correspondingly punished if they later suffer even bigger losses
This encourages excessive risk-taking : some of the men most responsible for the current crisis walked away immensely rich from the bonuses they earned in the good years , even though the high-risk strategies that led to those bonuses eventually decimated their companies , taking down a large part of the financial system in the process
The Federal Reserve , now awakened from its Greenspan-era slumber , understands this problem and proposes doing something about it
According to recent reports , the Fed 's board is considering imposing new rules on financial-firm compensation , requiring that banks `` claw back '' bonuses in the face of losses and link pay to long-term rather than short-term performance
The Fed argues that it has the authority to do this as part of its general mandate to oversee banks ' soundness
But the industry supported by nearly all Republicans and some Democrats will fight bitterly against these changes
And while the administration will support some kind of compensation reform , it 's not clear whether it will fully support the Fed 's efforts
I was startled last week when Mr. Obama , in an interview with Bloomberg News , questioned the case for limiting financial-sector pay : `` Why is it , '' he asked , `` that we 're going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players ?
That 's an astonishing remark and not just because the National Football League does , in fact , have pay caps
Tech firms do n't crash the whole world 's operating system when they go bankrupt ; quarterbacks who make too many risky passes do n't have to be rescued with hundred-billion-dollar bailouts
Banking is a special case and the president is surely smart enough to know that
All I can think is that this was another example of something we 've seen before : Mr. Obama 's visceral reluctance to engage in anything that resembles populist rhetoric
And that 's something he needs to get over
It 's not just that taking a populist stance on bankers ' pay is good politics although it is : the administration has suffered more than it seems to realize from the perception that it 's giving taxpayers ' hard-earned money away to Wall Street , and it should welcome the chance to portray the G.O.P. as the party of obscene bonuses
Equally important , in this case populism is good economics
Indeed , you can make the case that reforming bankers ' compensation is the single best thing we can do to prevent another financial crisis a few years down the road
It 's time for the president to realize that sometimes populism , especially populism that makes bankers angry , is exactly what the economy needs
Some skeptics are calling Henry Paulson 's $ 700 billion rescue plan for the U.S. financial system `` cash for trash .
Others are calling the proposed legislation the Authorization for Use of Financial Force , after the Authorization for Use of Military Force , the infamous bill that gave the Bush administration the green light to invade Iraq
There 's justice in the gibes
Everyone agrees that something major must be done
But Mr. Paulson is demanding extraordinary power for himself and for his successor to deploy taxpayers ' money on behalf of a plan that , as far as I can see , does n't make sense
Some are saying that we should simply trust Mr. Paulson , because he 's a smart guy who knows what he 's doing
But that 's only half true : he is a smart guy , but what , exactly , in the experience of the past year and a half a period during which Mr. Paulson repeatedly declared the financial crisis `` contained , '' and then offered a series of unsuccessful fixes justifies the belief that he knows what he 's doing
He 's making it up as he goes along , just like the rest of us
So let 's try to think this through for ourselves
I have a four-step view of the financial crisis : 1
The bursting of the housing bubble has led to a surge in defaults and foreclosures , which in turn has led to a plunge in the prices of mortgage-backed securities assets whose value ultimately comes from mortgage payments
These financial losses have left many financial institutions with too little capital too few assets compared with their debt
This problem is especially severe because everyone took on so much debt during the bubble years
Because financial institutions have too little capital relative to their debt , they have n't been able or willing to provide the credit the economy needs
Financial institutions have been trying to pay down their debt by selling assets , including those mortgage-backed securities , but this drives asset prices down and makes their financial position even worse
This vicious circle is what some call the `` paradox of deleveraging .
The Paulson plan calls for the federal government to buy up $ 700 billion worth of troubled assets , mainly mortgage-backed securities
How does this resolve the crisis
Well , it might might break the vicious circle of deleveraging , step 4 in my capsule description
Even that is n't clear : the prices of many assets , not just those the Treasury proposes to buy , are under pressure
And even if the vicious circle is limited , the financial system will still be crippled by inadequate capital
Or rather , it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys , giving financial firms and their stockholders and executives a giant windfall at taxpayer expense
Did I mention that I 'm not happy with this plan
The logic of the crisis seems to call for an intervention , not at step 4 , but at step 2 : the financial system needs more capital
And if the government is going to provide capital to financial firms , it should get what people who provide capital are entitled to a share in ownership , so that all the gains if the rescue plan works do n't go to the people who made the mess in the first place
That 's what happened in the savings and loan crisis : the feds took over ownership of the bad banks , not just their bad assets
It 's also what happened with Fannie and Freddie
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Mortgage interest rates have come down sharply since the federal takeover .
But Mr. Paulson insists that he wants a `` clean '' plan
`` Clean , '' in this context , means a taxpayer-financed bailout with no strings attached no quid pro quo on the part of those being bailed out
Why is that a good thing
Add to this the fact that Mr. Paulson is also demanding dictatorial authority , plus immunity from review `` by any court of law or any administrative agency , '' and this adds up to an unacceptable proposal
I 'm aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days , with at most a few modifications that make it slightly less bad
Basically , after having spent a year and a half telling everyone that things were under control , the Bush administration says that the sky is falling , and that to save the world we have to do exactly what it says now now now
But I 'd urge Congress to pause for a minute , take a deep breath , and try to seriously rework the structure of the plan , making it a plan that addresses the real problem
Do n't let yourself be railroaded if this plan goes through in anything like its current form , we 'll all be very sorry in the not-too-distant future
Last Thursday there was a huge march in Jena , La. , to protest the harsh and unequal treatment of six black students arrested in the beating of a white classmate
Students who hung nooses to warn blacks not to sit under a white tree were suspended for three days ; on the other hand , the students accused in the beating were initially charged with second-degree attempted murder
And one of the Jena Six remains in jail , even though appeals courts have voided his conviction on the grounds that he was improperly tried as an adult
Many press accounts of the march have a tone of amazement
Scenes like those in Jena , the stories seemed to imply , belonged in the 1960s , not the 21st century
The headline on the New York Times report , Protest in Louisiana Case Echoes the Civil Rights Era , was fairly typical
But the reality is that things haven t changed nearly as much as people think
Racial tension , especially in the South , has never gone away , and has never stopped being important
And race remains one of the defining factors in modern American politics
Consider voting in last year s Congressional elections
Republicans , as President Bush conceded , received a thumping , with almost every major demographic group turning against them
The one big exception was Southern whites , 62 percent of whom voted Republican in House races
And yes , Southern white exceptionalism is about race , much more than it is about moral values , religion , support for the military or other explanations sometimes offered
There s a large statistical literature on the subject , whose conclusion is summed up by the political scientist Thomas F. Schaller in his book Whistling Past Dixie : Despite the best efforts of Republican spinmeisters to depict American conservatism as a nonracial phenomenon , the partisan impact of racial attitudes in the South is stronger today than in the past
Republican politicians , who understand quite well that the G.O.P. s national success since the 1970s owes everything to the partisan switch of Southern whites , have tacitly acknowledged this reality
Since the days of Gerald Ford , just about every Republican presidential campaign has included some symbolic gesture of approval for good old-fashioned racism
Thus Ronald Reagan , who began his political career by campaigning against California s Fair Housing Act , started his 1980 campaign with a speech supporting states rights delivered just outside Philadelphia , Miss. , where three civil rights workers were murdered
In 2000 , Mr. Bush made a pilgrimage to Bob Jones University , famed at the time for its ban on interracial dating
And all four leading Republican candidates for the 2008 nomination have turned down an invitation to a debate on minority issues scheduled to air on PBS this week
Yet if the marchers at Jena reminded us that America still hasn t fully purged itself of the poisonous legacy of slavery , it would be wrong to suggest that the nation has made no progress
Racism , though not gone , is greatly diminished : both opinion polls and daily experience suggest that we are truly becoming a more tolerant , open society
And the cynicism of the Southern strategy introduced by Richard Nixon , which delivered decades of political victories to Republicans , is now starting to look like a trap for the G.O.P. One of the truly remarkable things about the contest for the Republican nomination is the way the contenders have snubbed not just blacks who , given the G.O.P. s modern history , probably won t vote for a Republican in significant numbers no matter what but Hispanics
In July , all the major contenders refused invitations to address the National Council of La Raza , which Mr. Bush addressed in 2000
Univision , the Spanish-language TV network , had to cancel a debate scheduled for Sept. 16 because only John McCain was willing to come
If this sounds like a good way to ensure defeat in future elections , that s because it is : Hispanics are a rapidly growing force in the electorate
But to get the Republican nomination , a candidate must appeal to the base and the base consists , in large part , of Southern whites who carry over to immigrants the same racial attitudes that brought them into the Republican fold to begin with
As a result , you have the spectacle of Rudy Giuliani and Mitt Romney , pragmatists on immigration issues when they actually had to govern in diverse states , trying to reinvent themselves as defenders of Fortress America
And both Hispanics and Asians , another growing force in the electorate , are getting the message
Last year they voted overwhelmingly Democratic , by 69 percent and 62 percent respectively
In other words , it looks as if the Republican Party is about to start paying a price for its history of exploiting racial antagonism
If that happens , it will be deeply ironic
But it will also be poetic justice
I 've always liked that story , but the truth is that the party received hardly any votes
And that means that the joke is really on us
For these days one of America 's two great political parties routinely makes equally nonsensical promises
Never mind the war on terror , the party 's main concern seems to be the war on arithmetic
And this party has a better than even chance of retaking at least one house of Congress this November
Banana republic , here we come
On Thursday , House Republicans released their `` Pledge to America , '' supposedly outlining their policy agenda
In essence , what they say is , `` Deficits are a terrible thing
Let 's make them much bigger .
The document repeatedly condemns federal debt - 16 times , by my count
But the main substantive policy proposal is to make the Bush tax cuts permanent , which independent estimates say would add about $ 3.7 trillion to the debt over the next decade - about $ 700 billion more than the Obama administration 's tax proposals
True , the document talks about the need to cut spending
But as far as I can see , there 's only one specific cut proposed - canceling the rest of the Troubled Asset Relief Program , which Republicans claim -LRB- implausibly -RRB- would save $ 16 billion
That 's less than half of 1 percent of the budget cost of those tax cuts
As for the rest , everything must be cut , in ways not specified - `` except for common-sense exceptions for seniors , veterans , and our troops .
In other words , Social Security , Medicare and the defense budget are off-limits
So what 's left
Howard Gleckman of the nonpartisan Tax Policy Center has done the math
As he points out , the only way to balance the budget by 2020 , while simultaneously -LRB- a -RRB- making the Bush tax cuts permanent and -LRB- b -RRB- protecting all the programs Republicans say they wo n't cut , is to completely abolish the rest of the federal government : `` No more national parks , no more Small Business Administration loans , no more export subsidies , no more N.I.H. No more Medicaid -LRB- one-third of its budget pays for long-term care for our parents and others with disabilities -RRB-
No more child health or child nutrition programs
No more highway construction
No more homeland security
Oh , and no more Congress .
The `` pledge , '' then , is nonsense
But is n't that true of all political platforms
The answer is , not to anything like the same extent
Many independent analysts believe that the Obama administration 's long-run budget projections are somewhat too optimistic - but , if so , it 's a matter of technical details
Neither President Obama nor any other leading Democrat , as far as I can recall , has ever claimed that up is down , that you can sharply reduce revenue , protect all the programs voters like , and still balance the budget
And the G.O.P. itself used to make more sense than it does now
Ronald Reagan 's claim that cutting taxes would actually increase revenue was wishful thinking , but at least he had some kind of theory behind his proposals
When former President George W. Bush campaigned for big tax cuts in 2000 , he claimed that these cuts were affordable given -LRB- unrealistic -RRB- projections of future budget surpluses
Now , however , Republicans are n't even pretending that their numbers add up
So how did we get to the point where one of our two major political parties is n't even trying to make sense
The answer is n't a secret
The late Irving Kristol , one of the intellectual godfathers of modern conservatism , once wrote frankly about why he threw his support behind tax cuts that would worsen the budget deficit : his task , as he saw it , was to create a Republican majority , `` so political effectiveness was the priority , not the accounting deficiencies of government .
In short , say whatever it takes to gain power
That 's a philosophy that now , more than ever , holds sway in the movement Kristol helped shape
And what happens once the movement achieves the power it seeks
The answer , presumably , is that it turns to its real , not-so-secret agenda , which mainly involves privatizing and dismantling Medicare and Social Security
Realistically , though , Republicans are n't going to have the power to enact their true agenda any time soon - if ever
Remember , the Bush administration 's attack on Social Security was a fiasco , despite its large majority in Congress - and it actually increased Medicare spending
So the clear and present danger is n't that the G.O.P. will be able to achieve its long-run goals
It is , rather , that Republicans will gain just enough power to make the country ungovernable , unable to address its fiscal problems or anything else in a serious way
As I said , banana republic , here we come
So , have you enjoyed the debate over health care reform
Have you been impressed by the civility of the discussion and the intellectual honesty of reform opponents
If so , you 'll love the next big debate : the fight over climate change
The House has already passed a fairly strong cap-and-trade climate bill , the Waxman-Markey act , which if it becomes law would eventually lead to sharp reductions in greenhouse gas emissions
But on climate change , as on health care , the sticking point will be the Senate
And the usual suspects are doing their best to prevent action
Some of them still claim that there 's no such thing as global warming , or at least that the evidence is n't yet conclusive
But that argument is wearing thin as thin as the Arctic pack ice , which has now diminished to the point that shipping companies are opening up new routes through the formerly impassable seas north of Siberia
Even corporations are losing patience with the deniers : earlier this week Pacific Gas and Electric canceled its membership in the U.S. Chamber of Commerce in protest over the chamber 's `` disingenuous attempts to diminish or distort the reality '' of climate change
So the main argument against climate action probably wo n't be the claim that global warming is a myth
It will , instead , be the argument that doing anything to limit global warming would destroy the economy
As the blog Climate Progress puts it , opponents of climate change legislation `` keep raising their estimated cost of the clean energy and global warming pollution reduction programs like some out of control auctioneer .
It 's important , then , to understand that claims of immense economic damage from climate legislation are as bogus , in their own way , as climate-change denial
Saving the planet wo n't come free -LRB- although the early stages of conservation actually might -RRB-
But it wo n't cost all that much either
How do we know this
First , the evidence suggests that we 're wasting a lot of energy right now
That is , we 're burning large amounts of coal , oil and gas in ways that do n't actually enhance our standard of living a phenomenon known in the research literature as the `` energy-efficiency gap .
The existence of this gap suggests that policies promoting energy conservation could , up to a point , actually make consumers richer
Second , the best available economic analyses suggest that even deep cuts in greenhouse gas emissions would impose only modest costs on the average family
Earlier this month , the Congressional Budget Office released an analysis of the effects of Waxman-Markey , concluding that in 2020 the bill would cost the average family only $ 160 a year , or 0.2 percent of income
That 's roughly the cost of a postage stamp a day
By 2050 , when the emissions limit would be much tighter , the burden would rise to 1.2 percent of income
But the budget office also predicts that real G.D.P. will be about two-and-a-half times larger in 2050 than it is today , so that G.D.P. per person will rise by about 80 percent
The cost of climate protection would barely make a dent in that growth
And all of this , of course , ignores the benefits of limiting global warming
So where do the apocalyptic warnings about the cost of climate-change policy come from
Are the opponents of cap-and-trade relying on different studies that reach fundamentally different conclusions
No , not really
It 's true that last spring the Heritage Foundation put out a report claiming that Waxman-Markey would lead to huge job losses , but the study seems to have been so obviously absurd that I 've hardly seen anyone cite it
Instead , the campaign against saving the planet rests mainly on lies
Thus , last week Glenn Beck who seems to be challenging Rush Limbaugh for the role of de facto leader of the G.O.P. informed his audience of a `` buried '' Obama administration study showing that Waxman-Markey would actually cost the average family $ 1,787 per year
Needless to say , no such study exists
But we should n't be too hard on Mr. Beck
Similar and similarly false claims about the cost of Waxman-Markey have been circulated by many supposed experts
A year ago I would have been shocked by this behavior
But as we 've already seen in the health care debate , the polarization of our political discourse has forced self-proclaimed `` centrists '' to choose sides and many of them have apparently decided that partisan opposition to President Obama trumps any concerns about intellectual honesty
So here 's the bottom line : The claim that climate legislation will kill the economy deserves the same disdain as the claim that global warming is a hoax
The truth about the economics of climate change is that it 's relatively easy being green
Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America 's financial system
They 're right to be outraged , but doing nothing is n't a serious option
Right now , players throughout the system are refusing to lend and hoarding cash and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression
It 's true that we do n't know for sure that the parallel is a fair one
Maybe we can let Wall Street implode and Main Street would escape largely unscathed
But that 's not a chance we want to take
So the grown-up thing is to do something to rescue the financial system
The big question is , are there any grown-ups around and will they be able to take charge
Earlier this week , Henry Paulson , the Treasury secretary , tried to convince Congress that he was the grown-up in the room , come to protect us from danger
And he demanded total authority over the rescue : $ 700 billion to be used at his discretion , with immunity for future review
Congress balked
No government official should be entrusted with that kind of monarchical privilege , least of all an official belonging to the administration that misled America into war
Furthermore , Mr. Paulson 's track record is anything but reassuring : he was way behind the curve in appreciating the depth of the nation 's financial woes , and it 's partly his fault that we 've reached the current moment of meltdown
Besides , Mr. Paulson never offered a convincing explanation of how his plan was supposed to work and the judgment of many economists was , in fact , that it would n't work unless it amounted to a huge welfare program for the financial industry
But if Mr. Paulson is n't the grown-up we need , are Congressional leaders ready and able to fill the role
Well , the bipartisan `` agreement on principles '' released on Thursday looks a lot better than the original Paulson plan
In fact , it puts Mr. Paulson himself under much-needed adult supervision , calling for an oversight board `` with cease and desist authority .
It also limits Mr. Paulson 's allowance : he only -LRB- only !
gets to use $ 250 billion right away
Meanwhile , the agreement calls for limits on executive pay at firms that get federal money
Most important , it `` requires that any transaction include equity sharing .
Why is that so important
The fundamental problem with our financial system is that the fallout from the housing bust has left financial institutions with too little capital
When he finally deigned to offer an explanation of his plan , Mr. Paulson argued that he could solve this problem through `` price discovery '' that once taxpayer funds had created a market for mortgage-related toxic waste , everyone would realize that the toxic waste is actually worth much more than it currently sells for , solving the capital problem
Never say never , I guess but you do n't want to bet $ 700 billion on wishful thinking
The odds are , instead , that the U.S. government will end up having to do what governments always do in financial crises : use taxpayers ' money to pump capital into the financial system
Under the original Paulson plan , the Treasury would probably have done this by buying toxic waste for much more than it was worth and gotten nothing in return
What taxpayers should get is what people who provide capital are entitled to : a share in ownership
And that 's what the equity sharing is about
The Congressional plan , then , looks a lot better a lot more adult than the Paulson plan did
That said , it 's very short on detail , and the details are crucial
What prices will taxpayers pay to take over some of that toxic waste
How much equity will they get in return
Those numbers will make all the difference
And in any case , it seems that we do n't have a deal
This has to be a bipartisan plan , and not just at the leadership level
Democrats wo n't pass the plan without votes from rank-and-file Republicans and as of Thursday night , those rank-and-file Republicans were balking
Furthermore , one non-rank-and-file Republican , Senator John McCain , is apparently playing spoiler
Earlier this week , while refusing to say whether he supported the Paulson plan , he claimed not to have had a chance to read it ; the plan is all of three pages long
Then he inserted himself into the delicate negotiations over the Congressional plan , insisting on a White House meeting at which he reportedly said little but during which consensus collapsed
The bottom line , then , is that there do seem to be some adults in Congress , ready to do something to help us get through this crisis
But the adults are not yet in charge
What can be done about mass unemployment
All the wise heads agree : there are no quick or easy answers
There is work to be done , but workers are n't ready to do it - they 're in the wrong places , or they have the wrong skills
Our problems are `` structural , '' and will take many years to solve
But do n't bother asking for evidence that justifies this bleak view
There is n't any
On the contrary , all the facts suggest that high unemployment in America is the result of inadequate demand - full stop
Saying that there are no easy answers sounds wise , but it 's actually foolish : our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act
In other words , structural unemployment is a fake problem , which mainly serves as an excuse for not pursuing real solutions
Who are these wise heads I 'm talking about
The most widely quoted figure is Narayana Kocherlakota , the president of the Federal Reserve Bank of Minneapolis , who has attracted a lot of attention by insisting that dealing with high unemployment is n't a Fed responsibility : `` Firms have jobs , but ca n't find appropriate workers
The workers want to work , but ca n't find appropriate jobs , '' he asserts , concluding that `` It is hard to see how the Fed can do much to cure this problem .
Now , the Minneapolis Fed is known for its conservative outlook , and claims that unemployment is mainly structural do tend to come from the right of the political spectrum
But some people on the other side of the aisle say similar things
For example , former President Bill Clinton recently told an interviewer that unemployment remained high because `` people do n't have the job skills for the jobs that are open .
Well , I 'd respectfully suggest that Mr. Clinton talk to researchers at the Roosevelt Institute and the Economic Policy Institute , both of which have recently released important reports completely debunking claims of a surge in structural unemployment
After all , what should we be seeing if statements like those of Mr. Kocherlakota or Mr. Clinton were true
The answer is , there should be significant labor shortages somewhere in America - major industries that are trying to expand but are having trouble hiring , major classes of workers who find their skills in great demand , major parts of the country with low unemployment even as the rest of the nation suffers
None of these things exist
Job openings have plunged in every major sector , while the number of workers forced into part-time employment in almost all industries has soared
Unemployment has surged in every major occupational category
Only three states , with a combined population not much larger than that of Brooklyn , have unemployment rates below 5 percent
Oh , and where are these firms that `` ca n't find appropriate workers ''
The National Federation of Independent Business has been surveying small businesses for many years , asking them to name their most important problem ; the percentage citing problems with labor quality is now at an all-time low , reflecting the reality that these days even highly skilled workers are desperate for employment
So all the evidence contradicts the claim that we 're mainly suffering from structural unemployment
Why , then , has this claim become so popular
Part of the answer is that this is what always happens during periods of high unemployment - in part because pundits and analysts believe that declaring the problem deeply rooted , with no easy answers , makes them sound serious
I 've been looking at what self-proclaimed experts were saying about unemployment during the Great Depression ; it was almost identical to what Very Serious People are saying now
Unemployment can not be brought down rapidly , declared one 1935 analysis , because the work force is `` unadaptable and untrained
It can not respond to the opportunities which industry may offer .
A few years later , a large defense buildup finally provided a fiscal stimulus adequate to the economy 's needs - and suddenly industry was eager to employ those `` unadaptable and untrained '' workers
But now , as then , powerful forces are ideologically opposed to the whole idea of government action on a sufficient scale to jump-start the economy
And that , fundamentally , is why claims that we face huge structural problems have been proliferating : they offer a reason to do nothing about the mass unemployment that is crippling our economy and our society
So what you need to know is that there is no evidence whatsoever to back these claims
We are n't suffering from a shortage of needed skills ; we 're suffering from a lack of policy resolve
As I said , structural unemployment is n't a real problem , it 's an excuse - a reason not to act on America 's problems at a time when action is desperately needed
Sometimes it seems that the only way to make sense of the Bush administration is to imagine that it s a vast experiment concocted by mad political scientists who want to see what happens if a nation systematically ignores everything we ve learned over the past few centuries about how to make a modern government work
Thus , the administration has abandoned the principle of a professional , nonpolitical civil service , stuffing agencies from FEMA to the Justice Department with unqualified cronies
Tax farming giving individuals the right to collect taxes , in return for a share of the take went out with the French Revolution ; now the tax farmers are back
And so are mercenaries , whom Machiavelli described as useless and dangerous more than four centuries ago
As far as I can tell , America has never fought a war in which mercenaries made up a large part of the armed force
But in Iraq , they are so central to the effort that , as Peter W. Singer of the Brookings Institution points out in a new report , the private military industry has suffered more losses in Iraq than the rest of the coalition of allied nations combined
And , yes , the so-called private security contractors are mercenaries
They re heavily armed
They carry out military missions , but they re private employees who don t answer to military discipline
On the other hand , they don t seem to be accountable to Iraqi or U.S. law , either
And they behave accordingly
We may never know what really happened in a crowded Baghdad square two weeks ago
Employees of Blackwater USA claim that they were attacked by gunmen
Iraqi police and witnesses say that the contractors began firing randomly at a car that didn t get out of their way
What we do know is that more than 20 civilians were killed , including the couple and child in the car
And the Iraqi version of events is entirely consistent with many other documented incidents involving security contractors
For example , Mr. Singer reminds us that in 2005 armed contractors from the Zapata firm were detained by U.S. forces , who claimed they saw the private soldiers indiscriminately firing not only at Iraqi civilians , but also U.S. Marines
The contractors were not charged
In 2006 , employees of Aegis , another security firm , posted a trophy video on the Internet that showed them shooting civilians , and employees of Triple Canopy , yet another contractor , were fired after alleging that a supervisor engaged in joy-ride shooting of Iraqi civilians
Yet even among the contractors , Blackwater has the worst reputation
On Christmas Eve 2006 , a drunken Blackwater employee reportedly shot and killed a guard of the Iraqi vice president
-LRB- The employee was flown out of the country , and has not been charged .
In May 2007 , Blackwater employees reportedly shot an employee of Iraq s Interior Ministry , leading to an armed standoff between the firm and Iraqi police
Iraqis aren t the only victims of this behavior
Of the nearly 4,000 American service members who have died in Iraq , scores if not hundreds would surely still be alive if it weren t for the hatred such incidents engender
Which raises the question , why are Blackwater and other mercenary outfits still playing such a big role in Iraq
Don t tell me that they are irreplaceable
The Iraq war has now gone on for four and a half years longer than American participation in World War II
There has been plenty of time for the Bush administration to find a way to do without mercenaries , if it wanted to
And the danger out-of-control military contractors pose to American forces has been obvious at least since March 2004 , when four armed Blackwater employees blundered into Fallujah in the middle of a delicate military operation , getting themselves killed and precipitating a crisis that probably ended any chance of an acceptable outcome in Iraq
Yet Blackwater is still there
In fact , last year the State Department gave Blackwater the lead role in diplomatic security in Iraq
Mr. Singer argues that reliance on private military contractors has let the administration avoid making hard political choices , such as admitting that it didn t send enough troops in the first place
Contractors , he writes , offered the potential backstop of additional forces , but with no one having to lose any political capital
That s undoubtedly part of the story
But it s also worth noting that the Bush administration has tried to privatize every aspect of the U.S. government it can , using taxpayers money to give lucrative contracts to its friends people like Erik Prince , the owner of Blackwater , who has strong Republican connections
You might think that national security would take precedence over the fetish for privatization but remember , President Bush tried to keep airport security in private hands , even after 9\/11
So the privatization of war no matter how badly it works is just part of the pattern
Every once in a while I feel despair over the fate of the planet
If you 've been following climate science , you know what I mean : the sense that we 're hurtling toward catastrophe but nobody wants to hear about it or do anything to avert it
And here 's the thing : I 'm not engaging in hyperbole
These days , dire warnings are n't the delusional raving of cranks
They 're what come out of the most widely respected climate models , devised by the leading researchers
The prognosis for the planet has gotten much , much worse in just the last few years
What 's driving this new pessimism
Partly it 's the fact that some predicted changes , like a decline in Arctic Sea ice , are happening much faster than expected
Partly it 's growing evidence that feedback loops amplifying the effects of man-made greenhouse gas emissions are stronger than previously realized
For example , it has long been understood that global warming will cause the tundra to thaw , releasing carbon dioxide , which will cause even more warming , but new research shows far more carbon locked in the permafrost than previously thought , which means a much bigger feedback effect
The result of all this is that climate scientists have , en masse , become Cassandras gifted with the ability to prophesy future disasters , but cursed with the inability to get anyone to believe them
And we 're not just talking about disasters in the distant future , either
The really big rise in global temperature probably wo n't take place until the second half of this century , but there will be plenty of damage long before then
For example , one 2007 paper in the journal Science is titled `` Model Projections of an Imminent Transition to a More Arid Climate in Southwestern North America '' yes , `` imminent '' and reports `` a broad consensus among climate models '' that a permanent drought , bringing Dust Bowl-type conditions , `` will become the new climatology of the American Southwest within a time frame of years to decades .
So if you live in , say , Los Angeles , and liked those pictures of red skies and choking dust in Sydney , Australia , last week , no need to travel
They 'll be coming your way in the not-too-distant future
Now , at this point I have to make the obligatory disclaimer that no individual weather event can be attributed to global warming
The point , however , is that climate change will make events like that Australian dust storm much more common
In a rational world , then , the looming climate disaster would be our dominant political and policy concern
But it manifestly is n't
Why not
Part of the answer is that it 's hard to keep peoples ' attention focused
Weather fluctuates New Yorkers may recall the heat wave that pushed the thermometer above 90 in April and even at a global level , this is enough to cause substantial year-to-year wobbles in average temperature
As a result , any year with record heat is normally followed by a number of cooler years : According to Britain 's Met Office , 1998 was the hottest year so far , although NASA which arguably has better data says it was 2005
And it 's all too easy to reach the false conclusion that the danger is past
But the larger reason we 're ignoring climate change is that Al Gore was right : This truth is just too inconvenient
Responding to climate change with the vigor that the threat deserves would not , contrary to legend , be devastating for the economy as a whole
But it would shuffle the economic deck , hurting some powerful vested interests even as it created new economic opportunities
And the industries of the past have armies of lobbyists in place right now ; the industries of the future do n't
Nor is it just a matter of vested interests
It 's also a matter of vested ideas
For three decades the dominant political ideology in America has extolled private enterprise and denigrated government , but climate change is a problem that can only be addressed through government action
And rather than concede the limits of their philosophy , many on the right have chosen to deny that the problem exists
So here we are , with the greatest challenge facing mankind on the back burner , at best , as a policy issue
I 'm not , by the way , saying that the Obama administration was wrong to push health care first
It was necessary to show voters a tangible achievement before next November
But climate change legislation had better be next
And as I pointed out in my last column , we can afford to do this
Even as climate modelers have been reaching consensus on the view that the threat is worse than we realized , economic modelers have been reaching consensus on the view that the costs of emission control are lower than many feared
So the time for action is now
O.K. , strictly speaking it 's long past
But better late than never
It 's 3 a.m. , a few months into 2009 , and the phone in the White House rings
Several big hedge funds are about to fail , says the voice on the line , and there 's likely to be chaos when the market opens
Whom do you trust to take that call
I 'm not being melodramatic
The bailout plan released yesterday is a lot better than the proposal Henry Paulson first put out sufficiently so to be worth passing
But it 's not what you 'd actually call a good plan , and it wo n't end the crisis
The odds are that the next president will have to deal with some major financial emergencies
So what do we know about the readiness of the two men most likely to end up taking that call
Well , Barack Obama seems well informed and sensible about matters economic and financial
John McCain , on the other hand , scares me
About Mr. Obama : it 's a shame that he did n't show more leadership in the debate over the bailout bill , choosing instead to leave the issue in the hands of Congressional Democrats , especially Chris Dodd and Barney Frank
But both Mr. Obama and the Congressional Democrats are surrounded by very knowledgeable , clear-headed advisers , with experienced crisis managers like Paul Volcker and Robert Rubin always close at hand
Then there 's the frightening Mr. McCain more frightening now than he was a few weeks ago
We 've known for a long time , of course , that Mr. McCain does n't know much about economics he 's said so himself , although he 's also denied having said it
That would n't matter too much if he had good taste in advisers but he does n't
Remember , his chief mentor on economics is Phil Gramm , the arch-deregulator , who took special care in his Senate days to prevent oversight of financial derivatives the very instruments that sank Lehman and A.I.G. , and brought the credit markets to the edge of collapse
Mr. Gramm has n't had an official role in the McCain campaign since he pronounced America a `` nation of whiners , '' but he 's still considered a likely choice as Treasury secretary
And last year , when the McCain campaign announced that the candidate had assembled `` an impressive collection of economists , professors , and prominent conservative policy leaders '' to advise him on economic policy , who was prominently featured
Kevin Hassett , the co-author of `` Dow 36,000 .
Enough said
Now , to a large extent the poor quality of Mr. McCain 's advisers reflects the tattered intellectual state of his party
Has there ever been a more pathetic economic proposal than the suggestion of House Republicans that we try to solve the financial crisis by eliminating capital gains taxes
-LRB- Troubled financial institutions , by definition , do n't have capital gains to tax .
But even President Bush has , in the twilight of his administration , turned to relatively sensible people to make economic decisions : I 'm not a fan of Mr. Paulson , but he 's a vast improvement over his predecessor
At this point , one has the suspicion that a McCain administration would have us longing for Bush-era competence
The real revelation of the last few weeks , however , has been just how erratic Mr. McCain 's views on economics are
At any given moment , he seems to have very strong opinions but a few days later , he goes off in a completely different direction
Thus on Sept. 15 he declared for at least the 18th time this year that `` the fundamentals of our economy are strong .
This was the day after Lehman failed and Merrill Lynch was taken over , and the financial crisis entered a new , even more dangerous stage
But three days later he declared that America 's financial markets have become a `` casino , '' and said that he 'd fire the head of the Securities and Exchange Commission which , by the way , is n't in the president 's power
And then he found a new set of villains Fannie Mae and Freddie Mac , the government-sponsored lenders
-LRB- Despite some real scandals at Fannie and Freddie , they played little role in causing the crisis : most of the really bad lending came from private loan originators .
And he moralistically accused other politicians , including Mr. Obama , of being under Fannie 's and Freddie 's financial influence ; it turns out that a firm owned by his own campaign manager was being paid by Freddie until just last month
Then Mr. Paulson released his plan , and Mr. McCain weighed vehemently into the debate
But he admitted , several days after the Paulson plan was released , that he had n't actually read the plan , which was only three pages long
O.K. , I think you get the picture
The modern economy , it turns out , is a dangerous place and it 's not the kind of danger you can deal with by talking tough and denouncing evildoers
Does Mr. McCain have the judgment and temperament to deal with that part of the job he seeks
Next week , President Obama is scheduled to propose new measures to boost the economy
I hope they 're bold and substantive , since the Republicans will oppose him regardless - if he came out for motherhood , the G.O.P. would declare motherhood un-American
So he should put them on the spot for standing in the way of real action
But let 's put politics aside and talk about what we 've actually learned about economic policy over the past 20 months
When Mr. Obama first proposed $ 800 billion in fiscal stimulus , there were two groups of critics
Both argued that unemployment would stay high - but for very different reasons
One group - the group that got almost all the attention - declared that the stimulus was much too large , and would lead to disaster
If you were , say , reading The Wall Street Journal 's opinion pages in early 2009 , you would have been repeatedly informed that the Obama plan would lead to skyrocketing interest rates and soaring inflation
The other group , which included yours truly , warned that the plan was much too small given the economic forecasts then available
As I pointed out in February 2009 , the Congressional Budget Office was predicting a $ 2.9 trillion hole in the economy over the next two years ; an $ 800 billion program , partly consisting of tax cuts that would have happened anyway , just was n't up to the task of filling that hole
Critics in the second camp were particularly worried about what would happen this year , since the stimulus would have its maximum effect on growth in late 2009 then gradually fade out
Last year , many of us were already warning that the economy might stall in the second half of 2010
So what actually happened
The administration 's optimistic forecast was wrong , but which group of pessimists was right about the reasons for that error
Start with interest rates
Those who said the stimulus was too big predicted sharply rising rates
When rates rose in early 2009 , The Wall Street Journal published an editorial titled `` The Bond Vigilantes : The disciplinarians of U.S. policy makers return .
The editorial declared that it was all about fear of deficits , and concluded , `` When in doubt , bet on the markets .
But those who said the stimulus was too small argued that temporary deficits were n't a problem as long as the economy remained depressed ; we were awash in savings with nowhere to go
Interest rates , we said , would fluctuate with optimism or pessimism about future growth , not with government borrowing
When in doubt , bet on the markets
The 10-year bond rate was over 3.7 percent when The Journal published that editorial ; it 's under 2.7 percent now
What about inflation
Amid the inflation hysteria of early 2009 , the inadequate-stimulus critics pointed out that inflation always falls during sustained periods of high unemployment , and that this time should be no different
Sure enough , key measures of inflation have fallen from more than 2 percent before the economic crisis to 1 percent or less now , and Japanese-style deflation is looking like a real possibility
Meanwhile , the timing of recent economic growth strongly supports the notion that stimulus does , indeed , boost the economy : growth accelerated last year , as the stimulus reached its predicted peak impact , but has fallen off - just as some of us feared - as the stimulus has faded
Oh , and do n't tell me that Germany proves that austerity , not stimulus , is the way to go
Germany actually did quite a lot of stimulus - the austerity is all in the future
Also , it never had a housing bubble that burst
And with all that , German G.D.P. is still further below its precrisis peak than American G.D.P. True , Germany has done better in terms of employment - but that 's because strong unions and government policy have prevented American-style mass layoffs
The actual lessons of 2009-2010 , then , are that scare stories about stimulus are wrong , and that stimulus works when it is applied
But it was n't applied on a sufficient scale
And we need another round
I know that getting that round is unlikely : Republicans and conservative Democrats wo n't stand for it
And if , as expected , the G.O.P. wins big in November , this will be widely regarded as a vindication of the anti-stimulus position
Mr. Obama , we 'll be told , moved too far to the left , and his Keynesian economic doctrine was proved wrong
But politics determines who has the power , not who has the truth
The economic theory behind the Obama stimulus has passed the test of recent events with flying colors ; unfortunately , Mr. Obama , for whatever reason - yes , I 'm aware that there were political constraints - initially offered a plan that was much too cautious given the scale of the economy 's problems
So , as I said , here 's hoping that Mr. Obama goes big next week
If he does , he 'll have the facts on his side
Can the super-rich former governor of Massachusetts the son of a Fortune 500 C.E.O. who made a vast fortune in the leveraged-buyout business really keep a straight face while denouncing `` Eastern elites ''
Can the former mayor of New York City , a man who , as USA Today put it , `` marched in gay pride parades , dressed up in drag and lived temporarily with a gay couple and their Shih Tzu '' that was between his second and third marriages really get away with saying that Barack Obama does n't think small towns are sufficiently `` cosmopolitan ''
Can the vice-presidential candidate of a party that has controlled the White House , Congress or both for 26 of the past 28 years , a party that , Borg-like , assimilated much of the D.C. lobbying industry into itself until Congress changed hands , high-paying lobbying jobs were reserved for loyal Republicans really portray herself as running against the `` Washington elite ''
Yes , they can
On Tuesday , He Who Must Not Be Named Mitt Romney mentioned him just once , Rudy Giuliani and Sarah Palin not at all gave a video address to the Republican National Convention
John McCain , promised President Bush , would stand up to the `` angry left .
That 's no doubt true
But do n't be fooled either by Mr. McCain 's long-ago reputation as a maverick or by Ms. Palin 's appealing persona : the Republican Party , now more than ever , is firmly in the hands of the angry right , which has always been much bigger , much more influential and much angrier than its counterpart on the other side
What 's the source of all that anger
Some of it , of course , is driven by cultural and religious conflict : fundamentalist Christians are sincerely dismayed by Roe v. Wade and evolution in the curriculum
What struck me as I watched the convention speeches , however , is how much of the anger on the right is based not on the claim that Democrats have done bad things , but on the perception generally based on no evidence whatsoever that Democrats look down their noses at regular people
Thus Mr. Giuliani asserted that Wasilla , Alaska , is n't `` flashy enough '' for Mr. Obama , who never said any such thing
And Ms. Palin asserted that Democrats `` look down '' on small-town mayors again , without any evidence
What the G.O.P. is selling , in other words , is the pure politics of resentment ; you 're supposed to vote Republican to stick it to an elite that thinks it 's better than you
Or to put it another way , the G.O.P. is still the party of Nixon
One of the key insights in `` Nixonland , '' the new book by the historian Rick Perlstein , is that Nixon 's political strategy throughout his career was inspired by his college experience , in which he got himself elected student body president by exploiting his classmates ' resentment against the Franklins , the school 's elite social club
There 's a direct line from that student election to Spiro Agnew 's attacks on the `` nattering nabobs of negativism '' as `` an effete corps of impudent snobs , '' and from there to the peculiar cult of personality that not long ago surrounded George W. Bush a cult that celebrated his anti-intellectualism and made much of the supposed fact that the `` misunderestimated '' C-average student had proved himself smarter than all the fancy-pants experts
And when Mr. Bush turned out not to be that smart after all , and his presidency crashed and burned , the angry right the raging rajas of resentment
became , if anything , even angrier
Humiliation will do that
Can Mr. McCain and Ms. Palin really ride Nixonian resentment into an upset election victory in what should be an overwhelmingly Democratic year
The answer is a definite maybe
By selecting Barack Obama as their nominee , the Democrats may have given Republicans an opening : the very qualities that inspire many fervent Obama supporters the candidate 's high-flown eloquence , his coolness factor have also laid him open to a Nixonian backlash
Unlike many observers , I was n't surprised at the effectiveness of the McCain `` celebrity '' ad
It did n't make much sense intellectually , but it skillfully exploited the resentment some voters feel toward Mr. Obama 's star quality
That said , the experience of the years since 2000 the memory of what happened to working Americans when faux-populist Republicans controlled the government is still fairly fresh in voters ' minds
Furthermore , while Democrats ' supposed contempt for ordinary people is mainly a figment of Republican imagination , the G.O.P. really is the Gramm Old Party it really does believe that the economy is just fine , and the fact that most Americans disagree just shows that we 're a nation of whiners
But the Democrats ca n't afford to be complacent
Resentment , no matter how contrived , is a powerful force , and it 's one that Republicans are very , very good at exploiting
Here 's the situation : The U.S. economy has been crippled by a financial crisis
The president 's policies have limited the damage , but they were too cautious , and unemployment remains disastrously high
More action is clearly needed
Yet the public has soured on government activism , and seems poised to deal Democrats a severe defeat in the midterm elections
The president in question is Franklin Delano Roosevelt ; the year is 1938
Within a few years , of course , the Great Depression was over
But it 's both instructive and discouraging to look at the state of America circa 1938 - instructive because the nature of the recovery that followed refutes the arguments dominating today 's public debate , discouraging because it 's hard to see anything like the miracle of the 1940s happening again
Now , we were n't supposed to find ourselves replaying the late 1930s
President Obama 's economists promised not to repeat the mistakes of 1937 , when F.D.R. pulled back fiscal stimulus too soon
But by making his program too small and too short-lived , Mr. Obama did just that : the stimulus raised growth while it lasted , but it made only a small dent in unemployment - and now it 's fading out
And just as some of us feared , the inadequacy of the administration 's initial economic plan has landed it - and the nation - in a political trap
More stimulus is desperately needed , but in the public 's eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs
In short , welcome to 1938
The story of 1937 , of F.D.R. 's disastrous decision to heed those who said that it was time to slash the deficit , is well known
What 's less well known is the extent to which the public drew the wrong conclusions from the recession that followed : far from calling for a resumption of New Deal programs , voters lost faith in fiscal expansion
Consider Gallup polling from March 1938
Asked whether government spending should be increased to fight the slump , 63 percent of those polled said no.
Asked whether it would be better to increase spending or to cut business taxes , only 15 percent favored spending ; 63 percent favored tax cuts
And the 1938 election was a disaster for the Democrats , who lost 70 seats in the House and seven in the Senate
Then came the war
From an economic point of view World War II was , above all , a burst of deficit-financed government spending , on a scale that would never have been approved otherwise
Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 - the equivalent of roughly $ 30 trillion today
Had anyone proposed spending even a fraction that much before the war , people would have said the same things they 're saying today
They would have warned about crushing debt and runaway inflation
They would also have said , rightly , that the Depression was in large part caused by excess debt - and then have declared that it was impossible to fix this problem by issuing even more debt
But guess what
Deficit spending created an economic boom - and the boom laid the foundation for long-run prosperity
Overall debt in the economy - public plus private - actually fell as a percentage of G.D.P. , thanks to economic growth and , yes , some inflation , which reduced the real value of outstanding debts
And after the war , thanks to the improved financial position of the private sector , the economy was able to thrive without continuing deficits
The economic moral is clear : when the economy is deeply depressed , the usual rules do n't apply
Austerity is self-defeating : when everyone tries to pay down debt at the same time , the result is depression and deflation , and debt problems grow even worse
And conversely , it is possible - indeed , necessary - for the nation as a whole to spend its way out of debt : a temporary surge of deficit spending , on a sufficient scale , can cure problems brought on by past excesses
But the story of 1938 also shows how hard it is to apply these insights
Even under F.D.R. , there was never the political will to do what was needed to end the Great Depression ; its eventual resolution came essentially by accident
I had hoped that we would do better this time
But it turns out that politicians and economists alike have spent decades unlearning the lessons of the 1930s , and are determined to repeat all the old mistakes
And it 's slightly sickening to realize that the big winners in the midterm elections are likely to be the very people who first got us into this mess , then did everything in their power to block action to get us out
But always remember : this slump can be cured
All it will take is a little bit of intellectual clarity , and a lot of political will
Here 's hoping we find those virtues in the not too distant future
The just-announced federal takeover of Fannie Mae and Freddie Mac , the giant mortgage lenders , was certainly the right thing to do and it was done fairly well , too
The plan will sustain institutions that play a crucial role in the economy , while holding down taxpayer costs by more or less cleaning out the stockholders
But Sunday 's action needs to be seen in a larger context that of the attempt by the Federal Reserve and the Treasury Department to contain the fallout from the ongoing financial crisis
And that 's a fight the feds seem to be losing
We 've come a long way from the days when Alan Greenspan declared a national housing bubble `` most unlikely .
There was indeed a bubble , and since it popped two years ago home prices have fallen faster than they did during the Great Depression
Falling home prices , in turn , have led to the much-feared phenomenon of `` debt deflation .
Yes , deflation : prices are going up at the checkout counter , but the prices of assets , which are what matter for balance sheets , are dropping fast
As the economist Irving Fisher observed way back in 1933 , when highly indebted individuals and businesses get into financial trouble , they usually sell assets and use the proceeds to pay down their debt
What Fisher pointed out , however , was that such selloffs are self-defeating when everyone does it : if everyone tries to sell assets at the same time , the resulting plunge in market prices undermines debtors ' financial positions faster than debt can be paid off
So deflation in asset prices can turn into a vicious circle
And one consequence of what he called a `` stampede to liquidate '' is a severe economic slump
That 's what 's happening now , with debt deflation made especially ugly by the fact that key financial players are highly leveraged their assets were mainly bought with borrowed money
As Paul McCulley of Pimco , the bond investor , put it in a recent essay titled `` The Paradox of Deleveraging , '' lately just about every financial institution has been trying to reduce its leverage but the plunge in asset values has nonetheless left these institutions with more debt relative to their assets than before
And the numbers keep getting worse
In July 2007 Ben Bernanke suggested that subprime losses would be less than $ 100 billion
Well , last month write-downs by banks and other financial institutions passed the $ 500 billion mark and the hits keep coming
Which brings us to Fannie and Freddie
They 're the only big financial institutions that have n't joined in the rush to deleverage , which is why they now account for about 70 percent of new mortgage loans
But their financial foundations have been undermined by debt deflation , even though their lending was more responsible than average
-LRB- A subprime borrower is basically someone whose credit was n't good enough to qualify for a Fannie - or Freddie-backed mortgage .
So Fannie and Freddie had to be rescued otherwise debt deflation would have gotten much worse
Indeed , their financial troubles have already caused problems for would-be home buyers : mortgage rates are up sharply since earlier this year
With the federal takeover , which removes the pressure on the lenders ' balance sheets , we should see mortgage rates drop again which is definitely good news
But is it enough
I doubt it
The current U.S. financial crisis bears a strong resemblance to the crisis that hit Japan at the end of the 1980s , and led to a decade-long slump that worried many American economists , including both Mr. Bernanke and yours truly
We wondered whether the same thing could take place here and economists at the Fed devised strategies that were supposed to prevent that from happening
Above all , the response to a Japan-type financial crisis was supposed to involve a very aggressive combination of interest-rate cuts and fiscal stimulus , designed to prevent the crisis from spilling over into a major slump in the real economy
When the current crisis hit , Mr. Bernanke was indeed very aggressive about cutting interest rates and pushing funds into the private sector
But despite his cuts , credit became tighter , not easier
And the fiscal stimulus was both too small and poorly targeted , largely because the Bush administration refused to consider any measure that could n't be labeled a tax cut
As a result , as I suggested , the effort to contain the financial crisis seems to be failing
Asset prices are still falling , losses are still mounting , and the unemployment rate has just hit a five-year high
With each passing month , America is looking more and more Japanese
So yes , the Fannie-Freddie rescue was a good thing
But it takes place in the context of a broader economic struggle a struggle we seem to be losing
