On the Need for a Second Stimulus

The growing chorus of "The Stimulus Didn't Work" is false and silly.  Moreover, calls for "fiscal restraint" or the need for everyone to "tighten their belts" is false and dangerous.  Finally, the suggestion that continuing the tax cuts for the top 2% of the country because they "create" jobs is false and tired.

Here's why:  the wealthy among don't "create" jobs.  This is Economics 101: DEMAND creates jobs.  No demand?  No jobs.  Think about this: what would happen if the government dropped the tax rate to zero on, say, profits from sales of Pet Rocks.  Would we suddenly have a booming Pet Rock industry?  Of course not.  Why?  Because no one wants to buy a Pet Rock.  There is no demand for Pet Rocks.  Conversely, there appears to be high demand for all sorts of illegal drugs.  Government has taken extreme measures to restrict the supply of illegal drugs.  But the drug business is booming.  Why?  Because people want to buy illegal drugs.  The demand remains high and, thus, the jobs are there.

The only time a supply shock (e.g. lower taxes on profits) can dramatically affect job creation is during a "supply deficit."  This happens when the demand is present but, for some reason, there isn't enough supply.  An example might be high-speed rail.  It's possible that lots of people would like to ride high-speed rail.  It might allow job seekers in Los Angeles and San Francisco to commute to the other city.  It could take people to and from Las Vegas or Dollywood rapidly.  But high-speed rail is expensive and takes lots of land.  It may take years and years for a business to recoup the billions needed to establish a high-speed rail line.  Also, one company may not be able to get the land-use rights to complete a full track.  THIS is where government policy can stimulate supply to solve the problem.  Here, providing a tax incentive to build rail lines, or lowering taxes on commuter-rail profits might entice supplies to enter the demand-rich market when they normally wouldn't.  But only then.

We are not in a supply deficit.  Companies have lots of cash, they're just not spending it.  Instead, we are in a demand deficit.  People don't have a lot of money, and those that do are saving it.  If no one's buying (Pet Rocks or anything else) then no one's selling and, thus, no jobs.

But didn't the first stimulus "fail?"  Of course not.  Quite the contrary -- it did exactly what it was supposed to do, it was just too small.

If I recall, the expected demand deficit was something like $2.5 trillion.  In other words, consumers were spending $2.5T less than they had previously.  Obama started out a stimulus proposal under $1T, included lots of tax cuts rather than spending (cuts are less stimulative), and then negotiated the amount down to around $800 billion.  Thus the stimulus was about one-third of what it would take to completely fill the gap.

To say “we did one-third of what we had to, and then things didn’t turn out well, means we should do even less going forward” is, in my opinion, dubious at best.

Think of it this way:  Imagine firemen arrive at the scene of a burning house.  They bring with them three hoses and hook them up to three fire hydrants.  But they decide to only use one due to worries about a drought in a few years.  After battling the fire for some time, they realize that they’ve made a little progress but the house is still burning.  At that point, one fireman says “Hey Fire Chief, we tried your water-based solution and it didn’t work.  We need to turn off the hose immediately.”

What would you do?

Rand Paul, Libertarianism and Racial Discrimination

I may be a bit late to the party regarding Rand Paul's stance on the 1964 Civil Right Act.  But I feel it's important to revisit this issue for a couple of reasons.  First, Rand Paul appears to be gaining popularity and momentum.  I suspect his ideas will also.  Second and paramount is that the progressive world simply did not do a good job of responding to his libertarian assertions.  We merely laughed and pointed fingers.  That just doesn't work.  Nothing cements the solidarity of a political supporter quite like mocking their idol.  Well, OK it works with liberals -- we run and hide when our leaders are mocked.  But the right-wingers will circle the wagons.  It is incumbent on us to explain why Rand Paul has it wrong.  Not just to assert that he does.

From Alex Pareene at Salon, discussing Rand Paul:

"[L]ibertarians and 'responsible' conservatives of yore usually understood that their intellectual defenses of states' rights just provided respectable cover for racist segregationists."

This is a very common response.  Alex claims that states' rights provided cover for the segregationists, but doesn't explain why or how.  Yes it may sound crazy that we have to re-litigate the Civil Rights Act 45 years later.  But we do.  And we will again and again.  So let's get it right today.  Now.

Here's what Rand Paul actually said, from a Rachel Maddow Show transcript:

"What I was asked by "The Courier-Journal" and I stick by it is that I do defend and believe that the government should not be involved with institutional racism or discrimination or segregation in schools, busing, all those things. But had I been there, there would have been some discussion over one of the titles of the civil rights.

And I think that's a valid point, and still a valid discussion, because the thing is, is if we want to harbor in on private businesses and their policies, then you have to have the discussion about: do you want to abridge the First Amendment as well. Do you want to say that because people say abhorrent things -- you know, we still have this. We're having all this debate over hate speech and this and that. Can you have a newspaper and say abhorrent things? Can you march in a parade and believe in abhorrent things, you know?"

I think it's a fair characterization to say Rand Paul's position is "The government should not itself discriminate.  But neither should the government tell private businesses that they cannot discriminate, no matter how abhorrent we find the practice."  Paul also said that he himself wouldn't frequent a discriminatory establishment.  This is consistent with a market-based view of discrimination: bad actors will not do well in the market; people will not support a business that treats others poorly.

Paul presents a specious argument.  He sounds quite reasonable, but the argument doesn't hold up to minimal scrutiny.  Several reasons.  First is the presumed separation between public and private discrimination.  It doesn't exist for quasi-public establishments, such as restaurants or stores.  Let's imagine a restaurant with a lunch counter that doesn't serve black people (sound familiar)?  Several black customers enter the restaurant, take seats and ask for menus.  The owner comes over and says "sorry, we don't serve black people here.  You'll have to leave."  In response, the customers say "Thank you, no.  We're not leaving.  You're discriminating against us and that's not fair."  The proprietor replies "This is my private business, I choose whom I want to serve.  We do  not serve black people.  You will have to leave now."  The black patrons refuse to leave.

What happens now?  Of course, the business owner calls the police to have the trespassers removed.  And here is where the public/private distinction breaks down.  Government provides a means to enforce private contracts.  Or the refusal to contract, as in this case.  As soon as the police or sheriff (i.e. the government) escorts the black people out of the restaurant or arrest them for trespass, we have institutional discrimination.

The second reason Paul's position doesn't hold water is the presumed agnosticism regarding discrimination.  Paul says that government shouldn't stop private discrimination even though he admits it's abhorrent.  OK.  Now imagine a private business where people pay to kidnap, torture and kill other humans (think "Hostel").  No one in their right mind would argue that government should allow "private kidnapping and torture" just because a private business can make money doing it.  Why not?  Well, of course, those acts are illegal.  And they're illegal because they hurt people and we find them abhorrent.  Racial discrimination, on the other hand...  Well... Well... that must be somehow different, no?

No.  Here's the most insidious part of the seemingly neutral libertarian stance.  Even libertarians would admit that murder and torture are inherently bad and we have a societal interest in preventing them.  Regardless of how much money one can make, as a fair and just society we simply can't tolerate these acts.  Their argument, however, MUST assume that racial discrimination either isn't inherently bad or we don't have a societal interest in preventing it.  So either (1) racial discrimination is not inherently bad or (2) we value private business concerns more than preventing racial discrimination.  Bottom line: either it's OK, or if you pay enough it's OK.

Now we can close the loop.  The Rand Paul/libertarian distinction between public and private discrimination (1) relies on government power to facilitate it and (2) strongly suggests that racial discrimination isn't bad.  That is why these types of arguments have provided "intellectual cover" for racists over the years.

PS: Rand Paul provides a "slippery slope" argument: if we don't allow businesses to racially discriminate, they we'll eventually lose our freedom of speech.  Remember, the CRA passed almost 50 years ago.  It didn't happen.  It won't happen.  Again, a completely specious argument.

Regulation Did not Cause the 2008 Crash

Memory is a funny thing.  We tend to remember things that support our world view.  Contrary facts tend to fade away.  Faulty memory may be a defense mechanism against cognitive dissonance, but I'll leave that to the psychologists.

How soon we forget.  I understand why Republican politicians and conservative talking heads maintain that bad government caused the 2008 crash: their entire livelihood depends on attacking government as "the problem."  It's a bit surprising, but only a bit, that they would run this year on rolling back the anemic Obama financial regulations.  But it's almost beyond belief that large swaths of the population buy this.  Almost.

We need little bit of history.  After the Civil War, the United States faced a series of bank panics.  Roughly every five or ten years (sometimes more frequently, sometimes less), the financial system would falter due to greed and corruption, creating mass panic.  People would rush to get their money out of banks, the banks would collapse and the economy would nosedive.

This series of boom and bust continued for about 70 years and culminated in the Great Depression.  Things were so bad that the Roosevelt administration put into place a series of financial industry regulations to ensure (and insure) that something of that magnitude would never happen again.  These depression-era regulations led to a "quiet period" lasting fifty years.  During that time, America experienced its greatest period of sustained growth.

In the 1980s, however, the Reagan administration and Congress repealed the depression-era regulations on the savings-and-loan sector.  At the time, the S&Ls needed "innovation," not "regulation."  About seven or eight years later, the S&L industry completely collapsed due to greed and mass corruption.

In 1999, the Clinton administration and Congress (Republican Phil Gramm led the charge) repealed depression-era regulations on the banking and investment banking industries.  About seven or eight years later, the banking and investment banking industries completely collapsed due to greed and mass corruption.  I do mean completely.  There are literally no major investment banks.  Even Goldman Sachs transmogrified into a bank-holding company.

Correlation is not causation.  I know this.  But given this compelling timeline, those advocating less regulation should bear an extremely heavy burden.  It seems they don't.  We should collectively laugh at those who maintain the crash was caused by poor people, Barney Frank and a 1970s lending standard.

Hopefully, we'll look back and refresh our memories regarding poor financial regulation before another crash does it for us.

On TARP -- No, It Did Not Work

Why are Democrats sticking up for TARP?

I fear it's a knee-jerk reaction to the vehement opposition against TARP from the tea party and other right-wing Republican groups.  It seems that anti-establishment Republican primary candidates used TARP as a club -- successfully -- against those incumbents that voted for it.  It's easy to make fun of the tea-party folks and assume that, if they're against it, it's probably a good thing.  But not this time.

With increasing frequency, I've heard Democrats and progressives stand up for TARP because "it worked."  We avoided a complete collapse.  The government even "made" money on it!  Stephanie Miller, for example, on Friday said that it was one of the things she thought George W. Bush did right.

Let's be frank -- it was a disaster.  It did not "work."  Here's why:

In mid- to late-2008, our financial sector and the world economy were on the brink of collapse.  We certainly did need to do something.  The government had essentially three options: some kind of cash infusion, some kind of tighter regulation, or some combination of the two.  Given the banking industry's dire straits, the government had an incredible opportunity to institute some reforms to help ensure this wouldn't happen again.  But we did nothing.  Nothing, aside from writing a blank check to virtually any institution that could fill out a four-page application.

Let me draw an analogy.  Imaging you have a crazy, ne'r-do-well cousin.  He's a drinker and a gambler.  Late one night he pounds on your door, barges into your living room and explains that he's in debt to some Vegas loansharks for $70,000 to cover gambling losses.  He's way past due and they're going to hurt him.  Oh, and because he gave them your name, they're going to hurt you and your family as well.

Given no choice, you get the money.  You empty your bank accounts, borrow money from your 401(k), even break open the kids' piggy banks.  He takes the money and heads off.  You know it's money you'll never see again.  Had to do it.  Maybe we can push back retirement a year or two.

Some time later, your cousin returns.  He's all smiles.  It turns out that he only owed $50,000 to the loan sharks and, with the extra $20,000, hit the craps tables.  But he hit a good run and turned that $20,000 into $120,000.  He gives you back the $70,000 you loaned him, an additional $30,000 for interest, and keeps the remaining $20,000 for himself.  He's going to do it again -- turn that $20,000 into a small fortune.  Off he goes.

Now, your "loan" to your cousin didn't "work."  Sure, he didn't die.  He gambled and won, paying you back.  But that's no investment.  And worst of all, you let your cousin and the loansharks know that, when it comes down to it, you'll cover the bad debts.  You have all but ensured this will happen again, and probably worse next time.

That's almost exactly what happened with TARP.  Large financial institutions leveraged themselves to the hilt making speculative investments -- gambling -- and faced ruin when those bets went bad.  The Bush administration and Congressional leaders browbeat the legislature into signing a massive check, with no strings attached.  The banks took the money, paid off their debts, and immediately returned to extreme risk taking.  In this way, TARP didn't "work."  Yes, we avoided disaster.  Today.  But because we took no steps to ensure it won't happen again, we have all but guaranteed that it will.

What would we do with our cousin?  Well, perhaps insist he go into rehab before he gets the money.  Take him to a Gambling Anonymous program.  Call up the loansharks, let them know that you'll cover it this time, but you're tapped out and just kill him next time.  Yes, that's extreme.  Those measures may not work.  But it's beyond negligent to require nothing of those who claim they need all your money to cover their bad decisions.