The Obama budget in a nutshell

This, from the Wall Street Journal:

High-wage earners, Wall Street hedge-fund managers, oil-and-gas investors, corporate executives, well-to-do seniors and Washington lobbyists all take hits in President Barack Obama’s budget plan.

The budget winners include middle-class families, low-wage workers, lower-income retirees, veterans, preschoolers, college students and the homeless.

Now I guess we all have to decide where on that we stand.

P.S. From a WSJ columnist, it’s worth remembering this:

This is the sort of thing that might set off a bit of class warfare — except that, in this case, the class being hit includes an awful lot of Obama supporters. In last November’s voting, exit polls showed, Mr. Obama actually won a majority of the votes from Americans in families making $200,000 or more annually. He got 52% of their votes, compared with 46% for Republican John McCain.

Interestingly, Mr. McCain won among Americans making $100,000 to $200,000. Mr. Obama’s support was a bit like a barbell — bulging among the poorest and wealthiest at either end of the income spectrum, and narrower in the middle.

An economic thought – “free” markets

There are no “free” markets in the sense that “anything goes.” All markets operate within a set of rules. Sometimes those rules are implicit, like be honest or your reputation will suffer and you’ll find yourself unable to conduct business. Other times, the rules are explicit, like the requirements that financial institutions should have enough money or assets on hand to cover their bets.

So, all of that said, should we have “free” markets? No, not if it means economic anarchy, free of all rules. Should we have “free-as-possible” markets? Yes. Capitalism – well and prudently regulated – still has a lot to offer.

I see an analogy in the freedom of speech – something that’s near and dear to my heart as a journalist. We do not have “free” speech in this country in the sense that “anything goes.” The courts have held that you do not have the right to yell “Fire!” in a crowded theater and possibly cause someone to be injured or killed in a rush to the exits.

Our individual liberties – speech, economic, etc. – have and always will be balanced against the needs of living together with other people within a set of rules.

New economic numbers are ugly

The government has posted its revised GDP numbers for the last three months of 2008, and they are ugly – a 6.2% annualized rate of decline. I link to the New York Times story on the GDP, which includes this nugget:

Among the more distressing aspects of the report, according to Joseph Brusuelas, a director at Moody’s, were the numbers for business investment. Investment in equipment and software, for example, fell at an annualized rate of 28.8 percent.

“We’re not going to have a consumer-led recovery out of the recession,” Mr. Brusuelas said. It will instead be led by the technology industry and businesses’ spending on capital investments he said, which makes the fourth quarter G.D.P. figures numbers “somewhat troubling.”

So, to emphasize what is said here, consumers will not save the economy (an idea I criticized in a post yesterday), and businesses will have to pick up the slack. I wonder where Cat will fit into this picture.

Also, just to build on something from my postscript in that same post yesterday, the article says “the last quarter of 2008 was the worst since the 1982 recession.” Let’s keep in mind that today’s numbers might be similar to the early-80s recession, but these two recessions are not at all the same. The early-80s recession was caused by the Federal Reserve cranking up interest rates to kill the economy in order to kill inflation. That recession was also ended by the Fed reducing interest rates once it felt inflation was dead. This time around the Fed is already at zero-percent interest rates, and we’re still struggling. Hence, the need for the stimulus bill.

Peoria’s economy really better off?

In the Peoria Journal Star today, Paul Gordon writes about a report produced by the Peoria area’s economic development organization. The report is designed to make everyone feel better about the local economy. Apparently, the Heartland Partnership has gotten some grief over its ad campaign that says “It’s better here,” even with the poor economy and layoffs at Cat.

I’m not convinced.

From the article:

The numbers show the area is faring better now than in earlier recessions, largely because of the way the local economy has diversified in the past 25 years and reduced its reliance on manufacturing, namely on Caterpillar Inc., the Partnership said during a news conference at its office Wednesday.

I would imagine that the local economy is less reliant on Cat. But is this true economic diversification, or has Cat’s contribution to the local economy shrunk to the point where the local economy just looks more diversified?

To think of this a different way, go check out the pie chart that was published along with the article. The economy looks diversified because Cat’s pie piece is relatively small. Now, imagine that the yellow Caterpillar pie piece was more than three times as big, as it was in the past. The economy now looks less diversified. This new economic “diversification” we seem to enjoy could just be the relative decline of Cat, while other parts of the economy remained largely fixed. Job figures cited elsewhere in the article might point to an answer to this question:

Another key statistic, the Partnership said, is the number of people working. In the five-county Peoria “metropolitan service area” – Peoria, Tazewell, Woodford, Marshall and Stark counties – there were, on average, 194,577 people working in 2008, before the layoffs began. In those same five counties in the late 1970s, before the recession of the 1980s, there were about 178,000 workers on average. By the end of 1985, that was down to about 146,000.

Basically, the Peoria area economy has generated 16,577 new jobs in 30 years – 552 jobs per year. I would want to look up some more comparative statistics, but given the growth of the overall U.S. economy in the last three decades, that does not strike me as anything to celebrate. And remember, none of this takes into account the layoffs taking place right now.

I also wonder if this idea of Cat’s reduced importance as an employer fails to capture the remaining essential reliance of the Peoria area’s economy on Caterpillar. Look at that pie chart again. How many of those other sectors (like leisure and hospitality, education and health, professional and business services) would decline precipitously without that sustaining wealth creation that Cat generates by brining in profts from around the globe?

Back to the article:

Saying he did not want to belittle the strife the area has seen during the recession, including recent layoffs at Caterpillar and other companies, McConoughey said the statistics nonetheless show “we are weathering this and doing fairly well. It is not better here than it was a year ago, that’s true, but it is when compared with recessions of the past and with how other areas are doing now.”

I think this is essentially true. If you compare the Peoria situation to where the economic bombs have really been going off (Florida, New York), we’re doing okay. Just consider the housing market. I was talking to a realtor I know yesterday, and he said that prices are holding up in Peoria. That’s certainly not true elsewhere.

However, that’s probably because Peoria never had as big of an economic run-up as other parts of the country. Think of all of the huge banker bonuses that bolstered the New York economy during the last few years. That point does come out in the article at one point:

Housing values have stayed steady because this area did not experience the housing bubble burst that occurred on the coasts and in Florida.

Moving on, according to the article, McConoughey made what, to me, was an alarming statement:

It’s important people know that, he said, so confidence can be restored. “We don’t want people to bury their money out in the back yard and then hole up waiting for the recession to end. We need to spend our way out of the recession,” he said.

Confidence is important, but I think this is dangerous, if not negligent, economic advice for individuals and households.

Consumers do represent about two-thirds of our nation’s economy. But part of the reason this recession will prove so disastrous is the debt overhang that individuals and consumers have from years of over-consumption. Quite sensibly, consumers are cutting back, especially when their jobs seem so insecure.

But that leads us right into Keynes’ Paradox of Thrift – the idea that what’s good for individuals separately is a disaster for everyone together. Everyone cutting back on their consumption will tank the economy, which will feed back into reducing people’s confidence, more job cuts, etc.

This, by the way, is the essential argument behind the stimulus bill. Government can act as that spender of last resort in the short-term, while consumers weather the economic storn, clean out their debt, and prepare to become stronger engines of the economy down the road. This kind of advice makes me think back to the “go shopping” rhetoric we got a couple of years ago.

And finally, things are likely to get worse:

Acknowledging the most recent layoffs by area employers, including Caterpillar, are not reflected in the December rate, the Partnership cited Bradley University economists as saying they don’t expect the region’s unemployment to reach beyond 9 percent during the current recession.

Yikes. Well, at least we won’t see 10 percent.

We’ll see if the Heartland Partnership can produce such an optimistic sounding report a year from now.

P.S. One last thing about that early 1980s recession that clobbered Peoria, much of the Great Lakes region, and the U.S. economy. I think it’s important to remember that that recession was not some sort of natual disaster. The Federal Reserve (under then-chairman Paul Volcker, now an Obama advisor) made a deliberate choice – with the backing of political leaders at the time – to crash the economy so as to kill inflation. Now, there’s a solid economic argument to be made for containing inflation. But that recession was done to us, in the name of saving the overall economy. It just happened to break the back of much of the industrial Midwest in the process.

I wonder at what point we’ll finally decide to break up the banking sector for the sake of the larger economy?

P.P.S. I happen to think that Paul Volcker is one of the best economic minds that Obama has near him right now. Far better than Larry Summers or Timothy Geithner. But unfortunately, signs have been that he’s not part of the inner circle.

Anti-stimulus Illinois Republicans now want $ for coal plant

From an AP article, three U.S. House representatives from Illinois – two Republicans and one Democrat – have sent a letter to the U.S. Department of Energy to get stimulus bill money for the FutureGen coal plant near Mattoon, Ill.

Of course, as we all know, every single Republican in the House voted against the stimulus bill.

The three Representatives are Tim Johnson (R), John Shimkus (R), and Jerry Costello (D).

Johnson has a press release on his web site:

U.S. Rep. Timothy V. Johnson today released a letter he is sending to Department of Energy Secretary Stephen Chu calling on the DOE to release its Record of Decision on FutureGen, along with $1 billion in Fossil Energy Research funding contained in the President’s stimulus package.

He goes on, apparently without any irony:

With the American Recovery and Reinvestment Act of 2009 now enacted into law, we recommend that DOE direct funds towards FutureGen because of the positive effects it will have on the economy. While not specifically mentioned in the stimulus package, it is our understanding that DOE could fund FutureGen at $1 billion under DOE’s ‘fossil energy research and development programs.’ We believe FutureGen would make exceptional use of these funds.

Looks like some Republicans are looking to punch their “conservative movement” card by voting against the stimulus and get their cake, too.

By the way, I found this little bit of info buried on B6 of today’s Peoria Journal Star.

(Cross-posted to Daily Kos)

One of my favorite economic quotes

This is from a footnote in Robert L. Heilbroner’s “The Nature and Logic of Capitalism.” It’s a bit convoluted, but bear with it:

I cannot resist adding an example of the modern use of economics as a system of clarificatory belief.

Thomas Schelling writes: “[T]he free market may not do much, or anything, to distribute opportunities and resources among people the way you and I might like them distributed…; it may encourage individualistic rather than group values. It may lead to assymentrial personal relationships between employee and employer….The market may even perform disastrously when inflation and depression are concerned. Still, within these serious limitations, it does remarkably well in coordinating or harmonizing or integrating the effects of…individuals and organizations” (Micromotives and Macrobehavior [New York: W.W. Norton, 1978]), pg. 23.

Schelling is by no means a bland “apologist” for the market system. Note, however, that the market is given its ultimate blessing on terms that excuse a maldistribution of opportunities and resources, unsocial values, unequal bargaining power, and perhaps “disastrous” performance during inflation or depression.
One is tempted to ask by what criteria the system would be deemed a failure.