Wednesday, February 2, 2011


One Blog that doesn't get the credit it deserves is Washington's Blog, found at A collection of articles that focus on economic issues written by authors with pen names, the general argument is that the economics embraced by our political and media establishment "represent the interests of the people as opposed to the big banks, major corporations, and the military-industrial complex." Hard to argue with that.

In a January 13th post, Washington made the strong case against what The Konformist has warned is really a plot to destroy public worker unions:

Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority.

"We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed."

Congress has also discontinued the Build American Bond program, which was significant in temporarily financing California and other states' budgets...

That's unfortunate, given that many states and big cities are in a dire financial situation, and given that Keynesian economists say that aid to the states is one of the best forms of stimulus...

Unfortunately, as I will demonstrate below, virtually the entire government economic policy is to throw trillions of dollars at the biggest banks.

GW then blasts the Wall Street Bailouts (starting with TARP) in a deserved dismissive tone:

The $700 billion dollar TARP bailout was a massive bait-and-switch. The government said it was doing it to soak up toxic assets, and then switched to saying it was needed to free up lending. It didn't do that either. Indeed, the Fed doesn't want the banks to lend.

As I wrote in March 2009:

The bailout money is just going to line the pockets of the wealthy, instead of helping to stabilize the economy or even the companies receiving the bailouts:

* Bailout money is being used to subsidize companies run by horrible business men, allowing the bankers to receive fat bonuses, to redecorate their offices, and to buy gold toilets and prostitutes

* A lot of the bailout money is going to the failing companies' shareholders

* Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is "a massive redistribution of wealth to the bank shareholders and their top executives"

* The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)

* And as the New York Times notes, "Tens of billions of [bailout] dollars have merely passed through A.I.G. to its derivatives trading partners".

The Blog then notes: "But the TARP bailout is peanuts compared to the numerous other bailouts the government has given to the giant banks.

Government Says No to Helping States and Main Street, While Continuing to Throw Trillions at the Giant Banks
Thursday, January 13, 2011

For what it's worth, here's the Center on Budget and Policy Priorities analysis of the budget problems on the state and local levels:

A spate of recent articles regarding the fiscal situation of states and localities have lumped together their current fiscal problems, stemming largely from the recession, with longer-term issues relating to debt, pension obligations, and retiree health costs, to create the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown.

The large operating deficits that most states are projecting for the 2012 fiscal year, which they have to close before the fiscal year begins (on July 1 in most states), are caused largely by the weak economy. State revenues have stabilized after record losses but remain 12 percent below pre-recession levels, and localities also are experiencing diminished revenues. At the same time that revenues have declined, the need for public services has increased due to the rise in poverty and unemployment. Over the past three years, states and localities have used a combination of reserve funds and federal stimulus funds, along with budget cuts and tax increases, to close these recession-induced deficits. While these deficits have caused severe problems and states and localities are struggling to maintain needed services, this is a cyclical problem that ultimately will ease as the economy recovers.

Unlike the projected operating deficits for fiscal year 2012, which require near-term solutions to meet states’ and localities’ balanced-budget requirements, longer-term issues related to bond indebtedness, pension obligations, and retiree health insurance — discussed more fully below — can be addressed over the next several decades. It is not appropriate to add these longer-term costs to projected operating deficits. Nor should the size and implications of these longer-term costs be exaggerated, as some recent discussions have done. Such mistakes can lead to inappropriate policy prescriptions.

Misunderstandings Regarding State Debt, Pensions, and Retiree Health Costs Create Unnecessary Alarm
Misconceptions Also Divert Attention from Needed Structural Reforms
Iris J. Lav and Elizabeth McNichol
January 20, 2011

In September 2009, the Washington's Blog pointed out the strategy of pouring money to lenders (i.e. banks) is decidedly inferior to helping out borrowers (i.e. businesses and consumers):

Following the advice of neoclassical economists, Obama has got not a bang but a whimper out of the many bucks he has thrown at the financial system.

In explaining his recovery program in April, President Obama noted that:

“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

What are the odds that this will happen, when they already owe more than they have ever owed in the history of America? ...

If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375%—more than twice the level that ushered in the Great Depression...

Steve Keen Out-Thinks Larry Summers
Saturday, September 19, 2009

Dave Dayen of does a great analysis of the payroll tax cut deal made by Team Obama, pointing out the ignored fact that the payroll tax replaces Making Work Pay:

Making Work Pay was a flat $400 for every worker, but the benefit phased out for workers making over roughly $95,000 a year. That meant it was targeted directly to people who would spend it and offered a pretty nice benefit. By contrast, the payroll tax cut applies to every worker in America, as Geithner says. Bill Gates will get a payroll tax cut. Alex Rodriguez will get a payroll tax cut. Paris Hilton will get a payroll tax cut. Because the payroll tax itself caps out currently at $106,800, the tax cut for Gates, Rodriguez, Hilton and anyone else making that number is $2,136. But that’s $2,136 more than they got under Making Work Pay. I’ll leave it toy you to determine whether that’s something they need, and something which will work to stimulate the economy.

By contrast, at the low end of the scale, the “benefit” from the payroll tax cut ends up worse than the benefit from Making Work Pay. Making Work Pay was a flat benefit of $400; with the payroll tax cut it’s a percentage of income. So any individual making under $20,000 a year or family making under $40,000 a year will see less of a benefit under the payroll tax cut. That comes out to roughly 50 million workers, or close to 1 in 3, using Geithner’s numbers.

So you have this crazy circumstance where the payroll tax cut ends up a worse deal for low-income workers, who would spend the money, and a better deal for high-income workers, who probably won’t.

It’s true that the payroll tax cut comes out to $110 billion in tax relief for 2011, roughly $50 million more than Making Work Pay on an annual basis. But it’s woefully targeted. And the phony use of “average tax cut” promulgated by Geithner belies the fact that it’s a worse deal for 1 in 3 workers.

And this critique is besides the concern the payroll tax cut may be a Trojan horse to destroy social security...

Sin of Omission by Geithner in Chest-Thumping over Tax Cut Deal
David Dayen
Saturday January 15, 2011

Matt Stoller, former Senior Policy Advisor for Alan Grayson, puts this in a context of the last 40 years at

Since the 1970s, Democratic elites have focused on breaking public sector unions and financializing the economy. Carter, not Reagan, started the defense build-up. Carter, not Reagan, lifted usury caps. Carter, not Reagan, first cut capital gains taxes. Clinton, not Bush, passed NAFTA. It isn’t the base of the Democratic party that did this, but then, voters in America have never had a lot of power because they are too disorganized. And there wasn’t a substantial grassroots movement to challenge this, either.

Obama continues this trend. It isn’t that he’s not fighting, he fights like hell for what he wants. He whipped incredibly aggressively for TARP, he has passed emergency war funding (breaking a campaign promise) several times, and nearly broke the arms of feckless liberals in the process. I mean, when Bernie Sanders did the filiBernie, Obama flirted with Bernie’s potential 2012 GOP challenger. Obama just wants policies that cement the status of a aristocratic class, with crumbs for everyone else (Republican elites disagree in that they hate anyone but elites getting crumbs). And he will fight for them.

There is simply no basis for arguing that Democratic elites are pursuing poor strategy anymore. They are achieving an enormous amount of leverage within the party. Consider the following. Despite Obama violating every core tenet of what might have been considered the Democratic Party platform, from supporting foreclosures to destroying civil liberties to torturing political dissidents to wrecking unions, Obama has no viable primary challenger. Moreover, no Senate Democratic incumbent lost a primary challenge in 2010, despite a horrible governing posture. Now THAT is a successful strategy, it minimized the losses of the Democratic elite and kept them firmly in control of the party. Thus, the political debate remains confined to what neoliberals want to talk about. It’s a good strategy, it’s just you are the one the strategy is being played on.

Understanding the Strategy of the Democratic Power Class
Matt Stoller
Thursday, January 13, 2011

Of course, criticisms of Carter and Clinton are completely deserved, but there are some major differences here. One, when Obama was elected, he was facing the worst economic crisis in the USA since the Great Depression, and thus a more left wing policy of helping the poor, the working class and the middle class not only was the correct economic remedy, it was a politically popular one winnable if Obama cared to fight for it. Two, the economic betrayals made by Obama put his economic policy decidedly to the right of Ronald Reagan, no matter what the GOP mouthpieces may scream, and has arguably radically shifted the frame of debate even further than George W. Bush could have ever dreamed. This was my major concern over Obama during the 2008 election, that he was backed by Wall Streeters who hoped his cult of narcissism would be substitute for a real New Deal II. As the battle to bankrupt states and destroy public unions heats up, it would be fair to say "Mission Accomplished"...

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