Treasury Secretary Candidates

As President-Elect Obama begins to piece together his administration, the most prominent post will likely be his choice for Treasury Secretary. Given the importance of the Secretary in shaping the course of the Economic Stabilization Act funds ($450 billion left if you are counting), we wanted to run down the most likely candidates:

Larry Summers

A leading Harvard economist, Summer won the John Bates Clark Medal for his research and served as Bill Clinton’s Secretary as well as heading up Harvard during a five year tenure. As a close Obama advisor well respected in academia and the financial sector, Summers is a strong candidate. Drawbacks include the “gender science” controversy that led him to resign from his administrative post at Harvard, as well as his close ties to hedge fund DE Shaw.

Timothy Geithner

Header of the New York Fed as well as Vice Chair of the Federal Open Market Committee which sets interest rates, Geitner has a background in international affairs, earning a graduate degree from SAIS and serving in a variety of positions from Under Secretary at the State Department to the Council of Foreign Relations and the IMF, as well as playing a crucial role in helping to orchestrate recent financial market interventions.

Paul Volker

Part of the “old guard”, Volker is seen as a stable pick who served as Federal Reserve Chairman in the 1980s under Presidents Carter and Reagan, where he helped “tame” inflation and earned respect on both sides of the aisle.

Robert Rubin

Currently a Director at Citigroup, Rubin served as Treasury Secretary in the Clinton Administration and is credited with helping shape “Rubinomics” policies that fostered economic growth and balanced deregulation.

Laura Tyson

A Berkeley economist, Tyson served as Chair of Bill Clinton’s Council of Academic Advisers as well as Dean of the London Business School and a member of the Council on Foreign Relations.

Jon Corzine

Currently serving as Governor of New Jersey, Corzine has a deep background in financial markets stemming from his work as a partner at Goldman Sachs.

Cristina’s Folly: A Billion Here, A Billion There

The Economist.com in an October 23, 2008 article entitled Cristina’s looking-glass world reports that Argentina President Cristina Fernández de Kirchner has a plan to nationalize private-pension funds that looks like a cunning, shortsighted effort to stave off another Argentina debt default. While Ms. Fernández claims that she is protecting “our workers and retirees,” many economists and opposition politicians fear that the government’s intention is to raid the pension funds to fill a widening national fiscal hole. The private-pension funds have assets of $30 billion and are the largest investors in Argentina’s depleted capital markets. The demise of the private-pension funds would make it far harder for local firms to raise money.

The concern is that Ms. Fernández is likely to give priority to the short-term claims of the public finances at the expense of impoverishing Argentines and their children in the future. Such a fear of government legally looting of funds designated for other purposes is a problem in the United States as well. For example, currently, Social Security tax surpluses exceed government expenditures on social security, allowing the government to legally loot the surpluses and spend them on non-Social-Security related priorities, thereby depleting Social Security assets, which will exacerbate the projected Social Security deficit in the coming years.

Another issue related to United States policy is Argentina’s agreeing to assume all liability (in the many billions) to citizen pensioners for their pensions. An analogous situation is where the United States through perhaps necessary but socialistic corporate welfare agreed in the Emergency Economic Stabilization Act of 2008 for a bailout of the U.S. financial system. The glib answer is that the U.S. is not economically unstable like Argentina and can therefore afford to take on unreasonable debt in bailouts and unnecessary war and not suffer any adverse credit standing. This road is the economics of the ostrich with its head in the sand. According to Matthew Benjamin, the $700 billion bailout will push the national debt to the highest level since 1954, to more than 70% of GDP. Every citizen’s share of this higher national debt is $37,000 per person.

The late Senator Everett Dirksen of Illinois used to say relative to government expenditure: “A billion here, a billion there, and pretty soon you’re talking real money.” The new spendthrift government motto, while profligately sliding down the bottomless pit of debt expansion with unnecessary war and with bailouts caused by government oversight incompetence is: “A trillion here, a trillion there, and pretty soon you’re talking real money.”

Political Forecasting With Tinted Lenses

The Wall Street Journal recently published an editorial by Mathew Kaminski entitled “The Axelrod Method,” extending a comparison of Barack Obama’s campaign methods with those of Massachusetts Governor Deval Patrick through the lens of their shared political adviser, David Axelrod. While this is an important shared connection, among others – both politicians are Harvard Law Graduates from single parent backgrounds with roots in the African American community – the WSJ piece has an implicit message that comes front and center toward its conclusion.

If (Patrick’s) experience in Boston is any guide, the ‘change’ President could be in for a rough ride…

Throughout the editorial, Kaminski seeks to preempt a potential Obama presidency by publicly airing his imagined prologue of the next four years. This is, in many ways, a reaction of the right to a paralell ‘misstep’ of forecasting on the center-left in America. We’re all too eager to prejudge a candidacy in the context of a political campaign that is becoming less competitive by the day.

In some ways this is a tit-for-tat partisan strategy that can be traced back to the ideological debates of the 18th century in the context of today’s straw man debate on financial governance. While this is not a new trend in American campaigns, it is vital that we actively participate in shaping the course of the next administration, whomever the winning candidate will be. We must do this through advocacy and private action, rather than seeking to forecast what is, at best, a stochastic process.

Economic Development: Lessons From Boston

Before I came to academia, I worked for eleven years in the field of economic development, a profession which is about many different things but, above all, about stealing some other city’s businesses with public money. By the time I was smart enough to form my own doubts about the job, I’d gotten good enough at it to be hired by the City of Fort Lauderdale to run their dedicated “Corporate Headquarters Recruitment” program–itself intended to exonerate the seven meanest, richest people in south Florida from standing accountable for their stupidly over-built downtown office market.

My first assignment (after one of the meanest and richest had gotten done refusing even to accept my business card, that is), was to spend a week in Boston–presumably stealing everything but the drapes. It was the first job because it was also supposed to have been the easiest one. What business its right mind would choose to stay in one of the most expensive markets in the world, both in terms of labor and tax burden, when new technologies enabled it to swap these out for beachside condos and blended drinks on Las Olas Boulevard? We’d even hired a marketing firm to pre-screen fifty or so contacts in Beantown who’d agreed at least in principal to consider the idea.
Know how many we got?

For five grueling days, I crisscrossed the greater Boston area, from Newton to Randolph and back to downtown, glad handing corporate real estate professionals in industries ranging from telemedicine to fiber optics to clutch plates, and not a single one of them expressed even the cursory interest that it would have taken to accede to an all-expenses-paid junket to South Florida. None of them. Zilch. Nada.

What could possibly have gone wrong? I mean to say, we were both cheaper and sunnier–the two things that Republicans have been telling us a business demands from its hosts, at least going back to Reagan and Stockman and the first ugly invocation of the words “supply side.” To hear them tell it, a chance to save half or more on both the labor and the tax-line items and sit on a beach after work every day to boot should have been the pitch that lobs itself. And yet there they were, their cars bogged in slushy parking lots, all but laughing me out of their offices.

It’s a single anecdote, of course, but it’s a powerful one, precisely for what it teaches us by counterexample about the fundamentally wrong-headed assumptions behind Republican economics. In their headlong rush to the sandy slopes of Mount Business-Friendly, Republicans have forgotten one of the most long-standing and crucial rules of Business: You get what you pay for.

True, costs are higher in Boston. But in Boston those higher costs are offset by the appeal of a significantly better-trained and more professionally minded workforce, having gotten that way through the benefit of some of the most well-funded educational infrastructure on all of planet earth, joined to its workplaces with some of the best physical infrastructure on earth, with most of both either directly paid for or at the very least subsidized, with public money.

That this story is such a cruelly perfect microcosm of America’s fading star on the global economic stage is a suggestion that hardly requires a rehabilitated economic developer to make: We’ve transformed the United States into the low-priced knockoff of the world, a place where leisure is vastly more important than ownership in one’s efforts, business decisions are based on instant gratification, college graduates can’t answer simple questions about the geography of their own country, and only those born into families of power and privilege are allowed to seek the highest office in the land without being dismissed as egocentric celebrities. And the world has taken notice, even if we haven’t, outsourcing all but its most menial tasks to places we’d never have dreamed of losing our jobs to, even ten years ago. And all the distressed mortgage buyouts on the planet aren’t going to fix that.

No, the way back to greatness for the United States is to start taking a few more lessons from the supposedly high-cost, anti-business climate up in Boston, and not through slashing taxes on those fortunate few who already pay some of the world’s lowest taxes for persons of their station. The way to fix this quieter, bigger mess of lost American industrial prominence is to redouble our investments in physical and social infrastructure.

And the way to start is to elect Barack Obama on November 4th to be our nation’s forty-forth President.

How did we get here?

NPR’s This American Life has delved into the economic world before. This summer’s show about the sub-prime mortgage crisis was one of its highest-rated episodes ever. Now, Alex Blumberg and Adam Davidson are back in an episode that explains the events on Wall St. of the last few weeks.

A lot of it has to do with financiers coming up with fancy new ways of managing debt and figuring out how to buy and sell debt so as to make a lot of money. Ben Bernanke and Henry Paulson were so adamant about the need for a bailout plan because the market for “short-term paper” — that is, short-term loans — froze. There was no one willing to lend money, and as a result, businesses that depend on short-term paper to power their cash flow (which is to say, most businesses) couldn’t get capital projects done. Some businesses, though, also use short-term paper to cover such mundane things as payroll. This freeze in the short-term paper market is what prompted Der Governator to ask Henry Paulson for $7 billion.

Just like Enron, it all boils down to the need for regulation. Time and time again, we have learned, if you leave financial mangers to their own devices, they will naturally come up with ways to find loopholes in the regulatory system that will allow them to make a lot of money — often at tremendous risk, if a link in the chain breaks, which was assumed not to be able to happen, but which did happen. And then some.

We’ll bail out you and all your friends; want to buy some wooden arrows?

While all of America was busy with Sarah Palin and Joe Biden, the House of Representatives just passed the Senate’s version of H.R. 1424, the Emergency Economic Stabilization Act of 2008.

But that’s not all they passed.

Lawmakers in Congress, when faced with a do-or-die piece of legislation, restrained themselves and limited the legislation only to those things that were absolutely necessary to solve the current economic crisis.

Just kidding! H.R. 1424 has more pork than a Texas barbeque festival. Everyone in Congress saw this bill as a free lunch and packed it full of all the earmarks they could ever want, since the bill needed to be passed and the picayune portions couldn’t be debated, for the sake of time. Thanks, Congress.

The bill contains three divisions. The first is for economic relief. Fair enough.

The second division is a completely different piece of legislation, the Energy Improvement and Extension Act of 2008. It deals with energy emissions and renewable energy credits. How is this related to economic recovery?

The third division is even better. It is the Tax Extenders and Alternative Minimum Tax Relief Act of 2008. This bill is something Democrats have wanted for a long time; namely, increasing the exemption from the AMT, which was designed to catch those people who were using tax loopholes to avoid paying taxes. Unfortunately, the AMT has also ensnared middle-income Americans in its net. Good idea to give those people exemptions, but what is this legislation doing here?

And by the way, Division C doesn’t just deal with the Alternative Minimum Tax. Here are some other fun tax incentives that have been rolled into this absolutely necessary legislation:

• § 202 of Title II extends the exemption of school supplies purchased by elementary and secondary school teachers until 2009.
• § 308 of Title III increases the limit of the rum excise tax to Puerto Rico and the Virgin Islands.
• § 309 of Title III extends an economic development tax credit to American Samoa until 2010.
• § 310 of Title III extends expensability of mine safety equipment until 2010.
• § 311 of Title III lengthens the tax credit of “domestic production activities” in Puerto Rico until 2010.
• § 314 of Title III lengthens an Indian employment tax credit until 2010.
• § 317 of Title III increases the cost recovery period of a “motorsports racing track facility” to 2009.
• § 502 of Title V extends tax exemption for “qualified film and television productions” to 2009.
• § 503 of Title V exempts from excise tax “certain wooden arrows designed for use by children.”

On The Small Matter of Government

Among rather a lot else, the first Presidential debate included a lengthy discussion of Senator McCain’s continued embrace of tax relief, specifically tax relief as a means of stimulating the economy. “Tax cuts are the best recipe,” said he, as though this were a declarative statement of fact and not an ominous homage to the tepid policy responses of two consecutive Presidents Bush. Still, the idea has traction with a substantial subset of the electorate (including many clever folks on the Editorial Staffs of the Wall Street Journal and the National Review), and thus, if for no other reason, it would seem topical to revisit the question of the proper role for government in a modern, mixed-industrial society like ours.

To begin with, few professional economists are prepared to argue the Ayn-Rand-extremist view that all modes of government intervention in the behaviors of markets are inherently pathological. Even Gregory Mankiw, the economic adviser who many say was forced to resign from the present Administration in disrepute after touting the virtues of outsourcing, argues in the first chapter of his own college-level economics textbook that “governments sometimes improve market outcomes.”

All market transactions include both private and social benefits and both private and social costs, and while the market does an excellent job of appropriately valuing the private aspects of both sides of this ledger, the social consequences pass through its membrane completely unaccounted. When the divergence is big enough (say, for example, when a hog rendering plant wants to open across the street from an orphanage), the government steps in to force internalization of the external benefits and costs. I usually tell my economics students that the next time someone tries to tell them how much better off the markets would be without a government, they you ask that person if they think football would be a better game without referees.

As some people already know, Senator McCain has been no friend to this permanent role for government during his tenure in Washington, tireless as he has been in his efforts to repeal government oversight authorities and deregulate entire industries during his various episodes as Chair and Ranking Member of the Senate Commerce Committee.

But even if Mr. McCain were to suddenly reverse his deregulatory course both in action, as well as in words, this belated getting-of-religion on the matter would have precious little impact on the tax-relief centerpiece of his economic plan, precisely because oversight is an acyclical role for government, while Mr. McCain is proposing to use tax-relief as a counter-cyclical measure to encourage renewed spending in the near term. There isn’t one, but two roles for government in our modern mixed-industrial economy.

The good news for McCain is that the verdict on conservative stabilization policy is decidedly less straightforward. Few can argue in good faith that Ronald Reagan’s approach to the matter was anything other than unambiguously beneficial for the time and circumstances in which he served (and never mind the inflation-fighting contribution of Paul Volcker at The Fed, over whom Mr. Reagan had no jurisdiction). The tax and regulatory burden of the late 1970s was an added disincentive to business investment at precisely a time when disincentives to business investment could be accidentally stepped in if a person weren’t careful when walking down the sidewalk.

But something else was true in the late 1970s, that isn’t true now: the government had just concluded the thick end of three decades spent investing a substantial sum of money on job-creation and human-capital development, much of it with semi-permanent effect on infrastructure.

Travelers to the developing world are in the habit of noticing with jarring forcefulness not the host country’s inability to embrace free enterprise–free enterprise is alive and well in places like Bangkok and Lagos and Port Au Prince–but rather the stunning absence of our comfortably taken-for-granted infrastructure: You can’t take a train, you can’t take a bus, you can’t drink the water, and if you did, there’s no health care. These are the things that suffer when a candidate for the Presidency pledges to slash the nation’s already gutted tax code, and these are the things that show up in the national consciousness as exported jobs, outbreaks of T.B, and collapsed bridges in the host cities of its National Political Conventions.

If it is true that this second role for government is fluid with the changing times, as I would seem to have argued, then it is equally true that this is hardly the time for us to start paring down our investments in education, transport, and health care. Just as the American business owner needed to know that his return on investment wouldn’t be taken from him in 1979 before deciding to build an addition on his factory, so today he must know that the factory will be reachable by his employees, that they will show up healthy and trained and ready to work, and that the products he produces will have a vigorous market full of prosperous families with  roofs over their heads.

In the final analysis, Mr. McCain is allowed to believe that these things will somehow arise as indirect consequences of his plan to hamstring the government’s ability to provide them, but he’s not allowed to claim the principles of modern market economics as his justification. Because this time around, they are with the other guy.

Ah, the Sweet Smell of Corruption

Republicans hate regulation, but they love corporate welfare, unaccountability, and opacity. How best to give big businesses a bunch of money while at the same time not solving any real problems and preventing anyone from questioning your actions? A $700 billion blank-check bailout request, that’s how!

Sure, that covers corporate welfare, and it definitely covers hatred of regulation, because, after all, a whole bunch of money isn’t going to fix the problems that caused this mess to begin with! But will this proposed legislation be outside the realm of any possible oversight? 

Wait for it … wait for it … yes! As it turns out, the legislation contains this proviso: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” So not only would Congress be handing Treasury a check for $700 billion, to do with what it will, but Congress will simultaneously be surrendering any oversight — at all, in perpetuity, throughout the universe — over the money or the decisions made by Henry Paulson.

That’s unaccountability I can believe in! I was concerned for a second there that the Republicans would leave the door open for someone to question Paulson’s decisions in the future. After all, the best way to go about resolving crises is to give people unquestionable emergency powers.

You’d better believe no one will be reporting on this aspect of the legislation. Instead, they will be talking about the “compromise” that consists of George Bush telling Democrats what to do, and Democrats eagerly complying.

Citizen Perks: 80% ownership in AIG

The Federal Reserve extended an emergency $85 billion funding line to global Insurance company AIG in return for an 80% equity stake in the company, making for a nice symmetry of otherwise frightening numbers. Faced with the prospect of a probable bankruptcy filing without intervention, the Fed went against precedent in its most recent bailout.  Without the agreement, the failure of AIG, which holds insurance policies in nearly every area, would have sent unthinkable shockwaves through the world economy. Just when you thought the benefits of American citizenship were limited to tax burdens, peacetime security and voting rights, you are now a certified owner of 4/5 of a global insurance comglomerate…

The Economy, Campaign Ads, and Undecided Voters

Senator McCain admits today that it’s a bad economy.

Of course, he’s a day late and a penny short! pardon the pun

As predicted here yesterday, Obama had an ad up quickly on yesterday’s remarks:

Generally, I haven’t been all that impressed with Obama’s ads. They been too detailed and missing a single theme to get at undecided voters. Let’s face it, to be truly undecided at this point you probably don’t feel strongly enough about any of the issues to care much about detailed policy prescriptions. Most undecided voters are voting for the person and this ad does a good job at making people be afraid of John McCain. If both are successful with their ads, McCain will make these voters be afraid of Obama on the war on terror and Obama will make these voters be afraid of McCain on the economy. In 2008, unlike 2004, that paradigm would likely tilt in Obama’s favor.

Ultimately, Obama must make ads more like this one that was made by an independent group (but yet to be aired):

However, the most recent ad is a good start. Definitely closer to the “ideal” ad than some of the ads he’s been running recently.

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