So much for Congress listening to the President....

From "The Hill" (http://thehill.com) today:

Leading Democrats on Wednesday appeared to brush aside President Obama’s suggestion that they sacrifice earmarks in the federal budget, arguing Congress knows better than “faceless bureaucrats” how to spend taxpayer money.

The pushback came just hours after the president, during his address to a joint session of Congress, implored lawmakers to help put the nation back on a path to fiscal health.

Despite Obama’s request, Senate Majority Leader Harry Reid (D-Nev.) and House Appropriations Committee Chairman David Obey (D-Wis.) on Wednesday stood by thousands of earmarks in the $410 billion omnibus spending bill, which the House passed Wednesday and is expected to be debated next by senators.

So much for President Obama controlling Congress.

Recommended - Like Medicare? Then Taxes Must Rise.

I recommend David Leonhardt's article in today's New York Times entitled Like Medicare? Then Taxes Must Rise. As he points out, there is no free lunch. Americans like having a strong military, they like having Medicare, they like wide highways and good bridges, they like having all sorts of government programs that cost money. The only way to sustain all those programs in the long term is to tax enough to pay for them, which we have not been doing in recent decades. Instead we have been increasing our national debt, but there is a limit to how far the world will fund our national debt, and that limit is set by how likely the world thinks we are to be able to pay it back eventually.

President Obama’s Speech

Barak Obama demonstrated in his campaign that he was a brilliant speaker, so it was no surprise that his speech last night was wonderful, witty, forceful, and full of straight talk, unlike the clichés and platitudes in most presidential speeches I have heard in recent administrations. I loved it. And in fact, I agreed with him on almost everything he proposed. The problem is, he can promise whatever he likes – what he can actually deliver depends heavily on Congress.

He promised frugal spending, and he promised during his campaign to put an end to earmarks and pork. Yet the stimulus bill passed with lots of earmarks and pork in it, and the $410 billion dollar House spending bill just passed is stuffed with yet more earmarks and pork. Will he veto it because of that? I doubt it.

He promised to tame the deficit, but as the $410 billion dollar House spending bill shows, the Democrats in Congress are hell-bent on funding every liberal program they have had on their wish list for the past eight years, with no attempt at all to figure how to pay for it.

He promised that not a dime of the money going to banks would go to the executives who got us into this trouble. A nice promise, but how does he propose to enforce it, especially as many of these bonuses and salaries are in enforceable contractual agreements?

He promised that none of the housing bailout money would go to homeowners who were speculators or who deliberately bought more house than they could afford. A nice promise, but how will he enforce it? How can anyone prove that a homeowner bought on speculation, or knowingly bought more house than they could afford?

He promised to improve education. A nice promise, but the quality of education is almost entirely controlled by state and local school boards, not by the Federal government. The most recent attempt by the Federal government to affect the quality of education resulted in the absurd “No Child Left Behind” program, which has been an unmitigated disaster in most places.

He appealed again for bipartisan action, but the Democratic Congressional majority show no inclination to be the slightest bit bipartisan, and the Republicans seem bent on simply opposing everything on principle. So again, a nice promise, but how does he propose to change the behavior of Congress?

I loved the speech, I loved his vision for the country, and I agree with almost everything he said. But I’m left wondering how he intents to bend Congress to this plan. They will applaud his words in public, but the Congressional ideologues on both the right and the left show no signs of accommodating to any of this, and I have yet to see any signs that he has tried to impose his will on Congress, and especially on the leaders of his own party, on any matter.

A great speech. Only time will tell if it is more than hopeful words.

Recommended - The Big Test

I highly recommend David Brook's Op Ed piece The Big Test in today's New York Times. I think he has expressed the fundamental worry that many of us have, which is that even though we admire President Obama's clear, rational thinking, and the brilliance of the experts he has assembled around him, we wonder if anyone really knows how to handle this "perfect storm" of problems, and if we are perhaps just digging ourselves into a deeper hole in our urgent attempts to get out.

So how will this play out?

Everyone else seems to be prognosticating these days, predicting X million jobs will be created or the Dow will recover to Y by summer or….. so why don’t I try as well?

Here is my read of our situation so far, subject of course to further unexpected events in the country or the world:

It seems likely that the just-passed stimulus package will have little or no perceptible effect on the economy in the next couple of years. The tax breaks and givebacks are probably too small to really make much of a difference to consumer confidence, and the spending will probably not be as effective as hoped. My experience is that when government, either directly or through a contractor, does something it costs 2-3 times as much for the same effect as if a private company, subject to shareholder restraints and competitive market pressures, does the same thing. Given the haste with which this package was assembled, and the mismanagement and pandering to special interests at both the Federal and state level and even the corruption that will inevitably ensue, a multiplier of 4-5 might be more realistic for these projects.

I would expect the administration to come back to Congress several more times over the next two years for various bailouts and extensions of the TARP and auto company bailouts and perhaps even another stimulus package or two. Congress, having found it can spend money without limit in this crisis environment, will happily oblige, though probably without significant Republican support. Expect Congress to continue to pack such bills with as many long-term liberal agenda items and as much local district pork as they can. The total of bailouts and stimulus packages and loan guarantees might well reach $5-6 trillion over the next two years, all added to the Federal debt.

The Republican alternative to have a payroll tax holiday and perhaps cut corporate taxes significantly might or might not have worked better. We will never know, because there is no prospect that they will get a chance to try it.

It seems likely that President Obama’s hopes for bipartisan support will be frustrated, and he may in fact have privately never expected it in any case. Congress runs on raw power. When parties have a majority, they tend to just ignore the minority party and ram through their own ideological programs. The Republicans did it when they last had a majority, and the Democrats are doing it now, and that behavior is not likely to change in either party. Besides, there are too few moderate Republicans left in Congress to appeal to.

Since the massive spending and bailouts will probably not solve the major financial problems within the next two years, I would expect the Republicans to make that a major campaign issue in the off-year elections, and perhaps win enough seats to eliminate the Democratic majority but not gain a working majority themselves, which will leave Congress in a stalemate – and that might be better.

Voters have short memories. Right now President Obama has inherited a Republican recession and Republican wars in Iraq and Afghanistan. In two years, especially if things haven’t improved, the recession will be a Democratic recession. In two years, if we are still in Iraq and/or Afghanistan, these will be President Obama’s wars.

If the economy is still in the dumps in four years, the Republicans may well recapture the White House, but at the moment there seems little prospect that they will be any more effective at solving the problems, given the far-right ideological flavor the party has taken on in recent years. They have bet heavily on unanimously opposing the stimulus package. If the spending doesn’t work, they will look good and liberal Keynesian fiscal policy will be in permanent disrepute. If the Democratic stimulus plan does appear to work, Republicans may have thoroughly marginalized their party and may well remain out of power for decades.

Given that the administration staffed its financial experts largely from Wall Street, there seems little chance that it will be able to summon the courage to take the drastic steps that are needed to identify the banks that are really in fact insolvent, and to restructure them through nationalization or bankruptcy. That means the credit crunch will likely persist for some years yet.

Given that this recession is affecting the entire world, and especially those nations like China that have been major purchasers of Treasury notes, it seems likely that the Treasury will have increasing difficulty rolling over the Federal debt, and that this will cause the administration yet more problems in a year or two.

The global slowdown is also likely to provoke some dramatic changes in the world. Nations which have been riding high on US consumption will experience dramatic slowdowns that will sometimes incite serious political instability. I would expect a number of nationalistic, radical and even anti-American governments to be voted in as a result. At the same time some of the nations that cause us concern these days may implode – Russia and China among them. China is already under very heavy internal stress as millions in their costal regions (where Western trade is concentrated) are now suddenly out of work.

There seems to me little prospect that President Obama will be able to do anything effective to address either the Social Security or the Medicare and Medicaid funding issues. Seniors and retirees are a major voting block, and they will vigorously oppose any reduction in benefits, especially during these hard times, and liberals will support them. At the same time, it will be extraordinarily hard to argue successfully for raising the taxes that support these programs during a recession, and conservative would fight such a move tooth and nail. President Obama floated the idea last week of reforming Social Security, and was promptly shot down by his own party, Nancy Pelosi and Harry Reid foremost among them. I expect much the same reaction from the his own party if he tries to reform Medicare and Medicaid. The conservative Republicans would probably balk too, but it will never get to that – the Democratic left will kill any such move at once. Result – no action and the long-term threat to our national finances will continue to grow worse.

If the history of the Great Depression is a guide, markets and housing prices will eventually recover, though not all the way to their “bubble” highs just before the crash, and will resume their steady climb of 6-8% per year. But misguided Washington policy, especially delay in dealing realistically with the insolvent banks, may delay this recovery for some years.

So there are some of my own prognostications. It will be interesting to look back in a year or so and see how accurate I was…..

Recommended - The Economic Crisis and the Fiscal Crisis: 2009 and Beyond

I recommend the new white paper The Economic Crisis and the Fiscal Crisis: 2009 and Beyond, just issued by the Brookings Institute. The authors are William G. Gale, Vice President and Director, Economic Studies at the Bookings Institute, and Alan J. Auerbach, University of California, Berkeley, Robert D. Burch Professor of Economics and Law, and Director of the Robert D. Burch Center for Tax Policy and Public Finance.

Recommended – Real Reaganites Raise Taxes

I recommend the article Real Reaganites Raise Taxes by Jonathan Rauch in the National Journal magazine. He makes a largely non-partison argument that conservatives need to rethink their current position on taxes. In any case, the current no-more-taxes position seems to me to be based more on knee-jerk ideology than on careful examination of the evidence. Given the massive Federal debt we have already built up (under Republicans as well as Democrats) someday taxes are going to have to go up to pay it back. Worth reading and thinking about.

Paying the piper

The nation’s economy is certainly in a train wreck right now, and the Obama administration is trying all sorts of things to pull the economy out of its current slump.

If you are a bank executive who made unwise business decisions, the government is going to inject new capital into your bank, take the bad loans off your hands, and limit your pay to only $500,000 a year plus bonus shares you can’t sell until you pay the government back. Not too shabby!

If you are a US auto company executive that couldn’t see the handwriting on the wall years ago and are now facing bankruptcy, the government will give you billions of dollars to keep you going, and limit your pay to only $500,000 a year plus bonus shares you can’t sell until you pay the government back. Though of course you may have to sell off a few corporate jets. Not too shabby!

If you are a homeowner who unwisely bought more house than you could afford, or unwisely accepted one of those teaser-rate adjustable mortgages that is killing you now, the government is going to use $75 billion dollars to help folks like you by lowering your payments and perhaps even reducing the principle on your loan. Not too shabby!

If you are a member of the House or Senate, that group of politicians in both parties who not only let this debacle develop, but have even helped it along in the past with unwise decisions, your job and your perks and your benefits are all safe, as is your future high-paying job among the lobbyists or in corporate life. Not too shabby!

If, on the other hand, you are just an ordinary worker or perhaps a retiree whose savings are now worth half what they were worth a year ago, and who is paying your mortgage because you only took on what you could afford, the government may possibly give you $400, and some of the bailout money may possibly eventually trickle down and help you keep your job if you have one.

If you are a small business being driven out of business because of this recession, the government isn’t going to give you anything, because you aren’t “too big to allow to fail”. Only big banks and big companies, with good connections in Washington, get the bailouts. Unless, of course, you are a construction company with good connections with whomever in your state is going to dole out the billions in infrastructure stimulus money.

But the government is sure going to take something from you someday, because there is no free lunch and someday it has to pay back all those trillions of dollars that Congress is passing out so freely, and the only place to get that money is from taxes.

I understand the urgency to get the economy going again, but it looks to me like most of the help is going to the people who caused this mess in the first place, not to the rest of us. Am I too cynical here?

Capping executive pay

One of the many, many little goodies hidden in the massive stimulus package that has just been passed is a provision that sharply limits executive pay for companies accepting bailout money, limits much more draconian than those imposed by the Treasury department last week. The provision prohibits cash bonuses for the five senior officers and the highest-paid 20 executives in a company, and limits any bonuses to no more than 1/3 of their base pay and to restricted stock that cannot be cashed out until the government has been fully repaid.

There has been a lot of talk, especially in the financial world, about how this will cause a brain drain of talent from these companies. But of course, if a company was so poorly managed that it had to accept bailout money to stay solvent, then one has to wonder if the management was so brilliant that it would be a loss if they left!

More to the point, one of the problems with America in recent decades is that so many of our best and brightest have been attracted by the money to “non-productive” fields like corporate law or Wall Street, instead of to innovation, research, science, engineering, the arts or productive entrepreneurial activities.. The “non-productive” label will, of course, make lawyers and financial types bristle and defend their occupations, but in point of fact such fields generally produce little of tangible use in the world, besides paper wealth for practitioners and their clients.

Think about it. A brilliant fund manager may figure out a trading scheme that brings his clients a few percent more gain in their holdings. A brilliant financial expert may create yet another complex derivative that his company can market at a profit. And a brilliant corporate lawyer may craft a clever deal that allows his client to buy out a rival at a better price. But in the end, what have their activities contributed to the real wealth or knowledge or productivity of the nation or the world?

A sharp diminution in the salaries available in these fields might thus redirect many of our best and brightest back into the more productive occupations that originally made this nation great. And that might not be a bad thing.

When will the stimulus money be spent?

The object of the recently-passed stimulus bill was supposed to be to get money into the economy as soon as possible, especially in the next few months. So when will this money be spent? The Washington Post put together an interesting graphic, which can be accessed here. (Click on it to make it larger and more readable) It shows that the peak spending year will be 2010, not in the next few months, with much of the spending tailing out into 2014 and beyond. So much for good intentions.

Recommended - Obama's antithesis to recovery

Ralph Reiland's article Obama's antithesis to recovery makes some interesting points worth pondering. As he notes, President Reagan came into office with much worse economic numbers - the 1980-82 recession he inherited from President Carter - and turned it around in his eight years in office partly with tax cuts.

Worth thinking about.

Near-term predictions

Here are a couple of near-term predictions. Let's see how well I do.

The Senate Democrats vowed they would not seat anyone appointed by discredited Illinois Gov. Rod Blagojevich. Then Blagojevich appointed Burris, who with his supporters played the race card, and the Senate folded and seated him. Now it turns out he purjered himself under oath to the Senate panel deciding whether to seat him or not, a "voluntary" admission he made only after phone records became available which showed he had in fact talked with Blagojevich's staff several times. I predict there will be a little public huffing and puffing, he will claim it was all an innocent oversight on his part and play the race card again, and the Senate Democrats will fold again and let him keep his seat. After all, what is a little perjury under oath among fellow Senators, especially if he is a member of your own party?

The automakers are required to appear before Congress tomorrow to show that they have a viable business plan for the future, otherwise they have to return the billions that Congress gave them a few months ago. I predict the plans they produce will not be the least bit convincing, but Congress will pretend they are and give them more billons. After all, we are bailing out insolvent banks that have no viable recovery plan and no hope of repaying their loans - why not auto companies?

I also predict the CEOs will not fly in on their private jets -- they will let their chauffeurs drive them to Washington in their limousines.

Did the New Deal really help?

Today’s liberal politicians seem to be fond of harking back to Roosevelt’s New Deal as a model for the massive spending programs they are promoting today. Perhaps they just don’t know their history, or perhaps they do know their history but also know that the American public mostly doesn’t know its history and lives with comforting, if erroneous, myths about how effective the New Deal was.

Perhaps they don’t recall the 1939 words of Henry Morgenthau, Roosevelt’s Treasury Secretary. He said “We have tried spending money . . . it does not work . . . we have just as much unemployment . . . and an enormous debt to boot.” Perhaps they don’t recall that in 1939 the US unemployment rate was still 19%, despite all the New Deal programs, and that what finally reduced unemployment by 7 million people was putting 8 million people into the army to fight WW II.

George Santayana said it all: ”those who cannot remember the past are doomed to repeat it.” Myths are dangerous if you build policy around them.

Recommended - Obama's Rhetoric is the Real "Catastrophe"

I recommend the article in Friday's Wall Street Journal Obama's Rhetoric Is the Real 'Catastrophe'. The author points out that despite President Obama's constant comparison of our situation to the Great Depression, first to support his campaign and more recently to justify the expensive bailouts and stimulus package, things are not nearly as bad. They are certainly bad, but thus far the figures are much more in line with the 1981-82 recession than the Great Depression.

But his constant harping on this message is not helping public confidence, which is key to our recovery.

Recommended - Federal Obligations exceed world GDP

Here is another rather startling article to ponder - Federal obligations exceed world GDP: Does $65.5 trillion terrify anyone yet?

The banks aren't the only ones cooking their books to look solvent - the U.S. government has been doing it for a long time under both political parties, and the chickens may be coming home to roost.

Recommended - Beyond the Age of Leverage

I recommend Niell Ferguson's article in today's Huffington Post, Beyond the Age of Leverage: Alternative Cures for the Global Financial Crisis. He makes a persuasive case that our political leaders are too wedded to John Maynard Keynes's policies, even though there is scant historical evidence that they work in the real world.

Will our society recover from this?

Jared Diamond wrote a book in 2005 called Collapse: How Societies Choose to Fail or Succeed, in which he examined a number of societies under stress and tried to figure out why some survived and some didn’t. He was interviewed briefly last night on a TV show, and was asked what he thought would determine if a society weathered a great crisis or not.

His answer, I thought, was quite provocative. He said he thought the single biggest factor determining whether a society weathered a crisis or not was whether the ruling elite, the wealthy and the leaders of the society – those who made the decisions -- felt they were impacted by the crisis or not. He pointed out, for example, that the Dutch take good care of their dikes because if they fail, the rich and the political leaders will be drowned just as quickly as the rest of the population, so they have a strong incentive to do the right things.

If, on the other hand, the ruling elites and the wealthy feel that they won’t be much affected by the crisis, then they will not be motivated to make the hard choices and take the difficult, expensive, or unpopular steps that are really needed. He pointed to New Orleans as a classic example. The wealthy and the community leaders all live on high ground, and so were not motivated to be sure the levees were really adequate.

Now think about our present crisis. Are the ruling elites, the wealthy and the politicians and the CEOs really at risk here? Members of Congress aren’t going to lose their jobs or their perks, at least not soon, and if they do finally lose an election, most can go down to K Street and get a lobbying job at twice their current pay and still keep their generous Congressional pensions. CEOs, even when they lose their jobs, seem to leave with multi-million dollar payoffs and bonuses, so they may be unemployed as they sit on their yachts, but they are hardly hurting. The truly wealthy, except perhaps for those who invested with Bernard Madoff, are still wealthy, if a little less so on paper.

Looking at the way the recent stimulus package was crafted, and at the administration’s unwillingness to take the hard steps with the insolvent banks, I don’t get the sense that the politicians involved feel any real personal urgency about this crisis – the sort of urgency they might feel if their own home was foreclosed or their own paycheck stopped or their own savings disappeared. Yes, they trot out all the right clichés before the microphones, but in fact their actions look like partisan Washington politics as usual, not like true urgency about the crisis.

Recommended - Nationalize Insolvent Banks

I recommend Nouriel Roubini's new article in Forbes, "Nationalize Insolvent Banks". Roubini is the economist who accurately predicted the current fiscal crisis several years in advance and earned the name "Dr. Doom" as a result, until he was proven right!

Clearly the Obama administration still can't bring themselves to take the hard steps with the banks - they still want to keep trying to bail them out. Perhaps after we have dumped another $2 or $3 trillion into them, someone will catch on that this isn't going to work.

Who’s right?

It would be nice to think that one political party or the other was in the right in this fiscal crisis, and no doubt “true believers” among liberals and conservatives are convinced they are the ones that are in the right. But in fact the whole political establishment – both liberal and conservative – bears full responsibility for the mess.

The conservative Republicans had the White House for eight years, during which they launched two expensive wars and vastly expanded the government while cutting taxes, thereby ballooning the federal debt. And to this day they are arguing for more tax cuts to stimulate the economy, despite clear evidence that the 2008 “stimulus” tax rebates had no perceptible effect on the economy. Conservative Republicans also championed the unfettered, under-regulated ”free market” that imploded so spectacularly this winter – on the watch of a conservative Republican president. So despite the rantings of Rush Limbaugh, the conservative Republicans don’t have a lot of credibility in this argument.

The liberal Democrats have had control of Congress for two years now, with little to show for it. Despite trying to remake their image as fiscally responsible, it was Democrats, during the Carter years, who first created the subprime mortgages as a way to push a liberal agenda of making home ownership more widely available - even, apparently, to people who couldn’t afford the mortgages. Congress at that time passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs" of "low-income, minority, and distressed neighborhoods."

And it was Democrats (Democratic Rep. Barney Frank of Massachusetts, the Financial Services Committee chairman, foremost among them) who turned back a Republican attempt in 2003 to increase the oversight of Freddie Mac and Fannie Mae. For those liberals with short memories, here are Representative Frank’s exact words at the time:

"These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

And now it is Democrats in the House and the Senate who have been trying to lumber the stimulus package with as many other expensive goodies as they can cram into it, with the result that a simple, clean stimulus bill that ought to have widespread bipartisan support will pass, if it passes at all, by the narrowest of margins.

So in truth neither the liberals nor the conservatives come out looking good in this mess. And that isn’t really surprising, because despite obvious ideological differences, Washington politicians on both side of the aisle are really much the same, players in a large-scale power, influence and money game.

President Obama came to power promising to change the way Washington works. Despite his best intentions and as much as we would like to see him succeed, it will be a hard promise to keep.

Recommended - Obama the pragmatist idealist

Another good Op Ed this morning, from a somewhat different point of view, is Doyle McManus' article in the Los Angeles Times "Obama the pragmatic idealist".

Recommended - Three weeks in and no one has Obama's back

I recommend Joan Vennochi’s piece “Three weeks in, and no one has Obama's back” in today’s Boston Globe. I think it summarizes fairly President Obama’s current problems.

Obama as a candidate was highly appealing, and I voted enthusiastically for him. He was smart, articulate, pragmatic, and offered a promise of change in Washington. But the nagging worry was always that despite his high promises he was too inexperienced to swim with the sharks in Washington. Washington is a tough place with lots of big, powerful sharks, and a lot of his opponents in both parties have been around for decades and know how to work the system. The battle over the stimulus package, in which Congress essentially ignored him and did their own pork-barrel thing just as they always have done, is not a promising start to his administration.

If he can’t regain control of the more extreme liberal elements in his own party, I think there is a fair chance he will be a one-term president. That would be a shame, because on other fronts he has done some smart things, and the team he has assembled looks promising. But this nation is almost 50% conservative (and many are not Republican), and if he lets his administration drift too far from the center, he will be in trouble, especially if the trillions of dollars dumped into stimulus and bailouts don’t have much visible effect on the economy within a year or two.

The reality about Federal debt

The US Federal debt currently (Feb 1, 2009) stands at just under 11 trillion dollars, or about $35,000 for every man, woman and child in the country. That is close to the entire domestic output of the US in a year. The Treasury funds this debt by selling US Treasury notes with terms ranging from 2 to 10 years. When these notes come due, the Treasury pays them off by selling new notes – this is called “rolling over the debt”. This system works so long as enough other nations have enough excess money to invest, and are willing to invest it in our Treasury notes because the interest rate is attractive and/or they feel the notes are safer than alternative investments.

Thus far the trillions of dollars spent on the wars in Iraq and Afghanistan, the trillion or so already pumped into or promised to Wall Street and the auto companies, and the trillion or so being proposed for a stimulus package have not been funded by simply printing money, which would rapidly lead to inflation. They have been funded by assuming more national debt, by selling more Treasury notes to nations like China. This will work so long as there is a market for the Treasury notes at a reasonable rate of interest. Here is the history of the US Federal debt for the past half-century:


One might note that in recent times “tax and spend” Democratic presidents have lowered the debt, while under supposedly fiscally conservative “small government” Republicans the debt has ballooned.

Now Garret Hardin wrote a book in 1986 called “Filters Against Folly: How to Survive Despite Ecologists, Economists, and the Merely Eloquent”. In it he suggested that for any proposal one ought to ask three questions: (1) are the ideas reasonable, (2) do the numbers work out, and (3) and then what? For the current bail-out and stimulus proposals, (1) the ideas sound reasonable – inject money to save jobs and businesses. (2) No one can really tell if the numbers work out, because no one really knows how this will play out. But (3) the “and then what” question is worrisome.

What happens if other nations stop buying US Treasury notes, and we can no longer roll over this massive debt? They might stop buying them because they too are having economic problems and don’t have spare cash to invest. They might stop buying them because they begin to suspect that someday the US won’t be able to pay back the loans, and they don’t want to lose their investment. Either way, we are suddenly in a world of hurt.

• The government could of course simply default on the debt – say we won’t pay it. That would ensure that no one ever loaned the U.S. a dime again!

• We could go to work and pay it back from taxes – that means all of us, every man, woman and child of whatever age – need to pony up an average of $35,000 in taxes over a few years, either as direct income taxes, or hidden in the prices of goods and services to pay the corporate taxes.

• The government could print more money, but that would rapidly lead to high inflation, and by the way would discourage buyers of Treasury notes (because at the end of the term they would get paid back in money worth much less).

• We could offer higher and higher interest on the loans to attract reluctant buyers, but of course that just pumps up our debt some more. (Last year we spent about $138 billion on interest payments on the Federal debt.)

None of these options is very attractive. It’s a worrisome long-term prospect. Yet Congress is hell-bent on increasing the debt by trillions more, under the guise of various stimulus programs. And no doubt they will add yet more trillions later in the year with all the new programs that President Obama promised and/or that the Democratic Congressional majority wants to push.

Clearly, while there is a short-term crisis to be addressed, someone had better be thinking about the longer-term consequences. Someone had better be asking Garret Hardin’s “and then what” questions.

Recommended - Was Keynes Right?

I recommend the evenhanded article by Michael Hirsh, "Was Keynes Right? We're about to plunk down nearly $1 trillion on a bet that he was. But no one's sure." It reflects the uncertainty among even the experts about this massive stimulus plan. I tend to agree with his assessment that we have to try the experiment, but we had better be clear that is it an experiment and it may well not work.

Personally, I think the odds would be better if we would just bite the bullet and do the painful things we need to do to the banks. Japan tried this stimulus approach in the early 1990's, and it didn't do much for almost a decade until they finally dealt with the banks instead of propping them up.

Would it be a disaster if the stimulus package didn’t pass?

All the politicians on both sides of the aisle, from the Presidents (both Bush and Obama) down, have been telling us that we absolutely need a big stimulus package immediately, and that failure of Congress to produce one would be a disaster. I’m not so sure.

First, we are in uncharted territory here. The Federal Reserve has a lot of experience managing economic dips by lowering interest rates, but they have already pulled that lever as far as they can – interbank overnight rates are effectively at 0% now. The world has little or no experience trying to manage a large economy by massive short-term spending stimulus. It may work; it may not work. No one (including the experts) really knows, and Congress is acting mainly because they feel the need to be seen by the voters to be doing something.

Second, if it doesn’t work, we have taken on a truly massive Federal debt – trillions of dollars of added debt – to no purpose. Eventually (perhaps sooner than we like) we will either have to pay it back or start printing money and risking soaring inflation. In fact, if it doesn’t work, the demands to pay it back may come even sooner, when nations like China get spooked and decide it is no longer so safe to buy US Treasury bonds.

Third, it is not likely to work unless the spending is tightly focused on (a) near-term items that (b) drive both employment and demand across broad sectors of the economy. The current stimulus package, in either the House or the Senate version, does not appear to do that.

It would certainly seem reasonable to try a massive stimulus package that (unlike the current proposals) was really shaped to have the best chance of being effective. But if what we are going to get is a massively expensive bill that is not likely to be effective, we would do better to have no bill at all and not assume the massive debt burden. And there seems little prospect of getting Congress, on either side of the aisle, to abandon their parochial interests and ideological stands and focus of shaping a truly effective package.

So failure to pass a stimulus bill may not be the end of the world. If it is going to be both ineffective and massively expensive, not passing it may in fact be the better of two bad options.

President Obama’s real opposition

It has been increasingly clear over the past few weeks that President Obama faces some serious opposition, not from the Republicans as one might expect, but from his own party, lead by House Speaker Pelosi. Of course the conservative Republicans have their own agenda, even in the minority, and they have been pushing that agenda. But the really serious battle has been between the White House and the liberal Democrats, led by Speaker Pelosi. President Obama would like an effective stimulus package NOW, preferably with bipartisan support so that he has some political cover if it turns out not to work – a very reasonable position. Speaker Pelosi would like a bill that funds a long wish-list of long-term liberal programs, and as she showed last week is quite happy to ignore the President and completely exclude the minority party in shaping it.

So the test will be to see whether President Obama is willing, or able, to stand up to his own party in Congress and force them to reshape the bill to provide the short-term stimulus we really need, without lumbering it with all the long-term liberal programs Speaker Pelosi wants to push.

This will be an interesting time.

If you would like to weigh in on this discussion, send your comment to the White House at http://www.whitehouse.gov/contact/, and/or contact your representatives in Congress.

Effective tax cuts

I’ve commented recently that the Republican drive to put tax cuts into the stimulus plan is not likely to be any more effective this time than it was with the Bush “stimulus” tax rebate of last year. $15 or $20 a week less tax withholding probably will have no effect at all on most people. Even a $500 or $1000 “stimulus check” isn’t likely to have much effect – it just isn’t enough to change people’s buying habits much in this difficult economy.

But that doesn’t mean tax cuts might not help, if they were large enough and targeted to provide incentives for public behavior we would like to encourage. Here are the sorts of tax cuts that might be large enough to change behavior in ways which would help the economy:

• Offer a tax rebate for the next two years of, say, 20% up to $5000 for buying a new car that gets at least 30 Mpg (EPA rating). Then I might consider replacing my 10 year old van, and with a more fuel-efficient vehicle. Make the same offer to business fleet owners and a lot of new cars might get sold.

• Offer a tax rebate for the next two years of, say, 20% up to $5000 for replacing doors and/or windows in my house with more energy-efficient designs, or increasing the insulation in my house. Then I might consider hiring a local firm to do that.

• Offer a tax rebate for the next two years of, say 15% up to $200 for each new refrigerator, washer or dryer bought that has an energy efficiency rating greater than some (high) minimum.

• Offer a tax rebate for the next two years of, say, 20% up to $10,000 for semi-trailer drivers to replace their current diesel tractors with tractors fueled by domestic natural gas.

• Offer businesses a 10% tax rebate for teleconferencing equipment purchased and installed that might significantly cut employee travel.

• Offer airlines a tax rebate for replacing older planes with more fuel-efficient planes.

One can think of many more such “targeted” tax rebates that would encourage people to buy products, and buy them soon (hence the two year limit) and at the same time encourage changes in peoples consumption habits that would help in the longer-term.

Are these really short-term stimulus items?

(CNN) -- On Monday, Congressional Republican leaders put out a list of what they call wasteful provisions in the Senate version of the nearly $900 billion stimulus bill that is being debated:

• $2 billion earmark to re-start FutureGen, a near-zero emissions coal power plant in Illinois that the Department of Energy defunded last year because it said the project was inefficient.

• A $246 million tax break for Hollywood movie producers to buy motion picture film.

• $650 million for the digital television converter box coupon program.

• $88 million for the Coast Guard to design a new polar icebreaker (arctic ship).

• $448 million for constructing the Department of Homeland Security headquarters.

• $248 million for furniture at the new Homeland Security headquarters.

• $600 million to buy hybrid vehicles for federal employees.

• $400 million for the Centers for Disease Control to screen and prevent STD's.

• $1.4 billion for rural waste disposal programs.

• $125 million for the Washington sewer system.

• $150 million for Smithsonian museum facilities.

• $1 billion for the 2010 Census, which has a projected cost overrun of $3 billion.

• $75 million for "smoking cessation activities."

• $200 million for public computer centers at community colleges.

• $75 million for salaries of employees at the FBI.

• $25 million for tribal alcohol and substance abuse reduction.

• $500 million for flood reduction projects on the Mississippi River.

• $10 million to inspect canals in urban areas.

• $6 billion to turn federal buildings into "green" buildings.

• $500 million for state and local fire stations.

• $650 million for wildland fire management on forest service lands.

• $1.2 billion for "youth activities," including youth summer job programs.

• $88 million for renovating the headquarters of the Public Health Service.

• $412 million for CDC buildings and property.

• $500 million for building and repairing National Institutes of Health facilities in Bethesda, Maryland.

• $160 million for "paid volunteers" at the Corporation for National and Community Service.

• $5.5 million for "energy efficiency initiatives" at the Department of Veterans Affairs National Cemetery Administration.

• $850 million for Amtrak.

• $100 million for reducing the hazard of lead-based paint.

• $75 million to construct a "security training" facility for State Department Security officers when they can be trained at existing facilities of other agencies.

• $110 million to the Farm Service Agency to upgrade computer systems.

• $200 million in funding for the lease of alternative energy vehicles for use on military installations.

Many of these items are worthy causes, though it’s not clear in normal times the American public would support funding many of them, especially if they increased the national debt. But I do notice that an awful lot of them are geared toward improving the government’s own infrastructure, rather than the nation’s. For example, $700 million are to build and furnish a fancy new headquarters for the Homeland Security department. And there is another $412 million for CDC buildings and property, and $500 million for building and repairing National Institutes of Health facilities in Bethesda, Maryland.

Obama may have ruled out earmarks, but these look to me just like earmarks by another name. So I understand the charge that liberals are using the stimulus package as a cover to quick fund their wish list with stuff they couldn’t get funded in normal times.

But most of all, few of them will put any stimulus into the economy in the short term – most will take 2-5 years to begin to have an impact. So I can see why the Republicans, and some conservative Democrats, are rebelling.

Do as we say, not as we do?

In this past Sunday’s Global Public Square program with Fareed Zakaria (a highly recommended program – airs each Sunday on CNN at 1 pm and 6 pm ET. See further information at http://www.cnn.com/CNN/Programs/fareed.zakaria.gps/) Fareed mentioned that in the Asian financial crisis of 1997, the US government, the World Bank and the IMF strongly urged Asian nations to do just the opposite of what Congress and the Presidents (both Bush and Obama) have been pushing. The exact transcript was:

ZAKARIA: Prime Minister Han [of South Korea], let me ask you your lessons, because I'm struck by a certain irony. During the East Asian crisis, American policymakers, people from the IMF, went to East Asia. And as I recall, they had three pieces of advice.

They said, you must not prop up your bad banks -- because you also had a banking crisis -- you must keep interest rates high, and you must not spend a lot of money, because that will bust the budget.

And when confronting our own crisis, the Western world, we have decided to bail out the banks, lower interest rates to zero and spend vast amounts of money.

Were we wrong then, or are we wrong now?

Interesting. We advise other nations in financial crisis to shape up and take hard medicine, but when we ourselves get ill we try the least painful (and perhaps least effective) approach.