Monthly Archives: October 2008

In this article for National Journal, I look at the arguments for a second fiscal stimulus. In light of the most recent data another fiscal boost is needed, and it had better be big.

This week, we learned that consumer confidence crashed in October to its lowest level since records began more than 40 years ago. This is far more worrying than a run of bad days on Wall Street. So severe a collapse in confidence — forecasters had expected a big drop, but not this big — is invariably the leading edge of a major recession, and unless governments act promptly and wisely, maybe a very prolonged one as well.

Several interacting forces are pressing the economy down. First, the credit system is broken. Good corporate borrowers cannot get financing to make new investments, or in some cases even to cover their payrolls and stay in business. Households are finding it harder to get loans as well, which is holding back recovery in the housing market. The government’s $700 billion bailout was intended to preserve the flow of loans. Without it, things would be even worse, but the situation is still anything but normal. The Treasury Department is telling banks that they must lend, lend, lend; but they are weak, and a process of sudden “deleveraging” — a collectively self-defeating effort to avoid risk by curbing credit — cannot be easily switched off.

Second, households are adding up their net worth. Their homes are valued at much less than they were a year ago, and prices are still dropping. Their 401(k)s have fallen by a third or more. Jobs that might have looked safe even a month or two ago no longer do. People suddenly feel much more vulnerable. To repair some of the savings shortfall, they are spending less, causing sharply lower sales of inessential goods. This, of course, is putting many companies under extra pressure. As firms cut their profit forecasts — which they are now doing en masse — and start to lay off workers, consumers become even more worried, and try even harder to cut back. And so it goes.

On top of all this is the fog of uncertainty about where the economy is heading. Until recently, many consumers had been telling themselves that the economy and the stock market would bounce back. They seem to have changed their minds. The parallels with the 1930s that the Bush administration drew to win support for the bailout were hardly reassuring. And lately, economists have been striving to outdo each other in the gravity of their assessments. In the end, all of this alarm seeps through.

A depression like that of the 1930s seems, even now, so unlikely as to be almost impossible — but in itself this is not very reassuring. Unemployment reached 25 percent in 1933. With government spending now much higher as a share of national income than it was back then, and with Congress, the administration, and the Federal Reserve Board all set on acting promptly and at sufficient scale, it is hard to see how a similarly massive and sustained contraction could happen again.

But unemployment in double digits — say half of what it was in the 1930s — is by no means unimaginable. Even if we are not headed for another Great Depression, we could easily be heading for the worst recession that most Americans have ever experienced. In fact, we most likely are.

You can read the whole article here. (The link expires in two weeks.)

I’ve had a lot of emails about my piece on McCain’s failure to sell his main tax proposal–the refundable credit for health insurance. The article explained how the credit would leave most middle-income Americans paying less tax than under Obama’s plans. As it happens, taken together, I prefer Obama’s tax and health-care proposals to McCain’s: I think McCain’s health credit is good as far as it goes, but it does not go nearly far enough. Obama’s plan would expand coverage much more, and it seems to me that this should be a key goal. However, the fact remains that McCain’s plan would put more disposable income (net of taxes and health-care outlays) in the pockets of most middle-income voters.

Well, you would not guess this from the way the McCain campaign has dealt with the issue. Joe the Plumber and the preoccupation with Obama’s thinking on redistribution has clouded what surely ought to have been the main thing, from a tactical point of view. Anyway, as many have pointed out, we are all redistributionists in principle. Republicans too believe in spreading the wealth around. Is McCain planning to abolish the earned-income tax credit? Is he proposing a flat-rate income tax with no exemptions? It is a question of how far, not whether.

Many of the emails I received began, “You are just wrong,” and came from accounting firms, lawyers, and academics of one sort or another. I was initially disconcerted. What had I missed, I wondered? But no, it turns out, my correspondents had simply misunderstood McCain’s proposal in one way or another–and I don’t blame them for having done so. He is offering a refundable tax credit, not an ordinary credit (which can only be set against taxes owed) and not a deduction in taxable income (which would provide a much smaller tax saving); this credit would also be paid to people with employer-provided health insurance, not just to people who buy their own; and the existing payroll-tax exemption for health insurance would continue under the McCain plan (if this were abolished too, his plan would cut disposable income rather than increase it for many households). These were the most popular reasons for believing I was mistaken, and for maintaining that the Obama proposals would give middle-income households a bigger overall tax cut. Even sophisticated voters have failed to get the message: McCain is offering middle-income American a bigger tax cut than Obama.

Am I naive to suppose that this would have been a stronger selling-point than Joe the Plumber? Wouldn’t it have been a good idea to make sure this was understood?

The odds in the US election were piled against Senator John McCain from the start. His party chose him reluctantly in the first place. He was nominated not by acclamation but by elimination, leaving many Republicans asking what had happened. So far as the wider electorate was concerned, he was asking to succeed a president of his own party who, by the end, was setting records for unpopularity.

During the campaign Mr McCain saw his strongest issue, national security, lose much of its previous urgency. The economy, where he was much less confident, took its place as the country’s greatest concern – and how. The next president faces the most challenging economic crisis since the Depression of the 1930s. On top of everything else, a press that had loved Mr McCain when he was a thorn in the side of the Republican party was certain to turn against him once he might become the next Republican president. And so it did.

Everything pointed the same way: 2008 would be a Democratic year. To overcome these odds – to go into next week’s election ahead in the polls, instead of where he is, five to 10 points behind – Mr McCain had to fight a flawless campaign and Senator Barack Obama had to slip up. As things turned out, it was the other way round.

The remainder of the article can be read here. Please post comments below.

I’ve been visiting London and the north of England for the past few days. Since I moved to the US in 2005, I’ve neglected British politics somewhat. I look at the news now and then, but it all seems increasingly strange. The saga of Gordon Brown is completely bewildering to me – his popularity now restored by the worst financial crisis in the country’s history? Whatever happened to “no more boom and bust”? Whatever happened to “prudence with a purpose”? (Allow me to mention a headline I once wrote for The Economist: “Gordon and Prudence–It’s So Over.” Little did I know.) It all seems such a long time ago.

And yet, in other respects, the more things change, the more they stay the same. Mohamed Fayed is on the front page of the Evening Standard still, this time questioned over an alleged sexual assault – which he vehemently denies. Peter Mandelson is back in government, and “Tory sleaze” is a resurgent theme: these stories seem to have the same Russian oligarch in common, which is a new twist, but still. When Mandelson left office for the second time, and the papers were saying his political career was over, I bet my friend and FT colleague Gideon Rachman a fiver that he would be back for a third spell in due course. And so it proved. However, Gideon now denies all knowledge of this wager. Did I dream it? I think not. I am searching for documentary support. Had blogs existed back then, I feel I would be in the money.

Private Eye is the fixed point around which the country revolves. Could anything be more English? The current issue has a disappointingly indulgent review of three new television programmes about America:  travelogues looking at the United States as though it were another (much more vulgar) planet, narrated with effortless superiority by Stephen Fry, Simon Schama and Griff Rhys-Jones. I sampled all three, as it happens, and could not stand to watch more than five minutes of any of them. Simon Schama, striving for intellectual depth as well as flattering visuals, was worried about the water shortage out west. Driving through the Nevada desert, he talked about “paradise lost”. Was it a green and pleasant land before the gluttonous appetites of Las Vegas stripped it bare? Who’d have thunk? Never mind, I am very fond of the Nevada desert.

Also from the current Private Eye, a feature called “Dumb Britain” compiles idiotic answers from TV quiz shows. It has this:

The Weakest Link

Anne Robinson: In education, what is a formal cap worn by academics and also a piece of equipment used by bricklayers?

Contestant: Trowel

As a friend said when I read that out to her, “Aw.” But really, “The Weakest Link” is still in business? And Anne Robinson, I imagine, is still very stern and rude to her guests – who, if they prevail against her scorn and all odds, stand to win as much as Gideon owes me, or even a little more. How come she hasn’t died of boredom?

Back to the Standard, and another very British story. A 16-year old is stabbed to death for no reason. The killer is sentenced to 12 years. He should be out for his 30th birthday. The judge is quoted: “This was an unprovoked attack, but I accept that your intention was not to kill when you used [the knife] to inflict that fatal wound and that you have behavioural and learning difficulties.”

Yes, I dare say stabbing people falls under the heading of “behavioural difficulties”. Calling Theodore Dalrymple. Get me back to the land of the sane.

Apologies: I jotted this down a few days ago and then forgot to post it. I’m blaming jet lag (see next post). Anyway, for the record…

What form will the backlash against lightly regulated capitalism take in the US? I ponder the question in this piece for the FT’s Analysis page:

Even before the worst financial crisis since the 1930s bore down on the US this summer, the country seemed poised for an ideological shift. The administration of President George W. Bush was immensely unpopular. Anti-trade and anti-business sentiment was on the rise and both main political parties, in different ways, were responding.

The technocratic market-friendly liberalism espoused by Bill Clinton and the New Democrats was already much less prominent in Barack Obama’s presidential campaign. As the country’s economic difficulties have worsened, the pro-market theme has not so much subsided as disappeared. Mr Obama now is far more likely to talk about the bankruptcy of “trickle-down economics” than the need for competition and incentives.

John McCain, the Republican candidate, has yielded nothing to his opponent in the stridency of his recent denunciations of “Wall Street greed”. The administration, meanwhile, has been forced to swallow what remained of its rhetorical commitment to market forces and deregulation with a $250bn bank recapitalisation – a plan that Hank Paulson, Treasury secretary, described as “objectionable” but necessary.

Where might this lead? Does the present upheaval, as some have speculated, point to the end of a distinctively American capitalism? On the whole, this seems unlikely – though the pressures on “American exceptionalism” have rarely looked so strong.

Read on here.

So much has gone wrong for John McCain that it is surprising he is not further behind in the polls. He has been a victim of circumstances and his own bad judgment. Some of his errors, however, are more perplexing than others. How is it, for example, that Mr McCain has been so thoroughly outmanoeuvred on tax policy?

Both candidates have offered complex tax proposals. Proliferating alternative baselines (with or without the extension of the Bush tax cuts, with or without a “patch” for the alternative minimum tax, and so forth) deepen the confusion. Unable to fathom the details, voters are left to weigh the competing slogans. Mr Obama promises to cut taxes for 95 per cent of working families. Mr McCain says the rich need a tax cut, too. Guess who wins that argument.

Here is a fact you might not have noticed. It certainly seems to have slipped by most Americans. The typical US household would get a bigger tax cut under Mr McCain’s proposals than under Mr Obama’s. I know a few politicians who could do something with that.

The remainder of this column can be read here. Please post comments below. 

It was the best of the three, and way better than the useless second debate, for sure. The format worked well–sitting at a table seemed to encourage them to engage with each other–and the moderator Bob Schieffer did a fine job, asking shrewd, pointed questions and then following up. Both men raised their game, especially McCain, who of the two had far more ground to recover. We got a fuller discussion than before of most of the issues that came up–tax policy, for instance, and health care. But I doubt it has changed anybody’s mind. Neither landed a heavy blow, and neither made a bad mistake–unless McCain’s increasingly tiresome references to Joe the Plumber fall into that category.

A critical moment came when Schieffer asked for their opinion of each other’s running-mate. Obama declined the invitation to attack, offering faint praise (“she’s a capable politician”) and saying that voters would make up their own minds. He will be criticised for that, but I think he was wise. Voters who think Palin a disaster don’t need to be reminded of it by Obama, and voters who think she’s a good choice wouldn’t have been swayed. The main thing was for Obama to stay cool and collected, to avoid seeming angry or rattled. Especially with the economy in such a bad way, those are the traits that commend him to independents, and where he compares so favourably with McCain. His restraint on Palin served to underline them.

McCain’s demeanour was much improved, I thought. He also scored a point or two in the tax discussion, criticising Obama’s penchant for “spreading the wealth around”. His seeming moderation on Supreme Court appointments–”no litmus test”–will have pleased some independents (at the cost of annoying many conservatives). His best single line of the night was probably when he said he was not George Bush, and that if Obama had wanted to run against Bush he should have run four years ago: “I will take the country in a new direction.”

I thought Obama had the better of the crucial exchange on health care. Both men got a bit bogged down in the technicalities. I wonder how many viewers followed what they were saying. But Obama emphasised that if you were happy with your existing insurance nothing would change, and that McCain’s scheme would undermine existing employer-provided cover (which indeed it would; it is intended to). For most voters, that wins the argument. McCain’s approach has virtues–employer-provided insurance is a bad idea–and Obama’s estimates of the cost of his scheme are not at all plausible, but McCain has made a hash of explaining his own proposal, and it is fatally flawed in any case, because it does so little to improve coverage.

We saw a better McCain than the McCain of recent weeks, but it almost certainly comes too late. With the economic ceiling falling in, Obama’s grace under pressure inspires more confidence than McCain’s agitation, attenuated as it was for tonight’s encounter. Obama has the momentum, and I saw nothing to change that.

My column for the FT this week (mentioned here two posts ago) states my own view on the implications of the financial crisis for the future of capitalism–namely, that the effects outside finance will be limited, and this is not the end of capitalism as we know it. Here are two other interesting and forcefully expressed opinions.

Harold Meyerson in the Washington Post thinks the game is up for “unregulated capitalism”:

In 1949, a number of famous writers, among them Arthur Koestler, André Gide, Richard Wright, Stephen Spender and Ignazio Silone, wrote essays explaining why they were no longer communists. The essays were collected in a volume entitled “The God That Failed.”

Today, conservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism. The fall of the financial system has been so fast and far-reaching that there’s been no time to fully consider its implications for the reigning economic theology of the past 30 years. But with the most right-wing administration in modern American history scurrying to nationalize the banks, the question cannot be elided indefinitely.

What exactly do economic conservatives believe now that their god is dead? What’s become of the glories of privatized Social Security? Of the merits of 401(k)s vs. defined-benefit pensions?

No wonder we’ve seen a disoriented John McCain wandering the moors howling about Bill Ayers. What’s he supposed to do? Admit that the Reagan-Thatcher faith in unregulated capitalism, to which every GOP presidential candidate was pledging allegiance just last winter, has collapsed?

Interesting to see this dismiss the Clinton and Blair administrations as mere extensions of the Reagan-Thatcher order. Actually I agree with Meyerson about that: they were. But I thought that the Democratic narrative upholds the 1990s as an example of how good things can be when intelligent, well-meaning people are in charge. In other words, good government is more a question of competence and good faith than ideology. To abandon that line, you have to consign Clinton and Blair to the trash.

I was also a bit puzzled by this:

McCain and Barack Obama disagree sharply on the government’s role in bolstering the economy. Obama favors public outlays on alternative energy and education, which would not only create jobs but also make us more competitive globally.

What is this, “make us more competitive globally”? Surely that is the old, dead paradigm. Even as the piece reads its last rites, that Reagan-Thatcher way of thinking is stirring back to life. If you are going to dispense with market forces, I don’t think you can afford to care very much about staying competitive globally.

The other piece, much more to my own way of thinking, is by Simon Jenkins. For many years (outside the specialist domain of economic commentary) he has been my favourite  British pundit, and one of the two or three best I have come across anywhere. Rigorous, liberal (in the old-fashioned sense), open-minded and surprising. See what you think:

So this is to be Brown’s Falklands. Victory on Mount All-fall-down. Bonfire of the bonuses. Service in St Paul’s. March-past by the Royal Troop of Derivatives Traders. Anthem to the Bankers’ Brigade. Tomb of the Unknown Arbitrageur.

A fortnight is clearly a long time in ideology. What fun historians will have with October 2008. Do you remember the hoary old days when they let Lehmans go bankrupt and refused to guarantee bank deposits? Where were you when a governor of the Bank of England worried about inflation and something called moral hazard? How tables turn. Socialism is now cock of the walk, capitalism mugged by reality.

It is rubbish, total rubbish. Market failure has been compounded by brain failure of the discredited profession of economics, overwhelmed by journalistic wish-fulfilment and glee.

The banks have not been “nationalised”, just deluged with money. They remain pluralist and competitive institutions, with independent boards. Their workers are not civil servants. Investors retain their shares. The bonus culture will revive. The impresarios of greed have been punished, or at least a few of them. But this is not socialism in our time, just public money hurled at the face of capitalism.

Warmest congratulations to Paul Krugman on getting the Nobel prize. It was overdue (but then it usually is). I can’t think of an economist who could match him at extracting deep insight from simple, ingeniously specified models–again and again, one thought, why did nobody else see this?–or whose forthcoming academic papers would arouse such excitement. He can be an irascible fellow. He often finds it hard to respect people he disagrees with. I think he is much too quick to accuse people of bad faith. But his detractors should not deceive themselves: he is a kind of genius.

As I’ve mused before, it was a significant loss to economics when he put scholarly work to one side to make himself the scourge of the Bush administration, not to mention an affront to the principle of comparative advantage. Economists of his quality are much harder to find than angry pundits, however effective, and serve a greater social purpose. An enlightened central planner would never have allowed it.

At least we can be sure that the prize won’t go to Paul’s head. As he pointed out a while back, the Nobel is a second-class award, conferring less distinction than the Clark medal. (Paul won that 16 years ago.)

The stunning scale of the interventions under way in financial markets – barely imaginable just weeks ago – make it seem that nothing will ever be the same. A crisis so grave, so weighted with ideological implications, must point to a grand political realignment, with much of what we thought we knew about the role of governments and markets overthrown. So it is argued, and so many people hope.

It is possible. It happened after the Great Depression. But I doubt that this crisis will change the world anything like as profoundly. In the end, I doubt it will even overthrow much of the conventional wisdom about states and markets.

In thinking through the parallel with the 1930s, the important question is how far the financial emergency will infect the rest of the economy. The Depression changed the US and the world because it wrecked the lives of countless millions of people.

The remainder of this column can be read here. Please post comments below. 

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

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