Romer first cites the role of the Bush administration, then segues into medical spending:
(Economists) Auerbach and Gale calculate that roughly half of the long-run deficit is due to the policy actions of the past 8 years. According to a study by the Center on Budget and Policy Priorities, just 3 percent of the long-run fiscal problem is due to the ARRA [American Recovery and Reinvestment Act]. The rest of this yawning gap is due to projected rises in spending on entitlement programs, primarily Social Security, Medicare and Medicaid. Some of this is the result of the aging of the population. But the far greater source is the fact that health care costs, both public and private, are rising much faster than GDP.
. . .
Some have argued that it is irresponsible to reform our health care system at a time when the budget deficit is so large and our long-run fiscal problems are so severe. I firmly believe the opposite: it is fiscally irresponsible not to do health care reform.
Federal Reserve Chairman Ben Bernanke is expressing support for the idea of having a council of regulators monitor systemic risk. In testimony before the House Financial Services Committee today, Bernanke said the Fed does a good job of monitoring the country's largest financial institutions but could use help watching the broader economy. However, he was quick to defend his agency when Representative Paul Kanjorski, D-Penn., said he was glad to see Bernanke was "not supportive of greater powers for the Federal Reserve." Bernanke responded:
There is not really a change. I think there has been some misunderstanding. We have never supported and the administration has never supported a situation in which the Fed would be some kind of untrammeled super regulator over the whole system. That is not what has ever been contemplated. The original administration proposal proposes a council, and we support the council. We think it has a very valuable role to play. We think underneath the council, each of the agencies, including the Fed but also including the SEC and others, should be looking at the systemic implications of their actions and working together through the council to look at the whole system. We have never objected to the council.
The Obama administration has been criticized for parts of its of its financial regulatory reform which some say would give the Fed too much power.
It's been called the "the personal, unfair recession," by Ezra Klein, and for good reason. A new survey by the Economic Policy Institute, "Tracking the Recovery" finds that 57 percent of respondents are close to someone who has been laid off. Sixty-one percent say the know someone whose hours or pay has been cut.
I'm struck by the chart above, which shows that people think the Obama administration needs to do more to combat unemployment -- and also that President Obama is the person they trust most to have the right economic policies.
The 2010 midterm Congressional elections may serve as a referendum on the president's handling of the economy. On the other hand, when I look at the chart above, I wonder how strongly people believe the economy is a political issue at all, or at least whether they believe in any politician's ability to get it right.
Rep. Ron Paul (R-Texas, and more) got a boost today in his crusade for a closer look at the Federal Reserve. Rep. Barney Frank (D-Mass., and chair of the House Financial Services Committee) said in a hearing that he backs Paul's proposal to let the Government Accountability Office pursue detailed audits of the Federal Reserve.
"We are serious about some legislation in this regard," Frank said on Capitol Hill today. The LA Times reports that Frank says he wants to curb the Fed's emergency lending powers. Frank says he'd like to include the audit power in legislation for overhauling financial regulation.
Paul has been pressing a measure for Congressional audits of the Fed for 26 years, longer than some people who work on Planet Money have been alive. That bill now counts two-thirds of all House members as co-sponsors.
Adam Davidson shared his views on President Obama's speech today on Talk of the Nation. Here's reaction from some of our other favorite econ watchers:
Felix Salmon of Reuters keyed in on the Consumer Financial Protection Agency and this quote from the speech: "If taxpayers ever have to step in again to prevent a second Great Depression, the financial industry will have to pay the taxpayer back -- every cent."
The financial industry. This is big, and important. Because what it does is it turns the whole industry -- every bank, every banker, every hedge fund manager -- into a mini-regulator, the eyes and ears of the systemic-risk regulator. All too often, those with eyes to see try to monetize their insights, rather than sounding a more general alarm. But if they ultimately end up paying for the cost of any bailout, they might stop just quietly putting on short positions, and start taking their analysis to the Fed instead. Which, under Obama's plan, will have the ability and authority to put an end to activities which pose major systemic risk.
I'm still pessimistic that any of this is going to actually happen, and I stand by my original criticisms of the plan.
Ezra Klein of The Washington Post dug into the choice of venue:
The anniversary of Lehman's collapse could have been used to remind the public of their anger and the Congress of the potential consequences for inaction. Instead, Obama chose to speak to the traders, asking them to not only cooperate with Congress, but begin the process of reform on their own. He took an opportunity to score some political points in full view of the public and used it instead to start a conversation with the people he means to regulate. The legislative effort seems likely to follow a fairly similar path, which is to say it's going to primarily be a conversation between financial elites and political elites.
More reactions and video of the speech, after the jump.
The White House budget office released its mid-session review of federal spending today. It includes the news that the 2009 shortfall will be $262 billion less than expected, because the White House has scaled back its estimates for continuing bailouts and lowered its projection for the cost of FDIC bank rescues.
Bank failures are still climbing, but the FDIC is now looking to "claw back" some of the profits from rescuing banks.
In his blog post, budget director Peter Orszag blames previous administrations for the running up the deficit. He argues it's important to consider the overall deficit as a proportion of gross domestic product in healthy economic years. Orszag's conclusion? It's too high. He writes:
It is worth noting, however, that by 2019, the difference between non-interest spending and revenue, which is also known as the "primary deficit," is only 0.6 percent of GDP. Interest payments, which almost entirely represent the cost of the debt accumulated due to the policies of past adminis??trations and the need to run short-run deficits to help the economy recover from the worst downturn since the Great Depression, are 3.4 percent of GDP.
During an economic downturn, one wants to allow the deficit to increase, so deficit reduction should be focused on the out-years -- after the economy has recovered. That said, the out-year deficits hover in the range of 4 percent of GDP, which is higher than desirable. Getting the out-year deficit under control is a top priority of the Administration.
Opposing the Obama plan in Portsmouth, N.H. (Jim Cole / AP Photo)
UPDATED By Laura Conaway
At a town hall meeting in Portsmouth, N.H., President Obama took a question from schoolgirl Julia Hall of Malden, Mass., telling her his plan won't "pull the plug on Grandma."
Key bit: Obama said of rationing care:
"Right now, insurance companies are rationing care. They are basically telling you what's covered and what's not. They're telling you, 'We'll cover this drug but we won't cover that drug. You can have this procedure or you can't have that procedure. So why is it that people would prefer having insurance companies make those decisions rather than medical experts and doctors figuring out, you know, what are good deals for care and providing that information to you as a consumer and your doctor so you can make good decisions?"
There's been debate recently among some of Planet Money's favorite econ bloggers about why community banks oppose the creation of a Consumer Financial Protection Agency (CFPA).
Simon Johnson of Baseline Scenario kicked off the conversation by suggesting that community bankers fears about "new regulatory burdens" are "fascinating but completely wrong." Felix Salmon of Reuters followed up -- saying he thinks the opposition is "a combination of fear of the unknown, on the one hand, and fear of the big banks, on the other." And Simon's blogging partner James Kwak weighed in to say that "small banks believe that once the CFPA is created, it will be captured by big banks, who will use it to screw them -- not an irrational fear, given the way regulation is often used as a stick with which one set of corporate interests beats on another."
The conversation made me think back to a podcast in June when we spoke to Diane Casey-Landry of the American Bankers Association. Landry represents all bankers, but she definitely has a soft spot for the little guy.
The way Ian Bremmer sees it, America's global influence is on the wane. Bremmer, author of The Fat Tail and president of Eurasia Group (Twitter, Facebook), says the U.S. remains the biggest player but it's showing up less often for games.
That's partly because the financial crisis has forced President Barack Obama to focus more on domestic issues.
"There is no Obama Doctrine, in the way there's been a Bush Doctrine, a Reagan Doctrine, a Carter Doctrine," says Bremmer, who's on the podcast today. "Like them, don't like them, they existed. Obama's foreign policy approach is 'I'm going to deal with it as a risk manager, and I'm going to respond to crises as they pop up."
The problem, Bremmer says, is that when a major situation erupts, people don't know what to expect from Obama. "With Bush, we knew," he says. "We probably didn't like it on many occasions, but we knew. This is going to lead to a lot of 'ad-hocracy' on the part of some of our allies and some of our more strategic competitors around the world."
After the jump, Ian Bremmer writes on Obama's foreign policy.
Nouriel Roubini, Tim Geithner, Fairy Godmother Getty Images
The Treasury isn't expected to release the results of its stress test on the nation's 19 largest banks until Thursday, but a basic outline has begun to emerge. Press reports have Bank of America and Citigroup out looking for more capital already. Today's Wall Street Journal says 10 of the 19 will soon be in the same boat.
Douglas Elliott of the Brookings Institute told me yesterday that the big question for him will be where the government's final assessment falls on the spectrum of forecasting. Is Treasury Secretary Tim Geithner leaning toward the pessimistic outlook of economist Nouriel Roubini, or is he moving more toward a gentler, rosier view? As Elliott writes in a new paper, he'll be watching for the final count of how much extra money the Treasury wants banks to raise:
The range I expect, of $100-200 billion, would be broadly in line with consensus expectations for the depth of the recession and the resulting credit losses. A smaller requirement would likely indicate the regulators and the Administration are more optimistic about the banking crisis. The $100-200 billion range is feasible within political constraints and therefore would not be avoided solely for political reasons. On the other hand, a larger figure might indicate that things are worse than the consensus believes. Imposing a larger total capital requirement would hit significant political barriers, particularly since it would probably force an eventual return to an unwilling Congress for more money. Doing this despite those political constraints would seem to indicate serious concerns.
The trickiest situation to analyze would be if the aggregate figure is in the expected range. This could either mean that this is the level regulators genuinely see as the right additional buffer or could reflect the political reality that Congress would be extremely reluctant to authorize more funds and would almost certainly add strings that the Administration would find onerous. It could be more appealing to operate within the present authorization and wait to see if that proves to be enough.
I'm reading through the Obama administration's new foreclosure plan. In addition to the word "responsible" showing up a lot, I'm seeing hints of political strategy -- like this one:
"The Home Affordable Modification program has a simple goal: reduce the amount homeowners owe per month to sustainable levels to stabilize communities."
The boldface there is mine. The Treasury Department says a single foreclosure pushes nearby home values down by as much 9 percent.
Conservative political blogger Andrew Sullivan serves up the right wing today, in a post about GOP opposition to President Obama's stimulus proposal. Italics his:
The GOP has passed what amounts to a spending and tax-cutting and borrowing stimulus package every year since George W. Bush came to office. They have added tens of trillions to future liabilities and they turned a surplus into a trillion dollar deficit - all in a time of growth. They then pick the one moment when demand is collapsing in an alarming spiral to argue that fiscal conservatism is non-negotiable. I mean: seriously.
President Barack Obama just finished delivering his Inaugural Address. Early on, he said:
"Starting today, we must pick ourselves up, dust ourselves off and begin again the work of remaking America."
Here at Planet Money, we hear so many conflicting opinions, from economists who say government should stay out of the economy and ones who say government hasn't yet waded in far enough. Today I find myself thinking, my goodness, I hope Obama gets this right -- whatever right turns out to be.
Five key spaces in President-elect Obama's economic team were filled last weekend, ending speculation (financial and otherwise) about some of the faces he will see in the Roosevelt Room and in the hallways of the West Wing. But who are these people, and what exactly are their jobs?
Simon Johnson and his colleagues over at Baseline Scenario have a guest post on the Wall Street Journal's Real Time Economics blog today. It's their own letter to president-elect Barack Obama.
1. Take advantage of competition. The US has some of the best run companies in the world. Ordinarily, the stronger companies acquire and restructure the weaker, and the weakest fail. There may be a difficult process of restructuring and consolidation in many sectors, but it would be a mistake to provide government support that will only delay necessary changes. In particular, support for auto companies can only be justified if it will produce a stronger, globally competitive, more fuel-efficient auto industry. Affected workers should be supported with money (extended unemployment benefits and a better health care safety net) and job retraining assistance. But the private sector should sort out the winners and the losers.
2. Scale up investments in education, with an emphasis on spreading technology-related skills through the population. There should be a massive expansion in community colleges, focusing on people who only completed high school; our major engineering schools should be challenged to take on this task directly. The "high school only" vs. "completed college" productivity and income divide in the US needs to be closed, for both equity and efficiency reasons. This will ensure competitiveness in tomorrow's global economy.
Our pal, Amir Sufi, at the University of Chicago School of Business (which got an eye-popping $300 million gift this morning from alumnus David Booth and will, natch, be renamed the University of Chicago Booth School of Business) sent over a copy of his recent research on the role politics is playing in the ever-expanding federal bailout plan.
Sufi and some colleagues have already run the numbers on politicians' voting records for both recent economic bailout packages, and their findings won't ease concerns about misspent billions.
NPR's stats genius Robert Benincasa sends this analysis of the presidential election. In a nutshell: Suburbanites felt the pain of the failing housing market -- they felt it, and they went for the Democrat promising change.
We'll have more on the podcast today. For now, Benincasa:
America was going to get a new president, and now we know that new president is Democrat Barack Obama.
The 44th president-elect has a whole lot on his plate, including the administration of the $700 billion TARP bailout, the precipitous drop in consumer spending, increasing layoffs in the workplace, an automobile industry in tatters, and an economy that now appears headed not just for two consecutive quarters of shrinking (recession?) but for deflation -- one of economists' worst nightmares.
Consider this your place to sound off on what incoming President Obama should do. What do you think his economic and fiscal priorities should be? What programs or strategies would you favor over others? Would you cut spending or raise taxes, or both? What spending would you cut, and whom would you tax more?
Hit the comments, please. We'll be looking for people to share their ideas on the podcast today. (The audio is in. Click for it, or subscribe to the podcast.)
Another listener takes Diana Furchtgott-Roth's challenge to Obama supporters to make sense of their candidate's economic proposals. This one says he's a small-business owner who believes the wealthy should pay more taxes:
NEW YORK, Sept 24 (Reuters) - Republican presidential
candidate John McCain on Wednesday said he will break off from
campaigning to help on a Wall Street rescue plan and asked that
a Friday night debate with Democrat Barack Obama be postponed.
McCain, in a statement to reporters, said he would suspend
his campaign on Thursday to return to Washington and called on
Obama to join him, saying he had spoken to the Democrat.
He said he did not believe a current $700 billion rescue
plan would pass the U.S. Congress in its current form. He urged
President George W. Bush to call for a bipartisan meeting of
lawmakers to try to find an agreement.
"It's time for both parties to come together to solve this
problem," he said.
McCain wants to suspend Friday's planned debate with Barack Obama. NPR's politics blog, Vox Politics, has the latest.
One of the huge mortgage companies at the heart of the credit crisis paid $15,000 a month from the end of 2005 through last month to a firm owned by Senator John McCain's campaign manager, according to a report in the New York Times today.
The paper says "the disclosure undercuts a remark by Mr. McCain on Sunday night that the campaign manager, Rick Davis, had had no involvement with the company for the last several years."
Both Mr. McCain, the Republican presidential candidate, and Democratic nominee Barack Obama have been slamming the two companies and the hordes of lobbyists that helped them stave off regulation and buy up so many risky mortgages in recent years.
Both also have donors and advisers who are tied to the companies.
If there are as many Paulites as Ron Paul says there are, the Bush Administration may have another reason to be worried about its economic bailout plan.
The former Presidential candidate came out against the proposal today and he didn't mince words.
"Unfortunately, the government's preferred solution to the crisis is the very thing that got us into this mess in the first place: government intervention."
Why does Paul matter anymore you ask? He's a member of the House Financial Services Committee that Paulson & Co. are meeting tomorrow. And what he writes outlines what many members of Congress who oppose the plan are saying in recent days.
Lawmakers no doubt took some political cover today by giving Paulson and Bernanke a drubbing for the cameras. But that doesn't mean all of that indignation was necessarily faked.
Several senators cursed PaulNanke for not reacting sooner to the mortgage mess. Our friends at seekingalpha.com appear to agree.
Fed chairman Bernanke, President Bush, Treasury Secretary Henry Paulson and SEC chairman Christopher Cox.
Chip Somodevilla/Getty Images
Just press play.
The Bush administration has asked Congress to pass a $700 billion bailout of Wall Street.
Jon Macey, deputy dean of Yale Law School, says it's clear that the economy seriously hit the skids last week and that something had to be done. What's got him worried is the sweeping power the administration wants Congress to hand over.
On Sunday night, Dodd began circulating a 44-page draft around Capitol Hill, hoping to convince lawmakers to make some significant changes to the rescue plan.
Sen. Dodd's plan would not allow the Treasury Department to purchase any assets "unless the Secretary receives contingent shares in the financial institution from which such assets are to be purchased equal in value to the purchase price of the assets to be purchased."
Translation: if the Fed is going to pony up so much cash for all these bad loans, it would want some ownership of the troubled companies.
Sen. Dodd's plan includes another lightning rod: limits on executive pay. According to the proposal, the bailout should include pay limitations on senior executives "determined to be appropriate in the public interest in light of the assistance being given to the entity."
The draft also recommends the creation of a special inspector general program and a separate emergency oversight board, which would include top officials from the Federal Reserve, Federal Deposit Insurance Corp., and Securities and Exchange Commission.
As the American financial system teetered ominously this week, outrage has been easy to find on the presidential campaign trail.
In a statement issued by his campaign, Sen. John McCain fumed:
"We should never again allow the United States to be in this position. We need strong and effective regulation, a return to job-creating growth and a restoration of ethics and the social contract between businesses and America."
His Democratic opponent, Sen. Barack Obama, added his own resentment -- saying that taxpayers are bearing the brunt of years of Wall Street excess:
"This crisis serves as a stark reminder of the failures of crony capitalism and an economic philosophy that sees any regulation at all as unwise and unnecessary. It's a philosophy that lets Washington lobbyists shred consumer protections and distort our economy so it works for the special interests instead of working people."
But neither candidate has offered up much meat on how he will fix the current mess if he's fortunate enough to become No. 44.
We took a quick look at each of the campaign's economic policy shops to gather some clues about just how McCain or Obama might fix Wall Street's growing mess. (As your mother always said: Tell me who your friends are and I'll tell you who you are...)
Republican presidential hopeful John McCain told a crowd in Florida today that the "fundamentals of our economy are strong." Coming amid news that Lehman Brothers and Merrill Lynch were joining the ranks of used-to-be's, McCain's analysis was"delighting" to Democrats and puzzling to at least some voters.
Christine wrote in:
When I hear McCain say "the fundamentals of our economy are strong," what does that mean -- and is it true?
When Nouriel Roubini -- a longtime and reasonably loyal Democrat -- says the Republican administration is helping out the rich at the expense of the taxpayer, you just think: Oh, it's a normal Tuesday.
But Ken Rogoff, the highly respected and self-identified Republican economist, tends to be far more circumspect.
In a Guardian column, he is blistering (in an economist-speak sort of way) at how the world is dealing with the crisis, effectively taxing citizens to give rich finance pros a break.
The financial sector has produced extraordinary profits, particularly in the Anglophone countries. And, while calculating the size of the financial sector is extremely difficult due to its opaqueness and complexity, official U.S. statistics indicate that financial firms accounted for roughly one-third of American corporate profits in 2006. Multi-million dollar bonuses on Wall Street and in the City of London have become routine, and financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election.
Why, then, should ordinary taxpayers foot the bill to bail out the financial industry? Why not the auto and steel industries, or any of the other industries that have suffered downturns in recent years? This argument is all the more forceful if central banks turn to the "inflation tax", which falls disproportionately on the poor, who have less means to protect themselves from price increases that undermine the value of their savings.
Hat tip to the always helpful, truly wonderful but, sadly, anonymous Yves Smith.
