Political game of blind man’s buff
By Martin Wolf
In tough times, politicians squabble. Out of this heat, light should emerge. Alas, it is not doing so, at least in the UK. The utterances of leading Labour and Conservative politicians do not explain how the UK economy is to emerge from its current quagmire.
The UK has proved horrifyingly vulnerable to a financial crisis that has cut off funding from abroad. But why is it so vulnerable? The answer from David Cameron, the leader of the opposition, is simple: “We’re in this mess because of too much debt – too much government debt; too much corporate debt; too much personal debt; and it becomes clearer all the time that the scale of Britain’s debts puts us in a much weaker position than other countries.”
The right answer, Mr Cameron suggests, is “an economy where government and its citizens live within their means, save for a rainy day, waste not and want not. It’s an economy where everyone has the chance to own their own home with space to live and breathe – and where we work to live, not live to work.”* So, in response to the biggest economic crisis since the 1930s, he has decided to take a pre-Keynesian view of the management of public finances.
Mr Cameron argues that the government should save for a rainy day. But he fails to note both that it did – public sector net debt was 36 per cent of gross domestic product at the end of 2007-08, down from 43 per cent in 1996-97 – and that no day could be much rainier than today.
Mr Cameron argues, again, that everyone should own their own home. Yet it was this silly idea – coupled with controls on house building supported by his party and the liberalisation of finance it promoted – that formed the housing bubble and explosion of household debt.
Mr Cameron argues for improving the tax treatment of savings. But an excessive private desire to save is now a huge danger. He also fails to note the already favourable treatment of home owners, savers for pensions and investors in “individual savings accounts”. He is pandering to current complaints about low returns. But low returns are an alternative to debt deflation and mass bankruptcy, which would wipe out many financial assets.
Mr Cameron continues to argue against the government’s decision to cut value-added-tax. But discretionary measures are forecast to cost only 1.1 per cent of GDP this financial year against the forecast of overall public sector net borrowing at 8 per cent of GDP. The question he ducks is whether the government should have tried to cut the fiscal deficit in the midst of a deep recession and, if so, by how much. Compared with this, the VAT cut was a mere bagatelle.
Yet Mr Cameron is also right to argue that “any action that must be taken in the short term must be consistent with the long-term economic change that Britain needs”.
This does not mean the government is wrong to act as borrower of last resort. But the weakness in the government’s position is indeed strategic. From what Alistair Darling, chancellor of the exchequer, said in his interview with the Financial Times this week, it is not clear that its strategy consists of more than trying to get back to normal as soon as possible. If by “normal” one means the pre-2007 economy, that goal is both unobtainable and undesirable. The post-crisis economy must be utterly different from before. Mr Cameron at least understands this.
What does this mean? It means a return to growth, despite lower levels of private borrowing, higher savings rates and a move to fiscal balance. If the government knows how to achieve this combination, it has not said so.
So what are the required elements?
First, the economy will have to grow out of its over-indebtedness during many years. It is important to sustain the financial system, but crazy to expect a return to buoyant lending.
Second, the current account will have to go into surplus, to generate activity without extra borrowing.
Third, higher savings will also be needed. That is partly because output of tradeable goods is more capital intensive than that of services.
Fourth, it makes sense to use a substantial portion of today’s massive government borrowing for investment, particularly in infrastructure. Such investment must make sense when the government can borrow cheaply.
Fifth, the transition to an economy with higher exports is going to take years. The fall of sterling should help. But the economy will depend on large net inflows of capital for some years.
Finally, the government must indeed maintain fiscal and monetary credibility. If a return to inflation is widely feared, the game will be up for the UK. The danger is not only deflation, but also a sterling collapse, a jump in inflation expectations and a spike in long-term government bond rates. The Bank of England was right to cut interest rates modestly this time.
What is needed now is a plan of escape into what should be a different economy. The opposition does have some notion of the need for such a strategic shift, but has a foolish response to the immediate crisis. The government now has a broadly sensible response to the crisis, but no strategic view. Each condemns the other for its failings. Meanwhile, the hapless UK economy flounders.
The Obama Gap
The Obama Gap
 Fred R. Conrad/The New York Times |
“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years.”
So declared President-elect Barack Obama on Thursday, explaining why the nation needs an extremely aggressive government response to the economic downturn. He’s right. This is the most dangerous economic crisis since the Great Depression, and it could all too easily turn into a prolonged slump.
But Mr. Obama’s prescription doesn’t live up to his diagnosis. The economic plan he’s offering isn’t as strong as his language about the economic threat. In fact, it falls well short of what’s needed.Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.
And the Obama plan is nowhere near big enough to fill this “output gap.”
Earlier this week, the Congressional Budget Office came out with its latest analysis of the budget and economic outlook. The budget office says that in the absence of a stimulus plan, the unemployment rate would rise above 9 percent by early 2010, and stay high for years to come.
Grim as this projection is, by the way, it’s actually optimistic compared with some independent forecasts. Mr. Obama himself has been saying that without a stimulus plan, the unemployment rate could go into double digits.
Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.
To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.
Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.
But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. (A number of Senate Democrats apparently share these doubts.) Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: “lots of buck, not much bang.”
The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.
Why isn’t Mr. Obama trying to do more?
Is the plan being limited by fear of debt? There are dangers associated with large-scale government borrowing — and this week’s C.B.O. report projected a $1.2 trillion deficit for this year. But it would be even more dangerous to fall short in rescuing the economy. The president-elect spoke eloquently and accurately on Thursday about the consequences of failing to act — there’s a real risk that we’ll slide into a prolonged, Japanese-style deflationary trap — but the consequences of failing to act adequately aren’t much better.
Is the plan being limited by a lack of spending opportunities? There are only a limited number of “shovel-ready” public investment projects — that is, projects that can be started quickly enough to help the economy in the near term. But there are other forms of public spending, especially on health care, that could do good while aiding the economy in its hour of need.
Or is the plan being limited by political caution? Press reports last month indicated that Obama aides were anxious to keep the final price tag on the plan below the politically sensitive trillion-dollar mark. There also have been suggestions that the plan’s inclusion of large business tax cuts, which add to its cost but will do little for the economy, is an attempt to win Republican votes in Congress.
Whatever the explanation, the Obama plan just doesn’t look adequate to the economy’s need. To be sure, a third of a loaf is better than none. But right now we seem to be facing two major economic gaps: the gap between the economy’s potential and its likely performance, and the gap between Mr. Obama’s stern economic rhetoric and his somewhat disappointing economic plan.Obama Employs His Version of Ronald Reagan
Obama Employs His Version of Ronald Reagan
By Larry KudlowObama spoke Thursday at George Mason University about his American Recovery and Reinvestment Plan -- a.k.a. the stimulus package. There’s an interesting section that would warm the heart of John Maynard Keynes. It goes like this:
“It is true that we cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe.”Well, 28 years ago Ronald Reagan said government was the problem, not the solution. Dealing with a bad recession like this one, the Gipper lowered taxes and domestic spending. Obama on the other hand has offered an $800 billion package, with plenty of infrastructure spending that alleges to create three million jobs.
Nobody really believes infrastructure spending will end the recession or create permanent new jobs. However, it’s interesting just how much the Obama plan has changed since the election. The size has been roughly constant. But the mix of tax cuts and spending increases is now totally different.
Instead of $100 billion worth of tax credits, there are now $300 billion worth of tax cuts. This includes a big new piece for business, more cash-expensing for small-business investment, and a restoration of the five-year tax-loss carry-back, which will especially help banks and homebuilders. It might even result in tax refunds for businesses, and might also allow banks to rid themselves of toxic assets, since the losses will now be spread over many years.
So what we have now is an $800 billion stimulus package with $300 billion of so-called tax cuts which could infer less spending than before -- maybe only $500 billion worth.
Obama’s economic advisers are bragging to me about their new tax-cut package. They say they’re very pro-growth. And you know what? I acknowledge it. People like Larry Summers, Austan Goolsbee, Christy Romer, and Tim Geithner are no left-wing big-government whackos. They may not be hard-core supply-siders. But in terms of the economics profession, I would call them center-right.
And they absolutely understand the importance of private business and investment in the job-creating economic-growth process. And I think they’re views are the main reason for the reshaping of the Obama package between the campaign trail and the eve of inauguration.
The problem is that they’re not reducing marginal tax rates on large and small businesses or individuals. Their tax credits will be two-year’s worth, not permanent. There will be no incentive effects to maximize growth. And many of the tax cuts are refundable credits, which really are a form of government spending.
So it’s not a supply-side package. However, I’ve really never met a tax cut I didn’t like. And any tax cut is better than a spending increase since private companies and individuals will at least get the money instead of government.
This is the interesting part of the Obama plan. Somewhere in there the tax cuts will have a small positive economic effect. I would have designed it differently, but then again Team Obama won the election. I guess I could say it could have been worse.
Of course, Team Obama will have to contend with the sticker shock of a $1.2 trillion deficit for 2009, just printed by the Congressional Budget Office. And that’s before the Obama stimulus plan. But I don’t think Republicans really have a leg to stand on with the deficit argument -- or for that matter the spending argument.
Yes, Obama is raising the ante, and the new numbers are just about over the edge. But a lot of that new deficit is TARP money that should be scored as investment -- not real spending. And in view of all the economic pessimism out there, I doubt if the public is very worried about deficits.
What’s most regrettable is that congressional Republicans have yet to make the alternative case. They haven’t pressed for marginal tax-rate cuts as an option to Obama’s credits. So far, the GOP is me-too. They’ve offered an echo instead of a choice.
Meanwhile, polls now say the public favors Obama’s plan by 55 to 65 percent. His personal approval rating is even higher. And he’s being politically astute by reaching out to Republicans. He has virtually removed partisan rhetoric. Simply put, Obama is in the driver’s seat right now.
Sure, the Democratic Congress may mangle Obama’s plan. They might even repeal the Bush tax cuts this year. So there is considerable uncertainty about the details of the final package. But I must say, a crafty Obama is doing his best top employ his version of the Reagan tax-cut plan. Obama talks big government. But so far his program actually reduces the government-spending share and increases the private tax-cut share.
Very interesting.GOP tug-of-war emerging over Obama plan
GOP tug-of-war emerging over Obama plan
Minutes after Barack Obama delivered his big economic speech Thursday, the top two Republicans on Capitol Hill popped in front of the TV cameras to say they were ready to work with the president-elect.
Some other members may not be so cooperative.
“There are ways to stimulate the economy. This isn’t one of them,” said Georgia Rep. Tom Price, the incoming chairman of the conservative Republican Study Committee.
Obama’s plan is expected to cost at least $775 billion, and Price and other conservative House Republicans are prepared to argue that “this is, at its fundamental base, money that we don't have.”
Congressional Budget Office estimated this week that the nation’s deficit will double, to $1.2 trillion, in 2009 – and that’s before the cost of the stimulus package is added in.
Obama acknowledged Thursday that his stimulus plan “will certainly add to the budget deficit in the short term.”
“But equally certain,” he said, “are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy.”
Obama has tried to assure Republican support for the spending in his plan by tying it to $300-plus billion in tax cuts. But as much as those may appeal to the GOP, Price calls the rest of the bill — hundreds of billions in spending for conservation projects, unemployment benefits and state aid to fund road projects and bridge Medicaid shortfalls – a “non-stimulus package.”
House Minority Leader John A. Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell (R-Ky.) both say they’re open to working with the incoming president – and vice versa. In addition, Boehner has made it very clear to his rank-and-file that Republicans will suffer if they become “The Party of No” by staging frequent fights with the popular president-elect.
“I do believe our economy is facing crisis,” Boehner told reporters on Thursday. “I do believe that Washington has to act.”
But neither leader wants to swallow principle in supporting the package. And if complaints from the rank and file grow loud enough, Boehner and McConnell may find themselves trapped between their need to represent their members and their desire to appear supportive of the new president — and understanding of the economic troubles facing many Americans.
Many of Boehner’s members abandoned him during negotiations over the $700 billion Wall Street bailout in the fall, and that frustration still remains.
So far, it’s not clear how outspoken Republicans intend to be. With Senate Democrats launching their own criticisms of the Obama plan, the Republicans have been able to fly under the radar while working on their own responses.
On Wednesday, at the House Republicans first Conference-wide meeting of the year, Pence, a former RSC chairman, delivered a Power Point
presentation outlining a series of conservative complaints with the
massive economic stimulus bill, members present at the meeting told
Politico.
Boehner has tasked his new No. 2, Republican Whip Eric Cantor, to organize a task force to plot the party’s negotiating strategy with the incoming president and his team.
The group met for the first time Thursday night in Cantor’s suite on the third floor of the Capitol. A participant said that embers present threw out a slew of ideas in a rapid-fire exchange during the meeting but did not reach any agreements.
Republican Party leaders retire to Annapolis, Md., this weekend to chart their course for the rest of the year.
Boehner and McConnell both signaled that their support for Obama’s plan hangs on whether he offers Congress “the right balance” between new spending and tax cuts. And, despite a suggestion otherwise from Boehner on Wednesday, the overall cost will be an issue.
“How much debt are we going to pile on future generations?” Boehner asked on Thursday.
McConnell said, “Obviously, the question is how big and what form.”
Obama's Choice: FDR or Reagan
Obama's Choice: FDR or Reagan
By Patrick BuchananBarack Obama, it is said, will inherit the worst times since the Great Depression. Not to minimize the crisis we are in, but we need a little perspective here.
The Great Depression began with the Great Crash of 1929. By 1931, unemployment had reached 16 percent.
By 1933, 89 percent of stock value had been wiped out, the economy had shrunk by one-third, thousands of banks had closed, a third of the money supply had vanished, and unemployment had reached 25 percent -- among heads of households. And in those days, there was no unemployment insurance, no Medicare, no Medicaid, no Social Security, no welfare.
FDR's answer: vast federal spending, tough new regulations on business and higher taxes -- like Herbert Hoover before him, only more so.
The Depression lasted until war orders from the Allies brought U.S. industry back to life. Before 1940, not once did unemployment fall below 14 percent. In May 1939, Treasury Secretary Henry Morgenthau testified:
"We are spending more money than we have ever spent before, and it does not work. ... I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. ... I say after eight years of this administration we have just as much unemployment as when we started ... and an enormous debt, to boot."
Politically, the New Deal was a smashing success, with FDR's landslides in 1932, 1934 and 1936 virtually wiping out the GOP.
Yet, economically, the New Deal was a bust, failing utterly to restore prosperity. Despite the indoctrination of generations of schoolchildren in New Deal propaganda, that is the hard truth.
Consider, now, how Ronald Reagan responded to the economic crisis of 1980, the worst since the Depression. In the "stagflation" of that Jimmy Carter era, interest rates had reached 21 percent and inflation 13 percent.
Reagan's answer was the tight money policy of Fed Chairman Paul Volcker and across-the-board tax cuts of 25 percent, while slashing the highest rates from 70 percent to 28 percent.
While unemployment hit 10 percent in 1982 and Reagan lost 26 House seats, in 1983 the tax cuts kicked in.
From there on out, it was boom times until Reagan rode off into the sunset, having created 20 million new jobs. "The Seven Fat Years," author Robert Bartley called them.
Reagan had followed the lead of Warren Harding and Cal Coolidge, who had cut Woodrow Wilson's wartime tax rates of near 70 percent to 25 percent, resulting in "The Roaring '20s," a time of unrivaled prosperity.
The JFK tax cuts of the 1960s, also a Reagan model, were equally successful.
Harding, Coolidge, JFK and Reagan all bet on the private sector as the engine of prosperity. All succeeded. Franklin Roosevelt bet on government. And the New Deal failed. It was World War II that pulled the United States out of the Depression ditch of the 1930s.
Comes now the financial collapse and economic crisis of 2008, inherited by Obama, with 40 percent of all stock values wiped out in a year, foreclosures pandemic, and unemployment near 7 percent and surging.
In crafting his solutions, Obama seems to be brushing aside the Reagan, JFK and Harding-Coolidge models, and channeling FDR and the New Deal Democrats.
Already staring at a $1.2 trillion dollar deficit for the year ending Sept. 30, about 8 percent of the entire U.S. economy, Obama intends to add a stimulus package of $700 billion to $1 trillion, yet another 5 percent to 7 percent of gross domestic product. The resulting deficit would be twice as large as Reagan's largest, 6 percent of GDP, which was the largest since World War II.
And how is this Niagara of money to be spent?
Hundreds of billions will go out in checks of $500 to $1,000 to wage-earners and individuals who do not even pay taxes. This is much like the George McGovern "demogrant" program of 1972, where every man, woman and child, if memory serves, was to get a $1,000 check from the U.S. government.
Other hundreds of billions will go to shore up state and municipal spending. Other hundreds of billions will go for "infrastructure" projects, another name for earmarks, which is a synonym for pork.
Now, as Obama does not intend to raise taxes, at least now, he is going to have to borrow this near $2 trillion from foreigners or U.S. taxpayers, or the Fed will have to create the money. Undeniably, this will have an impact upon the economy. But what will that impact be?
Where in history, other than World War II, is there evidence that such a mass infusion of spending restored prosperity?
Obama and the Democrats are taking a historic gamble, not only with their careers but with the country. If this monstrous stimulus package, plus the trillions in hot money, do not work; if the two ignite rampant inflation, rather than real growth, we are all out of options. The toolbox is empty.
And what will follow may truly resemble the 1930s.
Pardon Scooter Libby
Pardon Scooter Libby
By Thomas SowellIn December, I was asked to file a second report on an automobile accident that took place back in September, during a visit to Los Angeles. A truck slammed into my car from behind while I was stopped at a traffic light.
As I sat down to write a new report, I tried to recall the details, beginning with where the accident took place, which I remembered as having been on Wilshire Boulevard.Fortunately, I had saved a copy of my first report on this same accident, which showed that it took place on Santa Monica Boulevard, not Wilshire, which was the street up ahead.
What if I had not saved a copy of that first report, and had written down and signed a report saying that the accident took place on Wilshire Boulevard, when everyone else involved said it was on Santa Monica Boulevard? If this was a statement made under oath, I could have been prosecuted for perjury.
All this made me think back to a more important case where memories differed and a man's life was ruined because of a perjury conviction. Moreover, it was about something that was no more crucial than the name of the street where an accident took place.
That man was Lewis ("Scooter") Libby, assistant to Vice-President Dick Cheney. He testified under oath that he had not leaked to reporters the information that Valerie Plame worked for the CIA, but had in fact learned about it himself from reporters, including Tim Russert.
Unfortunately for Scooter Libby, there was testimony from Tim Russert that he himself did not know that Valerie Plame worked for the CIA at the time of his conversation with Libby. Perhaps even more damaging, the White House's own press secretary, Ari Fleischer, said that Libby mentioned to him that Ms. Plame worked for the CIA. This was a few days before Libby talked with Russert.
It seems clear that Libby had his facts wrong.
But in more than 8 months between the various conversations at issue and Scooter Libby's testimony before a grand jury, those facts assumed a far greater importance than they had at the time, when there was no reason for them to be particularly memorable.
While it is a crime to reveal the identity of an undercover CIA agent, Valerie Plame was no longer an undercover agent, her identity having already been revealed long before this whole episode. She was now just someone with a desk job at CIA headquarters in Virginia when this furor broke out.
The only reason her name appeared in the media was that her husband, former ambassador Joseph Wilson, had attacked the Bush administration for going to war in Iraq. Wilson had gone to the African nation of Niger to check out suspicions that Saddam Hussein was seeking uranium from there, in order to create weapons of mass destruction. He concluded that this was not so.
Wilson became an instant hero to critics of the Iraq war in the mainstream media. The impression was widespread that the Bush administration-- specifically Vice-President Dick Cheney-- had sent him to Niger and then rejected his report.
This was news to officials of the Bush administration, who scrambled to find out who this man was and who sent him to Niger. Among those scrambling to find out was Scooter Libby.
What Libby and others discovered was that Wilson had been sent by the CIA, on the recommendation of his wife, Valerie Plame. When this was revealed in a column by Robert Novak on July 14, 2003, a clamor went up that a CIA agent had been "outed" in retaliation for her husband's criticism of the administration.
In reality, Robert Novak got his information from Richard Armitage, not Scooter Libby. Moreover, Novak was a critic of the Bush administration's decision to go to war in Iraq, so he was very unlikely to be part of a plot to retaliate against Wilson.
Neither Novak nor Armitage nor anybody else was prosecuted for revealing Valerie Plame's name, for it was no crime. But Scooter Libby was prosecuted big time for getting his facts wrong.
As someone who has any number of times had his memory corrected by consulting old records or old letters, I don't think a man's life should be ruined for that, when there was no crime to investigate in the first place.
Surely President Bush can pardon this man before leaving office.
Pelosi Turns Back the Clock on House Reform
Pelosi Turns Back the Clock on House Reform
Moderate Democrats will be frozen out.
JOHN FUND
Every two years the leadership of the U.S. House of Representatives introduces a new set of rules to govern the body. Normally, this event passes with barely a yawn from the public. But the changes pushed through on Tuesday by Democrats will have real-world consequences for fiscal conservatives of both parties.
Gone are term limits for committee chairmen, a big comeback for seniority over merit. Cost containment measures on Medicare, one of the fastest growing programs, are simply suspended for this Congress.
Tax increases now will be easier to pass, because opponents will not be allowed to offer a simple motion to strike any increase without making up for the "lost revenue." In addition, tax cuts are made more difficult, because they cannot be offset with spending cuts. The new rules will mean that the only way to push for a tax cut will be to propose a tax increase elsewhere.
Democratic leaders said these changes were needed to make the legislative train run faster. "Congress has to accomplish things," said Massachusetts Rep. Jim McGovern of the Rules Committee. "This is designed to help us do just that."
To further grease the wheels, Democrats have also emasculated the "motion to recommit" -- a procedural safeguard first given to the minority a century ago after a rebellion against tyrannical GOP Speaker Joe Cannon. It has been used by both parties to offer motions to "recommit" or send back bills on the floor to the relevant committees.
Republicans used the tactic 50 times in the last Congress, primarily to block tax increases buried in larger bills. Sometimes they also used the device to tack on a popular amendment to a bill -- such as an amendment in 2007 ending Washington, D.C.'s, then-existing gun ban, which was added to a bill on voting rights for D.C. residents. That made the overall bill political poison, forcing an infuriated Speaker Nancy Pelosi to pull the bill off the floor.
Her new rules package severely limits the use of motions to recommit. Dismissing GOP complaints about this change, Massachusetts Rep. Barney Frank said the minority was only "interested in game playing."
Mrs. Pelosi used to see things differently. Back in 2004, she unveiled a proposed "Bill of Rights" to protect House minority interests. It called on Republicans to allow more meaningful substitutes to bills, give members enough time to read bills before final votes, and stop holding roll-call votes past the normal 15 minutes. She had a point. In late 2003, Republican leaders held open a roll-call vote on the Medicare drug entitlement for three hours until they bullied enough wavering members into voting aye.
Mrs. Pelosi warned in 2004 that "When we [Democrats] are shut out, they are shutting out the great diversity of America." We want a higher standard." In 2006, just before becoming speaker, Mrs. Pelosi reiterated her plans to promote "bipartisanship" and "to ensure the rights of the minority."
That was then. This month, she even suggested passing a huge new stimulus package before Barack Obama is sworn in on Jan. 20.
Term limits on committee chairs -- part of the 1994 GOP "Contract With America" -- modified a seniority system that entrenched power in a handful of members. Overall, it has helped inject new ideas and merit into Congress. But Democratic bulls wanted their old power back, so now longevity will once again determine who runs the show. Can this really be the "change" that voters wanted last November? Wags are already joking that Democrats are really delivering "senility you can believe in."
Ironically, some of the biggest losers from the Pelosi rules changes will be fiscally conservative Blue Dog Democrats. The "pay-go" rules they fought so hard for two years ago -- to require new spending proposals be balanced with additional revenue or cuts elsewhere -- have been gutted. And no term limits will mean they will have to stand in line for a taste of real power.
"All those nice pro-life, gun-owning young Democrats recruited to run by Rahm Emanuel will never have any real influence now," says Grover Norquist, head of Americans for Tax Reform. "They were useful in getting Democrats a majority but now they'll be in the back of the bus."
Barack Obama ran for president pledging to end needless partisanship and to create "a new politics." He is at least making a stab at that by appointing a couple of cabinet members with Republican ties and consulting with GOP Congressional leaders. It's unsettling that his fellow Democrats on Capitol Hill seem intent on marching in a completely opposite direction.
Drunk-Driving on the US's Road to Recovery
Drunk-Driving on the US's Road to Recovery
By Joseph StiglitzA consensus now exists that America's recession - already a year old - is likely to be long and deep, and that almost all countries will be affected. I always thought that the notion that what happened in America would be decoupled from the rest of the world was a myth. Events are showing that to be so.
Fortunately, America has, at last, a president with some understanding of the nature and severity of the problem, and who has committed himself to a strong stimulus programme. This, together with concerted action by governments elsewhere, will mean that the downturn will be less severe than it otherwise would be.
The United States Federal Reserve, which helped create the problems through a combination of excessive liquidity and lax regulation, is trying to make amends - by flooding the economy with liquidity, a move that, at best, has merely prevented matters from being worse. It's not surprising that those who helped create the problems and didn't see the disaster coming have not done a masterly job in dealing with it. By now, the dynamics of the downturn are set, and things will get worse before they get better.
In some ways, the Fed resembles a drunk driver who, suddenly realising that he is heading off the road starts careening from side to side. The response to the lack of liquidity is ever more liquidity. When the economy starts recovering, and banks start lending, will they be able to drain the liquidity smoothly out of the system? Will America face a bout of inflation? Or, more likely, in another moment of excess, will the Fed over-react, nipping the recovery in the bud? Given the unsteady hand exhibited so far, we cannot have much confidence in what awaits us.
Still, I am not sure that there is sufficient appreciation of some of the underlying problems facing the global economy, without which the current global recession is unlikely to give way to robust growth - no matter how good a job the Fed does.
For a long time, the US has played an important role in keeping the global economy going. America's profligacy - the fact that the world's richest country could not live within its means - was often criticised. But perhaps the world should be thankful, because without American profligacy, there would have been insufficient global aggregate demand. In the past, developing countries filled this role, running trade and fiscal deficits. But they paid a high price, and fiscal responsibility and conservative monetary policies are now the fashion.
Indeed, many developing countries, fearful of losing their economic sovereignty to the IMF - as occurred during the 1997 Asian financial crisis - accumulated hundreds of billions of dollars in reserves. Money put into reserves is income not spent.
Moreover, growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can't spend it all.
The world's unending appetite for oil, beyond its ability or willingness to produce, has contributed a third factor. Rising oil prices transferred money to oil-rich countries, again contributing to the flood of liquidity. Though oil prices have been dampened for now, a robust recovery could send them soaring again.
For a while, people spoke almost approvingly of the flood of liquidity. But this was just the flip side of what Keynes had worried about - insufficient global aggregate demand. The search for return contributed to the reckless leverage and risk-taking that underlay this crisis.
America's government will, for a time, partly make up for the increasing savings of US consumers. But if America's consumers go from their near-zero savings to a modest 4% or 5% of GDP, then the depressing effect on demand (in addition to that resulting from declines in investment, exports and state and local government expenditures) will not be fully offset by even the largest government expenditure programmes. In two years, governments, mindful of the huge increases in the debt burden resulting from the mega-bailouts and the mind-boggling deficits, will be under pressure to run primary surpluses (where government spending net of interest payments is less than revenues).
A few years ago, there was worry about the risk of a disorderly unwinding of "global imbalances". The current crisis can be viewed as part of that, but little is being done about the underlying problems that gave rise to these imbalances. We need not just temporary stimuli, but longer-term solutions. It is not as if there was a shortage of needs; it is only that those who might meet those needs have a shortage of funds.
First, we need to reverse the worrying trends of growing inequality. More progressive income taxation will also help stabilise the economy, through what economists call "automatic stabilisers". It would also help if the advanced developed countries fulfilled their commitments to helping the world's poorest by increasing their foreign-aid budgets to 0.7% of GDP.
Second, the world needs enormous investments if it is to respond to the challenges of global warming. Transportation systems and living patterns must be changed dramatically.
Third, a global reserve system is needed. It makes little sense for the world's poorest countries to lend money to the richest at low interest rates. The system is unstable. The dollar reserve system is fraying, but is likely to be replaced with a dollar/euro or dollar/euro/yen system that is even more unstable. Annual emissions of a global reserve currency (what Keynes called Bancor, the IMF calls SDRs) could help fuel global aggregate demand and be used to promote development and address the problems of global warming.
This year will be bleak. The question we need to be asking now is, how can we enhance the likelihood that we will eventually emerge into a robust recovery?
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