Decade at Bernie’s

By PAUL KRUGMAN, Feb 16, 2009, NY Times

By now everyone knows the sad tale of Bernard Madoff’s duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else’s imagination.

Unfortunately, that’s a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century.

Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?

Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. And if the belief of many Americans that they could count on capital gains forever sounds naïve, it’s worth remembering just how many influential voices — notably in right-leaning publications like The Wall Street Journal, Forbes and National Review — promoted that belief, and ridiculed those who worried about low savings and high levels of debt.

Then reality struck, and it turned out that the worriers had been right all along. The surge in asset values had been an illusion — but the surge in debt had been all too real.

So now we’re in trouble — deeper trouble, I think, than most people realize even now. And I’m not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now.

For this is a broad-based mess. Everyone talks about the problems of the banks, which are indeed in even worse shape than the rest of the system. But the banks aren’t the only players with too much debt and too few assets; the same description applies to the private sector as a whole.

And as the great American economist Irving Fisher pointed out in the 1930s, the things people and companies do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time. Attempts to sell assets and pay off debt deepen the plunge in asset prices, further reducing net worth. Attempts to save more translate into a collapse of consumer demand, deepening the economic slump.

Are policy makers ready to do what it takes to break this vicious circle? In principle, yes. Government officials understand the issue: we need to “contain what is a very damaging and potentially deflationary spiral,” says Lawrence Summers, a top Obama economic adviser.

In practice, however, the policies currently on offer don’t look adequate to the challenge. The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured.

There’s hope that the bank rescue will eventually turn into something stronger. It has been interesting to watch the idea of temporary bank nationalization move from the fringe to mainstream acceptance, with even Republicans like Senator Lindsey Graham conceding that it may be necessary. But even if we eventually do what’s needed on the bank front, that will solve only part of the problem.

If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.

Since nothing like that is on the table, or seems likely to get on the table any time soon, it will take years for families and firms to work off the debt they ran up so blithely. The odds are that the legacy of our time of illusion — our decade at Bernie’s — will be a long, painful slump.

Obama Riding the Wave

By BOB HERBERT

Listening to President Obama, I was struck by how well he understands that most voters are not driven by ideology and are not searching for politically orthodox leadership. Most want leaders who speak to their needs — especially in this time of economic crisis — and a government that works.

Republicans in Congress — all but completely united in their effort to build a wall of obstruction in the path of President Obama’s economic revitalization effort — seem to be missing this essential point.

In a conversation with a small group of columnists aboard Air Force One on Friday, the president discussed the fight over his stimulus package, which was in the process of gaining final passage as he flew from Washington to Chicago for a brief rest with his family.

He said that the fact that he’d been rebuffed so far in his quest for bipartisanship would not stop him from reaching out for Republican support.

“Going forward,” he said, “each and every time we’ve got an initiative, I’m going to go to both Democrats and Republicans and I’m going to say, ‘Here’s my best argument for why we need to do this. I want to listen to your counterarguments. If you’ve got better ideas, present them. We will incorporate them into any plans that we make, and we are willing to compromise on certain issues that are important to one side or the other in order to get stuff done.’ ”

When I asked him if there was any reason to believe that the G.O.P. had made a good-faith effort at bipartisanship, given the fact that only three Republicans voted for the stimulus plan in the Senate and none in the House, he said he did not want to question the motives or sincerity of those who opposed the plan.

But he made a point of adding, “Now, I have to say that given that they were running the show for a pretty long time prior to me getting there, and that their theory was tested pretty thoroughly and it’s landed us in the situation where we’ve got over a trillion-dollars’ worth of debt and the biggest economic crisis since the Great Depression, I think I have a better argument in terms of economic thinking.”

He also made it clear that he won’t let his desire for bipartisanship undermine important initiatives. “I’m an eternal optimist,” he said. “That doesn’t mean I’m a sap.”

Mr. Obama’s tone and demeanor during the nearly hourlong interview was a duplicate of his nationally televised press conference last week.

He was relaxed and had complete command of a range of complex issues, including the troubled banking sector, health care reform and the need to do more in terms of innovative education initiatives.

But beyond his specific policies (and whether one supports them or not), Mr. Obama is emerging as the very model of the type of person one would want in high public office. He is intelligent, mature, thoughtful, calm in the face of crises and, if the nation is lucky, maybe even wise.

When asked about the sharp drop in the stock markets after Treasury Secretary Tim Geithner announced an expanded bank bailout plan last week, Mr. Obama replied:

“I am not planning based on a one-day market reaction. In fact, you can argue that a lot of the problems we’re in have to do with everybody planning based on one-day market reactions, or three-month market reactions, and as a consequence nobody was taking the long view.

“My job is to help the country take the long view — to make sure that not only are we getting out of this immediate fix, but we’re not repeating the same cycle of bubble and bust over and over again; that we’re not having the same energy conversation 30 years from now that we had 30 years ago; that we’re not talking about the state of our schools in the exact same ways we were talking about them in the 1980s; and that at some point we say, ‘You know what? If we’re spending more money per-capita on health care than any nation on earth, then you’d think everybody would have coverage and we would see lower costs for average consumers, and we’d have better outcomes.’ ”

Near the end of the interview, the president said that there are certain moments in history when significant change is possible.

“It’s not a certainty,” he said, “but it’s possible.”

He said he believed that it’s very difficult for any single individual to actually set that kind of “momentum” for change in motion. But when that historical wave is there, he said, “I think you can help guide it.”

When asked if we are in one of those moments now, he said, “Yes. I firmly believe that.”

Obama Gains G.O.P. Support From Governors

By JACKIE CALMES, NY Times Feb. 17, 2009

WASHINGTON — President Obama must wish governors could vote in Congress: While just three of the 219 Republican lawmakers backed the $787 billion economic recovery plan that he is signing into law on Tuesday, that trifling total would have been several times greater if support among the 22 Republican state executives counted.

The contrast reflects the two faces of the Republican Party these days.

Leaderless after losing the White House, the party is mostly defined by its Congressional wing, which flaunted its anti-spending ideology in opposing the stimulus package. That militancy drew the mockery of late-night television comics, but the praise of conservative talk-show stars and the party faithful.

In the states, meanwhile, many Republican governors are practicing a pragmatic — their Congressional counterparts would say less-principled — conservatism.

Governors, unlike members of Congress, have to balance their budgets each year. And that requires compromise with state legislators, including Democrats, as well as more openness to the occasional state tax increase and to deficit-spending from Washington.

Across the country, from California’s Arnold Schwarzenegger to Florida’s Charlie Crist and New England’s Jim Douglas in Vermont and M. Jodi Rell in Connecticut, Republican governors showed in the stimulus debate that they could be allies with Mr. Obama even as Congressional Republicans spurned him.

“It really is a matter of perspective,” Mr. Crist said in an interview. “As a governor, the pragmatism that you have to exercise because of the constitutional obligation to balance your budget is a very compelling pull” generally.

With Florida facing a projected $5 billion shortfall in a $66 billion budget, and social costs rising, the stimulus package “helps plug that hole,” Mr. Crist said, “but it also helps us meet the needs of the people in a very difficult economic time.”

Mr. Obama’s two-year stimulus package includes more than $135 billion for states, to help them pay for education, Medicaid and infrastructure projects. Yet even that sum would cover less than half of the total budget deficits the states will face through 2010, according to the Center on Budget and Policy Priorities, a liberal research and advocacy organization.

The states’ reliance on the federal government in times of distress will be showcased this weekend, when the governors come to Washington for their annual winter meeting. Their focus will be on infrastructure needs and home foreclosures.

The disconnect between Republican members of Congress and governors recalls the mid-1990s, when Republicans took control of both the House and Senate for the first time in 40 years. After an initial public show of being partners in a “Republican revolution,” the partnership all but dissolved when governors strongly objected as the more dogmatic conservatives in Congress tried to cut domestic programs and then shut down the federal government in an unsuccessful showdown with President Bill Clinton.

Recently, Governors Schwarzenegger, Crist, Douglas and Rell joined 14 Democratic governors in signing a letter to Mr. Obama lauding his economic plan. Other Republicans would have signed on, said a person familiar with the letter’s drafting, but for party pressure in their states.

The National Governors Association sent a bipartisan letter of support to Congressional leaders of both parties, signed by its Democratic chairman, Edward G. Rendell of Pennsylvania, and Mr. Douglas, its Republican vice chairman. “The combination of funds for Medicaid, education and other essential services is critical for governors as they work to manage the downturn in their states and improve government for the long term,” it said.

Mr. Crist even campaigned last week with Mr. Obama in Florida for the recovery package.

“Whether it’s teachers or people on road crews helping our infrastructure, those in the health care arena as it might relate to Medicaid, all of these areas are important, all of them can produce jobs,” Mr. Crist said, adding, “Regardless of what your party is, Republican or Democrat, it really doesn’t matter. We have a duty and an obligation to the people who elected us, no matter what our position happens to be, to work together to get through this thing.”

Yet all 16 of Florida’s Republicans in Congress voted against the package. Representative Cliff Stearns condemned it during the final debate as an “unprecedented big-government grab for citizen reliance on the federal government.” Joe Scarborough, a former Republican congressman from Florida, called the bill “a steaming pile of garbage” on his cable television talk show.

The House Republican leader, John A. Boehner of Ohio, angrily dumped the 1,073-page bill to the floor during debate. In the Senate, John McCain of Arizona called it “nothing less than generational theft.” And Republicans in both chambers derided what they described, often misleadingly, as pork spending for the likes of marsh mouse preservation.

Many projects, however, reflected the job-creation wish lists that governors had sent in.

Utah’s Republican governor, Jon Huntsman Jr. sought up to $14.4 billion for roads, rail and sewer projects and for construction of a prison, courthouses and veterans’ nursing homes. Gov. Bob Riley of Alabama, another Republican, came to Washington to discuss transportation projects with his state’s Congressional delegation. “He’s going to make sure Alabama doesn’t miss out on the money we’re entitled to,” a spokesman said.

Mr. Obama began courting the governors before taking office. He invited them to Independence Hall in Philadelphia in December to discuss the economic challenges. Nearly all accepted.

In his opening remarks, Mr. Obama had “a special word” for the Republicans: “I offer you the same hand of friendship and cooperation that I offer our Democratic governors.” He deferred to Mr. Douglas, the Vermont Republican, to steer the discussion.

Privately, Republicans favorably contrasted Mr. Obama with the outgoing Republican president, George W. Bush, according to two participants.

Though Mr. Bush had been a governor — in good economic times — his relations with state executives were distant at best. Amid a downturn early in the decade, he unsuccessfully opposed $20 billion for the states. Last fall, he resisted some Republicans’ pleas for aid.

Mr. Douglas in January sought a meeting with the new administration at the White House office that is a liaison to governors. Instead, he got an Oval Office meeting with Mr. Obama.

When reporters briefly came in — the two men flanked the fireplace just as presidents and foreign heads of state typically do — Mr. Douglas praised Mr. Obama for his leadership. The stimulus bill “might be a little different” if he had written it, the Republican said. “But the essence of a recovery package is essential to get our nation’s economy moving.”