In the middle of the valley

There is little doubt that the crisis has affected the less educated much more than others in this economy. The construction sector, one where many less-skilled workers are hired along its supply chain, has suffered and so have those sectors that provide them with goods and services, which also employ many workers.

The credit crunch has affected consumption in a significant fashion promoting in some sectors of the economy a sort of market concentration as many firms were forced to shut down their operations. The lack of trust in the future aggravated the situation affecting the level of productive investment thereby decreasing the demand for labor.

All that has became apparent and possibly understood by now. Forecasting the future is another act entirely. A casual reading of opinions suggests a lack of consensus about timing and severity. At the center of the disagreement is the question of policy effectiveness.

Will the tepid reforms in the financial sector help to avert a new crisis? I say no. But that is ketchup for a different burger.

For the middle class, some employed and worried and some already unemployed, the present probably seems like a big valley. Standing in the middle of it there are very big and tall seemingly insurmountable hills. Not that we know what may be on the other side, but a gulp of fresh air would be nice now and then.

But the current situation does not seem to indicate that we are going to leave the valley soon. As unemployment continues to increase, although affecting the service and construction sectors more than others, and as the credit markets globally look like a placid still water brewing with bacteria, there seems to be little indication as to where the path out of the valley really is.

The public discourse has shifted away from the ongoing crisis towards other relatively more insipid subjects. But the unemployed and marginalized continues to be there, waiting, the uninsured are there and so is the worried middle class, with an uneasy feeling, like a dark cloud, hanging over our heads.

In the minds of the powerless collective there must be one question: when are we going to get out of this mess?

The answer does not seem to be in sight. After the big hoopla of indignation and public scorn the financial sector is emerging less competitive, more powerful, and not that much more regulated than before.

Public works may be in their beginning stages, but we may not see results for some time to come.

Will economic activity pick up later this year or by 2010? Perhaps, if we do not go through another shock we may see better days by then.

The paradox is that while most individuals rationally save for the incoming rain, the effect on economic activity accelerates the rain and transforms it into a possible thunderstorm. Our behavior partly promotes our problems.

In the middle of the valley most of us can only see the mountains, maybe our problem is that our leaders have a difficult time tracing a path, a credible one. The promises made during the election campaign were of a change that so far is not materializing into progressive economic policy. It cannot be. Obama’s team is ideologically conservative; not what he promised.

That is why we cannot shake that uncomfortable feeling that we are in a valley and that for now we will not find our path out of it.

--Luis Brunstein

Will the stimulus package work?

In the midst of the evolving crisis everybody is asking the same question, will the Obama economic program for recovery work?

The answers one hears from “experts” these days tend to be coated with a healthy layer of partisan biases adding fog to an already complex issue. Is this a “socialist” program? Can we recover by building bridges?

What makes this crisis so complex to address is the fact that the disastrous shape of the financial markets, resulting from very lax regulation, affected the real economy as credit began to dry affecting both consumption and investment.

Unemployment increases as the demand for good and services fall and it worsens as the demand for new equipment to produce those goods and services falls as well. Fear begets fear.

The stimulus package proposes some steps to put cash in people’s hands quickly, such as a tax cut of $1000 per family, not much but surely to multiply fast as it becomes immediate consumption.

The modernization of millions of houses and thousands of public buildings, to make them more energy efficient, will create many jobs in a sector that needs to hire many people that will turn around and spend most of their money back into their local economies right away, promoting more jobs, while their work help the country to save energy and pollute less.

The same effects will come from jobs generated out of the construction efforts in the modernization of the infrastructure in the education sector, the area of broadband expansion and the retrofitting and maintenance of our roads and bridges.

However, as the real economy becomes more dynamic the fearful credit markets hold the economic expansion down.

It is not enough to put cash in the workers’ hands, a modern economy needs to have a functioning credit sector that allows its work force to buy cars, refrigerators and houses so that consumers can access the goods and producers have an incentive to hire more workers who will, in turn, buy the goods they all make.

That is why the debate around the stimulus package is beginning to center around the question of whether the government should take control of the banks in order to start lending more money to consumers and producers since banks are not lending enough to buttress the recovery effort.

It is not enough for the government to become the employer of last resort. The stimulus package is a good idea full of good intentions and with an eye into the future. But if the banking sector does not change its behavior quickly, not likely to happen soon, the government will have to intervene and become, at least for a while, a lender of last resort while implementing a stronger regulatory environment.

Instead of lending the money to bankers, lend money to consumers and producers, not speculators. At least let’s do it until we recover. This eliminates the risk of money fleeing to countries with laxer regulation and supports the recovery stimulus program at home. Only then will the stimulus program have a chance to work within a reasonable amount of time while hoping for no new storms.

--Luis Brunstein

The ideological battle once again

People in and outside the United States were probably more than curious about the first press conference that Obama held on Feb. 9 where he addressed the economy and the other secondary sound bites like the Middle East policy, nuclear proliferation and the recalcitrant attitude of the Republicans on the other side of the aisle.

The main topic of discussion has boiled down to two questions: will 800 billion be enough to get the economy going? And, how much should we cut taxes and how much should we spend in public works?

Both questions are being debated along strong and historically determined ideological lines so cleanly defined that it reminds us of the arguments between Obama and McCain during the campaign.

Those who question de wisdom of public spending seem to intentionally or otherwise have forgotten their basic economics. Workers spend most of their money to pay for shelter, food and other necessities. They alone have the strongest capacity to move the economy forward and can do it faster than any other measure during a crisis like this one.

Public spending is not a hand out if it is used to built and maintain needed public infrastructure. It is an investment that promotes greater levels of productivity in the future; better roads to get to better schools and hospitals.

Hence, we build a stronger country and promote greater demand for all goods and services. Most economists are questioning if the government is spending enough rather than too much.

However, many Republicans have argued that the best way to restore the economy is by cutting taxes or by implementing complicated schemes to make sure that we do not run up de budget deficit.

If the crisis continues to evolve the budget deficit will be the least of our problems; the patient is dying and also has a headache, let’s make sure he does not die with a headache, bring the aspirin fast.

During a crisis tax cuts work only if they go directly to those who will spend it for sure, the middle and working classes. The upper classes will save it until a better day.

The ideological battle in Congress today takes shape in it purest form by criticizing the government’s intention to get the money as fast as possible into the hand of those who will spend it.

What is not being debated, however, is how this administration will manage to create a policy to restore confidence in the credit markets, assuming that we alone can do that; rather doubtful, we need a global coordinated solution.

Perhaps, if all else fails Obama should consider to either deepening the government’s intervention in the credit system or nationalizing parts of it in order to promote the flow of cash across the economy; the government as a lender during a crisis, novel but not that daring. But that would also face a greater battle; it is politics as usual in Washington.

— Luis Brunstein

The evolving crisis

According to the National Bureau of Economic Research the United States has now being officially in a recession for about a year and the Chairperson of the Central Bank, Bob Bernanke, anticipates a weak economy.

A casual reading of economists’ prediction in the media suggest that the United States may live through a recession that could last about a year — and maybe more — and that there will be a significant reconfiguration of the international financial structure waiting at the beginning of the recovery period.

The world, and particularly the people in the United States, have placed a lot of stock on the incoming administration and its economic plan that would allegedly motorize the heart of the economy by heating up de demand side of it while fixing up the nation’s infrastructure.

Doubts about the future are beginning to mount as the appointees to key positions are of a rather conservative ideological extraction, suggesting a perhaps tepid approach to a problem of historical proportions.

President Elect Obama insists that his view will be the prevailing one, meaning that his government will give a big push to the economy and it will work at restoring the financial system by implementing strong regulatory measures.

We are at a crossroads right now, nobody expects bold measures of the outgoing administration and we just have to sit in the waiting room.

One of the problems about waiting is that time accentuates the polarization of the socioeconomic structure because recessions tend to castigate workers with limited skills in a disproportionate fashion, think about the already precarious service sector, and by January the problem will be much greater.

The global crisis exacerbates the recessionary effect because, as our trading partners suffer, we will suffer as well via the multiple economic linkages, and the global crisis does nothing to improve consumer and producers’ sentiment about the future.

The magnitude and direction of the initial jolt of the economic rescue package to be implemented by Obama will shape the profile of the future because to a significant extent the new government will have a window of opportunity, albeit getting smaller, to improve the expectations about the future, and that would be, at this point, a much needed initial push.

Expectations are not everything, but the real economy is dramatically affected by the functioning of the financial sector and the confidence level of consumers and producers; and both feed into each other dynamically. Restore confidence and we may be able to make some inroads into the recovery period.

If China, the European Union and Japan do not fall down too deep into their own cycles and if nothing extraordinary happens in the developing world the Obama plan may have a chance to provide the initial spark, but those are big ifs. For now, sit on tight and knock on wood, there is much more water to pass under this bridge.

— Luis Brunstein

The deeper economic question

That we are in the middle of a financial crisis and an economic recession is a fact. That we are not sure how long it is going to last or even how either one of them will evolve and affect the other is also true. We are just guessing.

We know that a recession was impending, but without a financial crisis it would have been all that much easier to mitigate its distributional effects. It is clear now that the financial crisis was generated by an excessive amount of capital searching for scarcer return opportunities around the globe and that in a lax regulatory environment they promoted the bubble that distorted the real picture of the economy and promoted a larger and more painful plunge.

The leaders of the 20 countries who gathered recently in Washington produced a text that essentially calls for more regulation, global standards, more transparency and more accountability. They also call for the creation of a super global regulator from the ashes of the IMF/World Bank combination.

However, the deeper economic question here is one of trust. In paper, all the regulations were in place and after the financial crises in Asia and Latin America it was understood that the systemic problem behind most crises is excessive risk-taking on the part of financial players during economic expansions.

Sometime before the economic cycle reaches its peak and the stocks of public companies are enjoying a prosperous market, the financial sector transforms itself from being speculative to being outright irresponsible or super speculative as the more solid investments become harder to find. Excess liquidity only exacerbates the behavior. This is why the sub-prime debacle took place at the end of the upward part of the economic cycle partly precipitating the inevitable.

Thus, if we understand all this very well, why are we calling for a radical transformation of the financial sector?

If the central problem is one of trusting the regulators, then the issue is relatively simple, change the regulator who failed for another one who has a stronger work ethic. That settles the secondary question of ownership. Ultimately, whether the State takes control or not we still need honest people.

Instead, the real effects of this reform so far have been an increased concentration of power in fewer hands leading to a much less competitive environment. Worse yet, fewer and larger financial institutions will have greater political power, ergo more lobbying power and will be more difficult to regulate.

And why do we need a new super regulator?

The IMF/World Bank combination has enough infrastructure to be one today, but their problem are the people working there, their ideology and the models they use to analyze the world.

Perhaps what we really need is to fire the people who failed at their jobs and hire other people who we can trust. Instead, we are hiring the same people who have failed at their jobs to redesign the system and we are spending billions in making it less competitive. It seems we are doing nothing short of planting the roots of a future crisis.

If the real problem is one of regulation, then we need more and better regulators, and some tougher laws. We understand what is wrong. What we really need is a group of leaders in which we can trust so our current institutions can be more effective at doing their alleged job, to maintain the trust in the international financial markets.

An economic stimulus package will go a long way to mitigate the plight of the unemployed and to promote consumption and production, but it will not restore faith in the financial sector. And that is the deeper economic question.

— Luis Brunstein

The emerging economic policy

From the ashes of the still-burning financial sector and slowly and tentatively walking across the fields of the newly ranks of the unemployed in the United States President Elect Barack Obama and a team of experienced members of the national economic establishment held a first meeting to profile a first approximation to a set of potential solutions.

Most notably is the mix of academics and practitioners, however, besides the former Secretary of Labor under Bill Clinton, Robert Reich, most of names are not associated to the progressive ideas exalted by Mr. Obama during his “change” campaign.

There are other people in this country, center-progressives like Joseph Stiglitz and Paul Krugman, who should have been consulted on account of their vast knowledge and understanding of global crisis. While this may be a sign of things to come, at this point is too early to produce a fair judgment.

From the initial meeting with this group of people Mr. Obama announced that the first order of businesses would be to quickly implement an economic stimulus package and during his speech he tangentially suggested that some of the bailout money could be diverted for this purpose.

Additionally he suggested that his administration will tray to revert a tax reduction on the upper classes passed during the current administration and lasting until 2010. Ideally Mr. Obama would like to revert the law in 2009, thus gaining a year of additional tax revenues to be used towards the stimulus package.

Are these good ideas?

The short answer is, yes.

Under the current circumstances it has become clear that increasing the amount of available money in the economy, lowering interest rates, and otherwise making it easy for banks to obtain fresh funds has not promoted economic activity, as verified by the recent increased in unemployment and fall in output. Hence, monetary policy is trapped in a pool of cash.

An stimulus package, allegedly, would not only restore employment, as hinted by Mr. Obama, via the public sector but would, fundamentally, put money in the hands of workers who will spend it right away in food, shelter, clothing, education and all the necessities. Every dollar that goes to the hands of the working class will have the largest multiplier effect on the economy.

During a crisis this is the most adequate and progressive solution. In that sense, it agrees with both, Krugman and Stiglitz’s views and most likely with many Keynesian and Post Keynesian economists dispersed across the academic firmament. And that reveals that perhaps, Mr. Obama is beginning to walk the walk above and beyond the views held by anyone in the traditional establishment.

— Luis Brunstein

The 2012 Presidential campaign

After a few days all of us are beginning to recover from the initial state of shock, we have witnessed the election of the first black President of the United States. Of almost equal significance is the manifested shift away from one political paradigm towards another, away from corporate-socialism/neo-conservatism towards center/progressivism.

It is true, Mr. Obama’s eloquence and public charisma has been a fantastic conduit for the relatively progressive platform profiled by the Democratic party onto the nation, but the vote in favor of “change” was also one of equal force and magnitude against “more of the same.”

This was a vote against policies emanating from the right wing of the Republican party, the “Bush doctrine” of preemptive strikes and equally harmful aggressive foreign policy stance including violations of human rights and crimes against humanity, the attempted privatization of our retirement system, the implementation of regressive and polarizing economic polices, the promotion of a lax and laxer regulatory environment at all spheres of our socio-economic life laying the groundwork for the current crisis. This was the essence, the core, of the rejected paradigm.

The newly elected President represents a historically disenfranchised minority; it is the cherry on top of the ice cream, a welcome opportunity for other minorities in the future.

But now, as we dry our last tears, it is time to go back to work. The 2012 campaign has begun. The incoming administration will have to make some difficult choices. There are some magnificent hurdles ahead of us.

In the immediate horizon this administration must find a way to restore the integrity of the heart of the core of our economic system, the credit markets. This will be a daunting task of gargantuan proportions and a sort of fiscal Pandora’s box. It will surely involve a much greater regulatory machine run from atop the State. Perhaps, as suggested by some, the solution would be to implement a super lender of last resort who would also be a super regulator. But that would suggest a much more progressive ideology than what has been currently exhibited, time will tell.

In the near future, this country needs to revisit the problems associated with undocumented immigrants peripherally associated to globalization and outsourcing, universal health care, public education, capitalization of public infrastructure, Social Security funding, the invasion of Iraq and seriously improving our foreign relations with the various players in the Middle East, Asia, Africa and Latin America.

In the long run, the mounting problem of our foreign debt will burden future generations who will have to learn how to consume less and pay higher interest rates in the credit markets. This may prove to be an insurmountable problem for the new President and one that will test all his management skills and political savvy. And then we have the ominous and related problem of global warming and funding the research for alternative fuels initiatives.

Along the way the Obama’s administration will make, surely, some mistakes, but if it stays true to its progressive agenda we, the ones who voted for him, need to remain ever vigilant by his side. We must never again fall sleep on our laurels, we did that before and look where it got us.

No, we cannot afford another calamitous administration. The 2012 campaign starts now and we are all in it; you have no choice. Be informed, participate, become educated and opinionated, questions your leaders, your representatives, walk the walk, vote in every single election, fight for power and hold on to those newly acquired progressive spaces, do not let go, be a Pitbull and a guardian for the progressive cause.

History shows that great pyramids are built over many years and with the aggregated effort of millions. We have a duty, an obligation to remain alert and combatant, because our future and that of your love ones depend on our continuous efforts, the next Presidential campaign has began.

--Luis Brunstein