Fly-Over Country

Barney Frank schools Jim DeMint

On Sunday ABC's "This Week" featured what the so-called liberal media considers a balanced panel (two CEOs, a Republican Senator, and a Democratic Congressman) to discuss the stimulus.  Happily the Democrat was Barney Frank, who wiped the floor with the Republican, Sen. Jim DeMint (R-SC).  This exchange is an excellent example:

DEMINT: And so it really comes down to a basic argument: Do you want a government-directed plan or do you want the free markets to work?

FRANK: Well, yes, I do want -- I want highways. I want better medical care for people laid off. This notion -- and the one thing I would most disagree with is you say we overregulated. It was the complete absence of regulation in the financial area that led to the crisis we're in today.

. . . FRANK: The policy was, yes, to put no restrictions on people outside the banking system who are extending themselves in the financial area into instruments which they couldn't back up. It was even within the banking system, letting people go with things that were off the balance sheet.

The complete absence of regulation in the financial area has, I think, been a disaster. And I think we're back to where we were when Theodore Roosevelt and Woodrow Wilson stepped in or Franklin Roosevelt.

But beyond that, the notion that everything is solved by a tax cut, of course there are sensible tax policies you could have. But there are public needs we have in this society...

DEMINT: Sure.

FRANK: ... that cannot be accomplished by a tax cut. No tax cut builds a road. No tax cut puts a cop on the street. No tax cut educates a child in -- in the way that it ought to be done.

So this -- only tax cuts, at a time when I think we have a deficiency in some areas that are important for the quality of our life is a big disagreement.

DEMINT: But, George, we -- we have programs. I mean, we're reauthorizing our highway bill this year.

FRANK: At too low a level.

DEMINT: And -- well -- well, let's talk about making it a higher level, but let's don't say it's a stimulus when it's a government spending plan. And all of these things, the needs in our society, education, these are things we debate every year.

FRANK: Spending can be stimulus. I don't understand what you think stimulus is.

(CROSSTALK)

DEMINT: But this is the largest spending bill in history, and we're trying to call it a stimulus when it's just doing the things that...

FRANK: Well, let me tell you what I think is the largest...

DEMINT: ... you wanted to do anyway.

FRANK: The largest spending bill in history is going to turn out to be the war in Iraq. And one of the things, if we're going to talk about spending, I don't -- I have a problem when we leave out that extraordinarily expensive, damaging war in Iraq, which has caused much more harm than good, in my judgment.

And I don't understand why, from some of my conservative friends, building a road, building a school, helping somebody get health care, that's -- that's wasteful spending, but that war in Iraq, which is going to cost us over $1 trillion before we're through -- yes, I wish we hadn't have done that. We'd have been in a lot better shape fiscally.

. . . FRANK: That's the problem. The problem is that we look at spending and say, "Oh, don't spend on highways. Don't spend on health care. But let's build Cold War weapons to defeat the Soviet Union when we don't need them. Let's have hundreds and hundreds of billions of dollars going to the military without a check." Unless everything's on the table, then you're going to have a disproportionate hit in some places.

DeMint's fatuous definition of the question ("Do you want a government-directed plan or do you want the free markets to work?") captures what's wrong with the Republicans' view.  According to Republicans, there's this magical "free market" that will solve all our problems if only we get out of its way.  I've written previously about this inanity, and that applies here.  There's no such thing as the "free market" -- at least as DeMint imagines it -- and it's appalling that someone could live to DeMint's age and still believe in the equivalent of the tooth fairy.

Then there's DeMint's complaint that "let's don't say it's a stimulus when it's a government spending plan."  Um, Jim?  Spending is a stimulus.  That's why, for example, it's stupid to ridicule the plan for the government to purchase $600 million in new vehicles.  That will stimulate the economy with $600 million of new spending.  To build those $600 million worth of vehicles, auto makers will have to pay people wages, and in turn they'll use those wages to buy things that other people will be paid wages to make.  And so on.  As a result of the multiple transactions that flow from spending, every dollar of spending produces about $1.50 of stimulus.  In contrast, every dollar that corporate taxes are cut produces about 30 cents worth of stimulus.  Republicans steeped in the voodoo of supply-side economics have forgotten that a demand side of the equation even exists.  That disables coherent analysis when, as is true today, we have a demand side problem.

Frank's point about Iraq is equally well taken.  According to Nobel-Prize-winning economist Joseph Stiglitz, the Iraq war will ultimately cost us about $3 trillion.  I'd say that every dollar of that is wasted, but it's worse than that because the Iraq war has been a disaster and made us worse off.  Perhaps there's a higher and better use for $600 million than buying the government new cars, but unlike the Iraq war, buying the government new cars won't make us worse off than we are right now.  Nevertheless, Republicans are standing in line to spend more on crazy wars.

Finally, Frank had an excellent response on the unfortunate "buy American" provisions of the House bill.  He conceded that they're bad policy, but he explained why they're good politics -- there's a huge gap between the elites and the people on issues like trade, because the elites don't care that the burdens of a globalized economy fall disproportionately on those least well equipped to shoulder them.  Ordinary people fear for their jobs, their pensions, their health care, and now even their homes.  These aren't just statistics that net out to the greater good in some economic model, they're living, breathing American families who lack a decent social safety net, and they can't afford to care about disinterested theories of international trade.  As Frank points out, business leaders who'd like a freer hand on trade and other issues have to back measures to protect the Americans whose lives are damaged and disrupted by the ensuing volatility.

All of these issues illustrate why it should be virtually impossible to work out a bipartisan compromise with Republicans, who are ideologically incapable of comprehending what is necessary, let alone doing what is necessary.  If there are spending measures preferable to those already included, then by all means do them instead.  For example, there seems to be something of a consensus that more should be spent on infrastructure.  Good.  But there's no reason to reduce the size of the package or replace spending with ineffective or counter-productive tax cuts to create bipartisan agreement on a bad bill.  Obama and Congressional Democrats should be prepared to work with reality-based proposals, but this is no time for a compromise between reality and ideology.

Martin Feldstein and Joseph Stiglitz on Charlie Rose

Yesterday Charlie Rose hosted an excellent discussion with economists Martin Feldstein and Joseph Stiglitz on the current economic crisis.

Feldstein and Stiglitz approach the subject from quite different philosophical perspectives, so it was striking to see that they agree on key points.  For example, both agree that the current crisis is very real and that a large fiscal stimulus is vitally necessary.  Both agree that the TARP bailout was badly designed, has thus far been badly executed, and has thus far accomplished very little.  Both agree that the remainder of the TARP funds ($350 billion) should be used to reset the mortgages on homes where buyers are upside down.  (Stiglitz would have the banks take a bigger haircut than Feldstein would.)  Both worry that the US economy has been propped up for the last several years by bubbles (in tech stocks, housing, and consumer spending) and that, while government spending can prop the economy up in the short run, it's unclear how we will restore sustainable economic growth in the longer run.

I was struck by Stiglitz's concern that the Bush administration's failures will prejudice people against the vitally necessary government action to come.  Perhaps, he worries, people will look at the failure of tax cuts and the bailout, and in a context of huge inherited debts and deficits, they will conclude that it's now best to let the market solve its own problems.  This would be a disaster, so I hope the Obama administration is ready to roll on this.

It's also notable that there is so little discussion about fixing the home mortgage crisis.  Both Feldstein and Stiglitz agreed that the financial sector won't make any progress until that happens, and relief to homeowners should be a central pillar of any stimulus package.  After all, there's no way consumers will start spending again until they quit bleeding out wealth in the falling values of their homes, and their homes will continue falling in value so long as foreclosures continue to devastate the housing market.  I hope Team Obama is listening to Barney Frank on this.