An amateur hitchhikers guide to the President's political agenda.
by Ravi Verma, Wed Nov 25, 2009 at 01:52:09 PM EST
In my previous diary , I laid out the background relevant to the President's economic agenda. To summarize
(a) US consumers like to save 5 to 10% of their disposable personal income. This number is grounded in the American psyche.
(b) In the runup to the financial crisis, Americans were lulled by the moneys they were borrowing against rising home values into decreasing their savings rate down to 0.
(c) Therefore, when the MEW ATM was turned off, US consumers decided to up their savings rate back into the 5-10% range.
(d) A savings shock of this magnitude has not been felt before (aside from WWII), and it is hard to predict the effect of this savings shock on personal consumption expenditures (PCE). The rule of thumb around historical data calls for a small decline, but there is considerable scatter in the data affected by various factors (such as confidence in the leadership etc.)
So that brings us to the present.
President Obama came into office when the savings shock was just at the initial stages (we are now, roughly halfway through). His primary economic goal is to mitigate effect of this shock. He has to convince "Joe the plumber" (remember him ? There was a reason why Candidate Obama wanted to talk to Joe so badly) of the following: (a) in the long run, Joe will be okay. (b) in the short run, Joe will have to endure some sacrifices (i.e., cut back on PCE), but those will not be too difficult to bear.
Note that these two parts are interrelated. Joe will be okay in the long run only if Joe does not unduly panic (or cut back too much) in the short run.
Joe will have confidence in his long term future only if he think the US government knows what it is doing. Thus, President Obama's personnel selection (his first major decision) is critical. The President is forced to choose a team with impeccable credentials ~ a team of very smart people with no ideological blindspots. He cannot pick any politicians...everybody knows that you cannot run for elected office if you understand economics.
He picked Geithner and Summers, and renominated Bernanke...even their critics agree that Geithner and Summers and Bernanke are all very smart. He could have looked elsewhere, but the choices were limited (Krugman wasn't interested, etc. etc.). Personally, I would have made a different choice, but I also would not get more than 2 votes if I ran for President (and that is only if I could convince my wife to vote for me). But, having made his choice, he has to stick with it. Nothing spooks an investor (in this case Joe the plumber) more than the thought that the guys in charge are idiots.
But Joe has other concerns that must be addressed before he goes out and buys an appliance that he does not necessarily need right away.
Joe would like to know that the guys in charge will be competent, even in 2013 and in 2017. President Obama can point to his technically qualified team today, but what assurance can he give us that he will be reelected? The risks of President Obama being replaced by a President Palin are too significant , and the impact of that risk is sufficiently high that Joe will not go out and buy an appliance. Actually, in this particular case, replace "Joe the plumber" with "John the bondholder". Joe might not care per se if President Obama is replaced by President Palin, but John does. After all, John has a 10 year (or 20 year) treasury bond, and he would like to be repayed... if John thinks that there is a substantial risk of the US government defaulting, then he will stop buying those bonds. And if he does not buy those bonds, then President Obama will not have the money necessary to loosen up the credit markets, and Joe will not get the financing that Joe needs in order to buy that appliance. And so, while Joe might not care (or perhaps, Joe might even prefer it) if President Obama is replaced by President Palin, Joe will not buy an appliance unless President Obama can address that risk. And if Joe does not go out and buy an appliance, the likelihood of President Palin increases. So what is President Obama supposed to do ?
In this case, President Obama needs to send a signal that he will do all he can to win, but even if he loses, he will do his best to lose to a President Romney, or a President McCain, or even to a President Bush (by that, I mean a Republican grounded in reality) and not to a President Palin. It may get bad if I lose, he will say to John, but it will not be a disaster, and you will still get paid.
So how does President Obama assure John that he will lose to a sane Republican when a substantial fraction of the Republican party is batshit insane, and he has 0 votes during their primaries ?
Actually, bipartisanship serves a second (and more important) purpose ~ it sends a direct signal to John that the policies being carried out by the current administration will not be reversed if it loses to the other side. And, if you think about it, you will realize that this signal to John (the bondholder) becomes more important during uncertain times, and specially during times when one side acts batshit insane. I don't know if bipartisanship (or what is sometimes described as caution) is President Obama's natural inclination, but it is definitely a survival instinct at this point. In addition, bipartisanship serves to prop up the non-batshit insane Republicans. Hopefully, the crazies will go away if Republican moderates have a voice in policymaking... hopefully.
But he is still not done.
Remember that another aspect to the crisis was banks taking on too many bad mortgages, and being seriously underwater. Bad banks do not make loans, and unless banks start making loans, Joe cannot buy anything. President Obama can sell bonds to John, but that does not result in the banks being healthy again, unless.....
Unless President Obama can nationalize the banks (the "n word") or he can give them a lot of money, or he convinces other people to give the banks a lot of money.
This is where, in my opinion, he made a mistake ~ he should have nationalized the banks. In doing so, he would have affected a short term shock to the system, but we would be well past that shock at this point. Instead, he chose a combination of giving them a fair amount of money (via all the rescue packages) and convincing other people to give them a lot of money (this is accomplished by lending the banks money at nearly 0% interest, and then having the banks lend that money out at around 5% interest). The short term liquidity problem was addressed by TARP (and other government programs), and the long term solvency problem is addressed by ZIRP (zero interest rate policy).
But, he chose to avoid the n-word. That was a political decision, and one that could not have been made by Summers, Geithner or Bernanke. Only the decider can decide such matters. As a decider, I would have decided differently (for reasons that I describe below), but then again I would not have gotten more than 2 votes if I wanted to be the decider (and come to think of it, I am not even eligible).
So, what is the rationale for nationalization ?
It turns out that there is still one more thing that Joe needs before he will go out and buy an appliance: a job. With the savings shock, the housing downturn, and the credit markets freezing up, it is inevitable that a lot of jobs will be lost...and some forever. Joe will need a job, or else.... Joe will not buy any appliances, and Joe will vote Republican...perhaps even for President Palin.
And furthermore, if Joe does not have a job, he will be really really pissed if he sees President Obama giving money to the banks. Under the circumstances, I would be pissed too! Come to think of it...I AM pissed, and I don't even know Joe. And with that amount of pissiness, the worst case scenario is not just Joe voting for President Palin, but Joe's neighbour and mother-in-law, and cousin (even the ones that do have a job)...all of them voting for President Palin.
In fact, come to think of it, the worst case scenario isn't Joe (and all his peasant friends) voting for President Palin, but Joe (and all his peasant friends) picking up pitchforks.
The risk (probability of that event X impact of that event) is so great that I would want to avoid that altogether...by uttering the N-word once and for all.
But the President did, definitely, rule out the N-word.
Why ? I don't know. Perhaps he believed that health care reform would free up a lot of dollars as it should have (instead of the other way around). Perhaps he believed that the jobs picture would not be quite as bad as it is (the unemployment numbers are running a fair amount south of the worst case scenario in the stress tests). Perhaps, as he claimed, he truly believed that the US was incapable of nationalizing banks... although I suspect he is too smart for that.
But, having ruled out the N-word, he is stuck with it. He cannot go back and undo those words without spooking off John (remember him, he still matters).
So, how far along are we ? When will this wild ride end ??
According to the latest figures from the Bureau of Economic Analysis:
Personal outlays -- PCE, personal interest payments, and personal current transfer payments -- increased $65.8 billion in October, in contrast to a decrease of $60.6 billion in September. PCE increased $68.3 billion, in contrast to a decrease of $60.3 billion.
Personal saving -- DPI less personal outlays -- was $490.3 billion in October, compared with $510.4 billion in September. Personal saving as a percentage of disposable personal income was 4.4 percent in October, compared with 4.6 percent in September.
Real PCE -- PCE adjusted to remove price changes -- increased 0.4 percent in October, in contrast to a decrease of 0.7 percent in September. Purchases of durable goods increased 2.0 percent, in contrast to a decrease of 8.7 percent. Purchases of motor vehicles and parts accounted for the increase in October and accounted for most of the decrease in September. The September decrease reflected the impact of the CARS program (popularly called "cash for clunkers"), which had boosted motor vehicle sales in July and in August. For further information on how the CARS program is reflected in the GDP statistics, please see the FAQ at BEA's Web site, www.bea.gov, "How will the federal Consumer Assistance to Recycle and Save Act of 2009 (i.e., the CARS program) be reflected in the National Income and Product Accounts (NIPAs)?" Purchases of nondurable goods increased 0.2 percent in October, compared with an increase of 0.6 percent in September. Purchases of services increased 0.3 percent, compared with an increase of 0.2 percent.
PCE price index -- The price index for PCE increased 0.3 percent in October, compared with an increase of 0.1 percent in September. The PCE price index, excluding food and energy, increased 0.2 percent, compared with an increase of 0.1 percent.
So, so far, we have endured a savings shock of around 4-5%. Here is a chart that describes the savings rate to date.
As per CR , the savings rate is expected to rise further...to around 8%. I have no crystal ball, and CR has generally been right about most things, so I like 8%. Besides, 8% happens to lie halfway in the 5-10 rule (if you are like me, and can only work with integers). Thus, 8% is a good target.
So far, we have managed to weather this savings shock with a relatively small overall effect on PCE, as depicted by the quarterly changes in PCE listed in the graph below.
Since personal consumption accounts for nearly 2/3 of US GDP, these changes are a big deal. Note that, even excluding the affect of the "cash for clunkers" program (which you can see in Aug-09), PCE appears to have bottomed out in Dec-08 or Jan-09. (And I seem to recall a certain minor event that may have taken place in Washington DC right around Jan 2009 ... hmmmm!)
In any case, if 8% is the target savings rate, and we are already at 4.5% but with an upswing in PCE, then the President's political strategy appears to be working. It may well be that he will run out of time (for instance, if the worsening jobs situation compromises the confidence in his leadership) before we are out of the woods. But for now, I have to admit...his policy is working.
And I also have to admit...I did not think it would.