By a vote of 14-7, the Senate Finance Committee passed its version of a package of a set of measures designed to stave off a possible recession. The bill's $157 billion total is about $10 billion more than a House economic stimulus bill passed last week. The key elements of the Senate bill include:

• An extension of unemployment insurance benefits; depending on a state's unemployment rate, those benefits could continue for up to 13 weeks beyond the current 26 week limit
• A flat $500 tax rebate for individuals and $1000 for couples plus $300 per child
• Rebates are limited to individuals earning less than $150,000 per year and $300,000 for couples
• To qualify for the rebate, workers must have earned $3,000 in 2007. Unlike the House bill, the Senate bill counts Social Security income toward this $3,000 requirement
• About $6 billion in tax breaks for renewable energy production
• It allows businesses to apply losses from up to 5 years prior to 2008 to 2006 and 2007 profits
• A smattering other business tax breaks

The following is my response.

Coming back to tenth-grade economics, in which we learn that "economic growth" refers to the change in the value of all goods and services (gross domestic product, or GDP) produced over a given time period in a given set of product and service markets, we can make any number of assertions that activity X will result in an increased value of such production.

Riedl's paper relies on this definition economic growth ("By definition, an economy grows when it produces more goods and services than it did the year before."), but then claims that increased consumer expenditure, prompted by an increase in consumer income enabled by government transfers (i.e. tax rebates), do not, in fact cause the economy to produce more stuff in 2008 than it would have without such rebates. This is wrong (see e.g., CBO Director Peter Orszag, Federal Reserve Board Chairman Ben Bernanke, Harvard Economics professor and former Chairman of the Council of Economic Advisers and President Reagan's chief economic adviser Martin Feldstein, and former Clinton Treasury Secretary Lawrence Summers).

This week, Bob Samuelson bemoans Wall Street and its ship-wrecking captains who command treasure chests of severance packages.

At Merrill Lynch and Citigroup, large losses on subprime securities cost chief executives their jobs -- and they left with multimillion-dollar pay packages. Stanley O'Neal, the ex-head of Merrill, received an estimated $161 million.

Everyday Americans will conclude (rightly) that this brand of capitalism is rigged in favor of the privileged few. It will be said in their defense that these packages reflected years of service, often highly successful. So? It's not as if these CEOs weren't compensated in all those years. If you leave your company a shambles -- with losses to be absorbed by lower-level employees, some of whom will be fired, and shareholders -- do you deserve a gold-plated send-off?

And that's all fine and good, but after a fair job of illustrating the perverse pay incentives facing CEOs, he ends his column worrying that Americans will lose faith in American capitalism.

But if the subprime failure turns out to be a preamble to a larger financial breakdown, flowing from the creation of new securities that offered short-term trading possibilities but whose long-run risks were underestimated, then the mood could turn uglier. Indeed, many Americans may conclude that capitalism has run amok.

And yet Samuelson can't quite bring himself to say that maybe capitalism has run amok. Nevertheless, here's to Samuelson for shining more light on the damaged goods of Wall Street.

The Republican War on Children's Health continues($).

The House failed Wednesday to override President Bush's second veto of a children's health insurance bill, again confounding Democrats' plans to expand government-sponsored health coverage to include an additional four million low-income kids.

The override failed 260-152, 15 votes short of the two-thirds majority required. Democrats wound up no closer to enacting their signature health policy proposal than they were in October, when their attempt to override Bush's first veto failed by 13 votes. In fact, Democrats lost ground since they passed the second bill Oct. 25 by 265-142, because three Democrats and two Republicans who supported that bill were absent for Wednesday's vote

Roll call here.

Rep. Jim Marshall (D-GA) was the lone Democratic 'nay' vote.

House Speaker Rep. Nancy Pelosi (D-CA), Senate Majority Leader Sen. Harry Reid (D-NV), and Congressional Republican leadership met with President Bush last night to discuss the broad outlines of an economic stimulus package. Bush came out of the meeting with a "very positive feeling" while Pelosi was "confident" that a bipartisan agreement could be reached.

So, here's what the package is shaping up to be so far - these are the boundaries that will most likely contain the package.

• $145 billion
• the majority of which will be tax breaks
• some unemployment insurance extension
• some food stamp expansion

But here's the most remarkable development of late:

Paulson said Friday that Bush wants "broad-based tax relief for those who are paying taxes."

But Paulson reversed that formulation yesterday, saying in a speech to the U.S. Chamber of Commerce that "the package must reach a large number of citizens." By saying "citizens" instead of "taxpayers," the secretary opened the door to ideas advanced by Democrats to extend the short-term tax relief to those who pay little to no income taxes.

The administration has gone from hinting that extension of 2001-2003 tax cuts should be in a package to saying that even those too poor to pay taxes should see some of the benefit.

From the WaPo story referenced above, it also looks like there could be a bill ready for Bush's signature by mid-February.

I don't know where to start with this week's Samuelson column ("Lollipop Economics"). It's a mess. I guess the quality control person at the Post had the day off.

As expected, Samuelson devotes another chunk of prime pundit real estate to heft the long term fiscal imbalance on the shoulders of the Baby Boom generation and their impending retirement. This is, of course, just wrong, wrong, wrong. As has been documented numerous times, the fiscal challenges of the next fifty years lay squarely in the rapidly raising cost of health care.

The premise this time for his Social Security bashing is Washington's current obsession with fiscal stimulus. Samuelson's main point is that a $100 billion economic jump-start is nothing more than an election-year gimmick aimed at bribing voters. That Samuelson fails to recognize that good politics and good policy are not mutually exclusive is simple-minded, and absolutely cynical when literally thousands could be affected by it. However, he also objects to fiscal stimulus on the grounds that:

1. Such a package is too small to do any good ("something much larger is needed")
2. 1.1 million lost jobs is no big whoop ("a setback, but not a disaster")
3. This recession is different than others ("Only time and patience will cure some economic problems")
4. And besides, recessions are good ("[they] dampen prices and incipient inflationary psychology")

Wow. Logically Samuelson cannot simultaneous believe (A) and (C). And while (B) and (D) are complimentary, they underscore his total lack of concern for people.

UPDATE: I hope Congress listens to the Congressional Budget Office, and not Samuelson, when it says:

[T]o add three-quarters of a percentage point to the growth rate of GDP over a year, it might be necessary to increase the budget deficit for the year by close to three-quarters of 1 percent of GDP, or about $100 billion.

The latest wage data released by the Bureau of Labor statistics show that in 2007, when accounting for inflation, workers saw about a 1% decrease in pay.

Average weekly earnings rose by 3.4 percent, seasonally adjusted, from December 2006 to December 2007. After deflation by the CPI-W, average weekly earnings decreased by 0.9 percent. Before adjustment for seasonal change and inflation, average weekly earnings were $605.96 in December 2007, compared with $578.67 a year earlier.

Disturbingly, this is nothing new. Since 2001, real median weekly earnings have declined year-over-year three times resulting in a net reduction in worker pay in that time period.

(click on image to enlarge)

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Posted by Craig Jennings, 11:49:37 AM

Tuesday, January 08, 2008