Obama's Bi-Partisan Risk

It's worth remembering what happened to Bill Clinton in 1994. Trying, along with his wife, to pass a comprehensive healthcare plan, he ignored suggestions from Democratic members of Congress and alienated them in the process. The resulting discord killed the plan, in spite of the large Democratic majorities in the House and Senate.

Fast forward to today and we find that some Democrats in the House are frustrated by the neglect that Obama has shown them. In his quest for fabled bi-partisanship, the President has ignored his true constituents. This is often a charge leveled at Democrats, who frequently go out of there way to talk to the other side while ignoring their base. [This is not the case with Republicans.] African-Americans have found this to be a real problem since the 1970s. Tonight, on Rachel Maddow's MSNBC show, Pete DeFazio expressed his frustration with the disportionate time that Obama and his aides have spent talking to Republicans. He spoke like someone who has not been allowed sufficient input and who is fed up with tax cut orthodoxy.

And what has been the result? The stimulus plan is dragged down by excessive tax cuts, including many that will have no stimulative effect on the economy. Meanwhile, public transit has gone mostly ignored and (as I've mentioned before) infrastructure spending on the whole is at least 1/3 less than it needs to be. Obama, his team, and the leadership in Congress have padded the bill with bipartisan posturing when real solutions are needed, solutions that may raise eyebrows among the commentariat. Perception only goes so far, though. If the economy fails to recover or our infrastructure collapses, appearances will no longer matter.

Not a single Republican voted for today's House stimulus bill. Some may come around when the bill is finalized, but the true lesson is that Republican support doesn't matter. No matter what Obama does, no matter how much he wines and dines them or fawns at their supposed influence, the Right no longer matters. They don't have the voters and most of their common faiths have recently been proved to be bankrupt. It may be a good tactical move to reach out to them, but that need only go so far.

Republicans are not going to vote for universal health care either. The biggest losers from such a bill are some of the Republicans' biggest supporters. They will fight it to the end. Nevertheless, even though the Republicans don't have the votes to stop it, health care could again be lost if Obama doesn't get his own house in order. It's time for him to start listening to suggestions from outside the Washington consensus. Including only the bare minimum of tax cuts may not be savvy, but it's right. Nationalizing the banks may sound un-American, but it's likely essential to economic stabilization. In his Inaugural speech, Obama asked the nation to take responsibility and put away childish things. I can think of nothing more childish than wasting money on illusory bipartisanship.

Doing the Right Thing: Obama's Challenges

I feel rather satisfied by Obama's first days in office. We've seen a lot of symbolic executive orders, so the overall trend is positive. The promises of the campaign are being realized quite quickly. Tomorrow, he will announce a plan to accept the stringent emission standards that California and 13 other states tried to enforce a couple years ago, before being overruled by the Bush EPA. In general, it appears that climate change is a high priority, based on the environmental components of the stimulus plan, Obama's choice of Energy Secretary, and comments by White House aids. To know whether Obama will be a moderate president or a more change-minded one, we have to look at several key issues. Will he make the tough choices?

The real tests will be:

Measures to deal with the economic meltdown

• Will he sign a stimulus that resembles the $825 million one proposed in the House? And will he make additions to it, over the next eight months, as will probably be necessary?
• Will he nationalize the banks, as is needed? A continuation of half measures like capital-injections (with no government control) and bad bank asset purchases will merely waste money and perpetuate the crisis.
  
• Will he and his team devise a solution to the housing problem, including a change in bankruptcy laws, the purchase of houses by GSEs, and loan principal modification?
• Will he and his regulators institute tough new controls on derivatives, hedge funds, and the rest of shadow banking industry?

Foreign policy

• Will he negotiate with the Taliban? No stability in Afghanistan is possible without this.
• Will he negotiate with Iran? They can be used to stabilize Iraq and Syria, while neutralizing Hezbollah.
• Will he negotiate with Syria regarding Lebanon, Iraq, and Israel?
• Will he chastise Israel for blockading Gaza and responding to minor attacks with disproportionate force? This is essential to winning good will in the Arab world.
• Will he bring Hamas into the negotiation process? This is essential to peace.
• Will he get Israel and the Palestinians at the peace table by the end of the year?
• Will he improve relations with Russia, seeing them as a potential partner on a host of important issues?
• Will he focus on Africa? (A war-crime-committing leader in Sudan; a long-time tyrant in Zimbabwe, and fractured control in the Congo.)

The War on Drugs

• Will he make some effort to change the failed policy of the last thirty years?
• Will he push for changes in crack cocaine sentences, as promised?
• Will he push for increased use of treatment over prison sentences?

Healthcare

• Will he introduce a comprehensive universal health care plan by the summer?
• Will it include an adult mandate? This was absent from his campaign plan.
• Will it effectively ensure that all American can pay for health care by use of subsidies, expanded Medicaid, a lowering the Medicare eligibility age, and institution of a government health plan choice?
• Will he get all of this passed by August 2010?
  

Labor

• Will he sign the Employee Free Choice Act? This will eliminate some of the major flaws in the Taft-Hartley Act of 1947 and increase unionization by up to 50%.
• Will he reject any trade treaties with countries that violate human rights?
• Will he renegotiate trade relations with China and India?
• Will he pass the bill guaranteeing paid sick leave for employees?

Supreme Court

• Who will he appoint a strongly liberal replacement when Souter retires from the Court this summer?* This will be the first nomination by a Democratic president in 15 years and only the third in the last forty.
  

*If Souter wanted a moderate to liberal successor, then the time to do it would be this summer. Next year would be okay but not great. In 2011, it would depend on the make-up of the new Senate. As for 2012, a re-election year is the worse time to be nominated; almost 50% of nominees over the last century have been rejected when nominated at such a time. He is not going to wait until 2013, because Souter is sick of being on the Court. He openly admits that he loathes Washington.

If the answer to most of the above questions are yes, then we will be looking at an excellent presidency.

First 100 Hours: What's Missing? (Economy, Part 1)

The main problem that has not been addressed, either directly or symbolically, is the most important: the economic meltdown. It looks increasingly likely that Citigroup and Bank of America will not be able to survive without government backing (either guarantees or outright nationalization). Accordingly, the whole US banking system is in danger. A comprehensive scheme must be passed sooner rather than later. If something is not announced by the end of the month, then we will be in trouble.

The housing problem must be directly addressed. Several routes are available. First, the government could alter bankruptcy rules, allowing those who file to have the terms of their mortgages adjusted by a judge. (Currently, this is only possible for secondary residences.) Such an alteration would decrease the number of foreclosures, and therefore, reduce the number of worthless assets on corporate balance sheets. (A foreclosure is likely to reduce the price of a housing asset by much more than a small adjustment in principle, interest, and terms.)

Unfortunately, the banking industry and the Republicans that they patronize are still subject to pre-bust wishful thinking. They think that the assets will magically appreciate over the next few years. With this thinking, any devaluation is an unnecessary lost. They fail to see that without a quarantine of the foreclosure contagion*, then the percentage of houses in foreclosure could head toward 20%.

Bankruptcy adjustment is just one component or option. Second, by nationalizing the banking industry, the government could unilaterally adjust the term of loans without house owners having to go through bankruptcy. This is a better option, because it will have a much larger effect. Only a portion of underwater, unable-to-pay home-owners will file for bankruptcy. A general program of adjustment, similar to the HOLC of the Depression-era, could buy up and change the principle and payments on mortgages. (This would result in major losses for the mortgage securities but not more than if we were to reach a 20% foreclosure rate.) This process can be accomplished outside of nationalization (as it was during the Depression), but the upfront cost would be much higher for a special plan. Additionally, in an age of too-big-to-fail banks, the circumstances that allowed the original HOLC to work -- the collapse of thousands of small banks -- will not be present. In either case, since the program would be government-run, the agency in charge would be better able to judge whether consumers really need the adjustment or are just trying to take advantage. But, we may in fact reach a point where such distinctions cease to matter. Moral hazard, as in the banking industry, becomes an ideal that no longer applies in a dire reality.

[A more controversial approach would be for the government to buy foreclosed and unoccupied properties and then rent them out as low income housing. This would be an alternative to home-ownership. Instead of subsidizing mortgages through Freddie Mac and Fannie Mae, we could merely push people into renting at low, subsidized prices. ]

By lessening the number of vacant, foreclosed, and underwater houses, we would be able to stop the rapid decline in house prices. Stopping asset deflation is a good way to shore up consumers and prevent this meltdown from spiraling further out of control. Coupled with stabilization of the banking industry (most likely through nationalization) and new, stringent regulation, we will be able to make it out of this crisis and begin a new era of finance.

The First 100 Hours

We're not quite at the 100 hour mark just yet. [We have to wait until Saturday at 2:05pm -- or Sunday at 11am, if you're counting from the re-oath.] Still, we can look at the accomplishments of the week. What do we have so far?

Ethics reform in the executive branch
---Strict lobbying restrictions for outgoing staff
---Strong requirements for incoming staff

Symbolic pay freezes for the highest-paid White House staff

Greater openness in the release of executive branch documents
---Current president can overrule former president's refusal
---Refusal of documents must stem from a legitimate security concern

A mostly symbolic ban on torture, though with practical implications

The probable closure of Guatanamo Bay prison camp within a year

Appointment of Former Sen. George Mitchell as envoy to the Middle East, especially the Israel/Palestinian conflict, and Richard Holbrooke as envoy to Pakistan, Afghanistan, and (hopefully) India

The initial opening by the FDA of further stem cell research

The elimination of the ban on using foreign aid for funding family planning organizations (read: condoms and abortions)

A missile attack on supposed Al-Qaeda targets in the Waziristan region of Pakistan

DED (Dire Economic Data) Alert

California's unemployment rate jumped from 8.4% in November to 9.3% in December. I've never seen an increase like this. The state unemployment measure is now at its highest level since the early 1990s housing collapse there plunged the state into a bad recession. LAT

Housing starts -- new home construction -- is at its lowest level since WWII. (In fact, record keeping for this statistic only began in 1959, but between 1946-1959, the country generally experienced a housing boom.) During WWII, housing construction essentially ceased because of the war effort. With no such excuse now, things are looking pretty dire in the housing sector -- in case you haven't been paying attention for the past two years. Bloomberg

David Leonhart, writing in the Times, said today's economic climate isn't quite as bad as the '81-'82 recession, though he admitted we will probably reach that kind of low. New evidence today shows just how soon that could happen. Weekly jobless claims are at their highest level since 1982. Bloomberg

Did I Write the Stimulus Plan?

No, I assure you. But it does seem like I did. There are some rather incredible similarities. My mouth dropped open when I read the numbers.

My ideal stimulus plan vs. today's House Appropriations committee stimulus plan:

(e) = red
Appropriations = black

COMPARISON

Total: $950 billion = $725 government spending + $225 tax cuts
Total: $825 billion = $550 government spending + $275 tax cuts


$70 to close all state budget gaps and prevent the curtailing of services / employment

• $79 billion in state fiscal relief to prevent cutbacks to key services, including $39 billion to local school districts and public colleges and universities distributed through existing state and federal formulas, $15 billion to states as bonus grants as a reward for meeting key performance measures, and $25 billion to states for other high priority needs such as public safety and other critical services, which may include education.

$150 for infrastructure projects

• $32 billion to transform the nation's energy transmission, distribution, and production systems by allowing for a smarter and better grid and focusing investment in renewable technology.

• $30 billion for highway construction

• $31 billion to modernize federal and other public infrastructure with investments that lead to long term energy cost savings

• $10 billion for science facilities, research, and instrumentation. (should be higher)

$50 billion in green technology jobs

• overlaps with above, see "modernize federal", "transform the nation's energy", and "science facilities"

$50 billion to increase federal matching of state Medicaid

• $87 billion for a temporary increase in the Medicaid matching rate.

$70 in subsidies to begin universal healthcare, including Cobra and Medicaid expansion and the beginning of a federal health plan

• $39 billion to support those who lose their jobs by helping them to pay the cost of keeping their employer provided healthcare under COBRA and providing short-term options to be covered by Medicaid.

$5 billion for rural broadband and general expansion of wi-fi / high-speed internet

• $6 billion to expand broadband internet access so businesses in rural and other under-served areas can link up to the global economy.

$15 for making buildings more green

• $6 billion to weatherize modest-income homes (also see "modernize federal" under infrastructure and "to repair public housing" under food stamps / housing)
  

$50 billion for expanded unemployment benefits, including for part-time employees

• $43 billion for increased unemployment benefits and job training.

$35 billion to increase food stamps / welfare and to provide additional public housing

• $20 billion to increase the food stamp benefit by over 13% in order to help defray rising food costs.

• $16 billion to repair public housing and make key energy efficiency retrofits.

$15 for environment preservation and conservation

• $19 billion for clean water, flood control, and environmental restoration investments;

$40 billion for new teacher and improved school infrastructure

• $41 billion to local school districts through Title I ($13 billion), IDEA ($13 billion), a new School Modernization and Repair Program ($14 billion), and the Education Technology program ($1 billion).

$20 billion in Pell Grant and Federal Loan Assistance increases

• $15.6 billion to increase the Pell grant by $500.

$15 billion for Amtrak and rail transit modernization

• $10 billion for transit and rail to reduce traffic congestion and gas consumption. (should be higher)
  

· $6 billion for higher education modernization.

$25 billion to modernize healthcare, by making record electronic, eliminating inefficiency, and increasing preventive care

• $20 billion for health information technology to prevent medical mistakes, provide better care to patients and introduce cost-saving efficiencies.

• $4.1 billion to provide for preventative care and to evaluate the most effective healthcare treatments.

$225 billion in tax cuts, mainly to individuals in the form of reduced payroll withholding

• $275 billion in tax cuts
  

ITEMS ONLY IN MY PLAN

$5 billion for electronic preservation of old government documents for online research

$20 billion for FAA / Air Traffic Control modernization

$90 billion for government employment modeled on WPA

ITEMS ONLY IN GOVT/APPROPRIATIONS PROPOSAL

• $4 billion for state and local law enforcement funding. (a good move to shore up Republican votes and needed too)
• about $30 billion (only $30 billion!) unaccounted for
  

FINAL COMMENTS

By my standards, this is an excellent (though not perfect) stimulus package. The main weaknesses are that too little is spent on health care (more should be spent on subsidies to lower the number of uninsured), infrastructure (especially public transit; I want my L.A. subway), and direct government employment (my WPA proposal).

My judgment is that health care is not addressed in full in this plan, because it will be dealt with later, as Tom Daschle comes up with a plan to institute universal coverage. I hope we will see a role-out of a government plan with subsidies, which will cost at least another $75-150b. (I have to say, however, the extensions in COBRA and Medicaid will make a big difference and probably give health insurance to 4-8 million people, which is a decent start.) I would have preferred, though, to front load more of this cost and shove it into this stimulus plan, which is more likely to pass.

When it comes to infrastructure, much of the spending is related to creating green industry and green jobs. I think too little is spent on public transportation infrastructure. Although I had a separate figure for Amtrak and special public transit projects (see bullet trains), I hoped that they would allot $20-40 billion just for public transit. No such luck -- and this explains some of the difference in my numbers and theirs. I think that to fix the US infrastructure on the whole (roads, bridges, buildings, power grid, ports, etc), it will cost at least $100 billion, and this is in addition to any "green" fixes, which would entail additional costs. So, overall I projected $200 billion total between infrastructure and "green", while the govt. plan only allows a little over $100.

I think the government should directly employ people like they did in the 1930s with the WPA. Many Democrats support this idea, but its inclusion would surely lead to a filibuster by Republicans in the Senate. No WPA until the Democrats get at least 63 votes in the Senate.

Overall, it's a good stimulus if it's holds up in House-Senate conference. I wish they would add a little more to infrastructure and health care spending, but I think it is a good start in terms of allocation. The only worry is that it be too little (yes, $850 billion can be too little), too late. Let's hope not.

An Ideal Stimulus Package (by me)

$950 Billion Stimulus Package

$725b in Government Spending

--$70b to close state budget gaps, so spending does not get cut
--$50b to increase federal matching of Medicaid
--$70b to increase COBRA/Medicaid and begin UHC subsidies
--$150b in infrastructure projects

• $30b in public transit
• $40b in roads/bridges
• $30b for energy infrastructure
• $10b for port/commercial transit
• $20b for research & development (non-environmental)
• $20b for other

--$50b in green investment ($30b in energy, $20b in enhancements)
--$5b in rural broadband and expanded wi-fi / high-speed
--$15b in greening of buildings, federal and private (low income)
--$50b in expanded unemployment insurance
--$35b in expanded food stamp, welfare, and govt. housing
--$40b for education (hiring teachers and school improvements)
--$15b for environmental preservation/conservation
--$15b for Amtrak and special public transit modernization
--$20b for FAA / Air Traffic Control improvements
--$20b for increases in Pell grants and other financial aid
--$25b for health records modernization and other improvements
--$5b for electronic preservation of govt. documents
--$90 for WPA-style public employment

$225b in Tax Cuts (mostly payroll tax decreases for those earning less than $150,000 single / $200,000 married)

Right now, the Obama stimulus plan is listed at $775b with $300b in tax cuts, so I'm not all that hopeful. One can dream, though.