Stimulus Package: If You Jump Halfway Across a Chasm You Fall Into the Abyss

Here's a thought: If we are going to spend two trillion dollars (and most likely more) trying to deal with the economic crisis, shouldn't we do it right?

The price of getting it wrong is, after all, extremely high. Think of a patient suffering from a grave viral infection who is treated with antibiotics. Not only will the treatment be unsuccessful, it will delay the proper care dangerously long.

So the ways the Obama administration handles the next phase of the bank bailout and the debate over the stimulus package are crucial.

So far, the debate over the stimulus package is, for starters, getting tied up in -- and dragged down by -- the public's widespread disgust at almost every aspect of the bank bailout, from the lack of transparency to the ongoing cluelessness of the Wall Street Marie Antoinettes to the lack of any recovery bang for our billions of bailout bucks.

Even worse than all that is wrong with the original bailout, is the prospect of the new administration repeating the mistakes of the old when Timothy Geithner announces his plans for the remaining $350 billion.

Early indications are that the next bailout tranche will be handed out from an equally Wall Street-centric perspective -- animated by the belief that all that ails us can be cured by pumping a few trillion into our financial institutions. This despite the mounting evidence that the best interests of the banks and the best interests of America are no longer aligned.

As Niall Ferguson told me in Davos, "It is time to start new banks; the old banks need to be completely restructured." And this includes an end to paying dividends to shareholders -- not to mention an end to bonuses, redecorating, new jets, Super Bowl parties, and stadium naming deals.

President Obama needs to make it clear that the next phase of the bailout is going to be handled radically differently than the first go round. As Bloomberg has reported, Henry Paulson invested twice as much taxpayer money in Goldman Sachs as Warren Buffett, yet gained warrants that were worth one-fourth as much. And the Goldman terms were repeated in most of the other bank bailouts. "If Paulson were still an employee of Goldman Sachs and he'd done this deal," said Joseph Stiglitz, "he would have been fired."

This is a mad-as-hell moment (see Sen. Claire McCaskill), and Obama needs to make it clear to the bankers that the American people are not going to take it anymore. And this requires more than finger-wagging -- it requires disgorging.

The administration also needs to use the debate over the stimulus package to rethink its too-timid approach -- otherwise we are going to miss a huge opportunity to both arrest our economic free-fall and create a 21st century economy.

"I support the stimulus package," Van Jones, author of The Green Economy, told me. "But when I look at it in its entirety, I fear that we may soon look back and say that we missed a huge chance to go bigger and bolder. After all, there were three flaws with the old economy that has crashed: it favored consumption over production; debt over smart savings; and environmental damage over environmental renewal. Some parts of the stimulus package seem to be more of the same -- trying to prop up the old, failed economy. That strategy simply won't work -- but we could waste a lot of money and time trying. Instead, we need a new direction for our economy. You can't jump halfway across a chasm -- you just end up falling into the abyss."

Rick Levin, president of Yale and an economics professor, echoed Van Jones' call for "bigger and bolder": "First of all, there's a question of magnitude. The overall stimulus is about 6 percent of GDP. We did not exit the Great Depression without a stimulus that amounted to about 25 percent of GDP -- we called that World War II... The second problem is with the mix... Only $335 billion worth goes to job creation -- that's about 3.5 million jobs, about $100,000 a job. Three-and-a-half million jobs is only two percentage points on the unemployment rate. That's not enough. I would get rid of the tax cuts and use the entire package for job creation... There are lots of great public works projects that would be well worth supporting. And, in the near term, what about CCC-type activities that put people to work right away, cleaning up public parks, weather-stripping homes, offices, schools, government buildings?"

Many experts in the key areas the stimulus package involves -- including healthcare and education -- are equally critical but reluctant to go on the record since, after all, there is something rather than nothing for them in the current bill. One high-ranking expert on education told me off-the-record: "We are really wasting an enormous opportunity. They are going to spend something like $100 billion on education and not get much reform. At this point, they would have so much leverage to get the unions to really think differently. Unions are worried about teacher layoffs. So Obama could say we'll give you money in exchange for tenure reform and teacher accountability. The president has a lot more leverage than he's using to rebuild a system that's not working."

As Michael Lynton, Chairman and CEO of Sony Pictures, told me: "I'm often asked, given Hollywood's struggles, if I were building a movie studio system from scratch, is the current model what I would build?"

The answer was, of course, no. Likewise, given the chance to rebuild America's economy, is the current system, with a few hundred billion dollars worth of patches, the one we want to build?

Obama has added or talked about adding several new cabinet-level positions, such as chief technology officer, climate czar, and car czar. How about an advisory cabinet of economic thinkers who can offer the president big ideas for a 21st century economy?

A good place to start would be among those who sounded the alarm about our current financial crisis -- all of whom are critical of the short-sighted, ad-hoc nature of the stimulus bill. People like Nouriel Roubini, the New York University economist who was so prescient about the collapse. Lawmakers, he says, are "injecting populist politics into economics decisions. Companies and sectors that should be left to drown are being floated lifeboats."

Jeffrey Sachs, the Columbia University economist who was instrumental in transitioning the economic system of the former Soviet Union, is also no fan of the stimulus bill, calling it a "a fiscal piñata," an "astounding mish-mash of tax cuts, public investments, transfer payments and special treats for insiders," and "a grab bag of hasty short-run spending." He warns that "without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good." This is especially true, he says, "if we allow further tax cuts during a time of fiscal hemorrhage, or give into 'bipartisan' demands to make the Bush tax cuts permanent."

Joseph Stiglitz is equally leery of the tax cuts that have been included in the stimulus package. "We are in uncharted territory in this crisis," he says. "But household tax cuts, except for possibly the poorest, should have no place in the stimulus. Nor should business tax breaks, except when closely linked with additional investment... Increased investments in infrastructure, education and technology, relief to states, and help to the unemployed need pride of place."

In October, Alan Greenspan, one of the poster children of the old system, conceded that there was a "flaw in the model." I'd say that events since then have exuberantly proven that to be an understatement. There's not a flaw in the model -- the model itself is flawed.

And instead of bailing water out of the sinking ship, we should construct a replacement appropriate for navigating the economic seas of the 21st century -- and steer it in the right direction.

Comments

[unionave]

I RECEIVED A LETTER FROM THE REALLY BIG PHONE COMPANY THAT TOLD ME THEY WERE RAISING MY PHONE RATES AND HOW HAPPY I WAS GOING TO BE WITH THESE NEW RATES . This was a few years ago and I am still trying to figure out when the happiness starts . THIS IS THE SAME LINE OF BULL THE GOP PUMPS OUT WHEN RUNNING FOR REELECTION . Along with a few racial innuendos and some refferences to terror . They never offer plans showing how they are going to help those in need or fix some thing that is broke . OR OFFER NEW PLANS . It's just character assassination and creating conditions of anxiety . There must be a lot of voters out there that enjoy those conditions because the GOP still gets a lot of votes .

[toje]

If you want to waste $1 trillion, by all means go with a government spending (Democrat) and tax cut (republican) stimulus bill. This will, at best, stave of the crash for about a year or two. But the crash will come, and will be even more dramatic.

But if you want to spend $1 trillion wisely, in a way that actually builds a newer, stronger foundation under our currently inflated economic situation, why not use it to target the best global companies in all fields and endeavors, from green technologies to computer programming to heavy equipment manufacturing (I'm thinking Germany, Japan, India, wherever), and use that money to entice them to come to America and set up shop (even if it's a subsidiary). Let's use our strength (that most people want to live here) to get the best, brightest, and most successful companies who aren't all ready here to come here. One of the problems with our economy is that we haven't mastered globalization yet. This would be a huge step in the right direction.

[EbonBear]

Want to save the economy? OK, enact universal healthcare. That quickly pumps a stack of cash into the construction, auto and medical tech industries and creates a load of new jobs, some of them semi- or unskilled (janitors, groundskeepers, etc). Those jobs are reliable and pretty much recession-proof and although it takes a massive amount of money to set up, it's cheaper to run year on year than your current system by far.

[torrrep]

You forgot one problem. The main problem we now face in healthcare is shortages of doctors, specialists, nurses and technologists. As it stands right now there are not enough medical personnel to cover the current demand for medical services. Now what do you suppose will happen when you suddenly flood the system with 50 million new people? Universal healthcare is meaningless if you have to wait months to get in to see a doctor or have to wait a year for a needed surgery. We are currently importing nurses from foreign countries because schools can not pump out nurses fast enough. And the medical association limits the number of med students each year. Yes there will be hundreds of thousands of jobs made available. Too bad we won't have enough people to fill them.

[URDRWHO]

What? All of the sudden they are going to build new hospitals? Ya gotta B kidding? Right? You are assuming that most of America is like the urban areas. Too many people and not enough hospital room. Sorry, that is what the broad landscape is like in most of the USA.

I live in a class II city, 300,000 people and I can go to the ER and be through triage in 15 minutes.

I'm not even going to spend time asking how you concluded this one: "That quickly pumps a stack of cash into the construction, auto and medical tech industries" Universal health care going to buy us new cars?

Spend some time on monetary policies and what is created when u print money at the speed our government is printing money.

[DenverJJ]

A-,
After going through the HR-1 today I would urge your readers to contact their public servants to go back to the drawing board and encourage the President to ask for a better bill: better yet he should ask for three bills.
One for pure infrastructure no spending, no pork.
One for tax cuts: new home purchases etc. no pork.
One for special prodjects (pork) that has wind broadband, wind, solar as well etc.
Jack Welsch of (G.E. fame) said almost as much last week on Charlie Rose.

This bill as it, a mish-mash of old stuff. It looks like left-over night at my dinner table or worse.. it's like having Tandoori Chicken and blueberry pancakes from IHOP with a lime snow cone topping. YUK! President gave the House and Senate a free hand in crafting it. Madame their are too many cooks in here in HR-1 to be sure.

HR-1 is not a Ponzi scheme of spending, but it's too easy for the Republicans to make that arguement if the economy worsens this fall (it will under this bill). My specific suggestion:
1) Limit the tax cut 5k on new homes.
2) Make mortgage interest deduction to 75% of total interest not 100% as now,
3) Extend that 75% to second home purchases.
Thank you for your work and Huff Post!!!.
Respectfully.
DenverJJ
Jeff W. (J.J.) Jones
http://writerswheel.blogspot.com/

[torrrep]

I agree. This would be the best approach. This "one bill solves all" mentality will not work.

[Bloggerrogr]

I'm sending the link to this article to the Pres. via the Whitehouse.Gov site. Maybe if enough of the rest of us do likewise, ya think he may listen. I want CHANGE. Do you?

[kendraro]

yep - done.

[DavidDial]

The basic premise of this article, as I understand it, is that the economy is more in need of changing than fixing. I agree. For many years now almost all the growth in our economy has derived from the fact that most of us want way more than we need and are willing to go into debt to get it. Too many of the winners have been those who have provided goods and services that are excessive and unnecessary...SUVs, flat screen TVs, double mocha lattes and Madoffian investment schemes. The losers have been those who need decent jobs, educations, health care, housing, food and transportation options but either can't find them at all or pay for them if they do in an economy more interested in providing luxuries to those who can afford them than necessities to those who can't. Does that need to change? Well hell yes it needs to change! All but the most avaricious "survival of the fattest" freaks among us can see that.

The catch is that while the majority of us can see that the economic system needs to change we live in a democratic political system and the majority can't agree on how to go about doing it. It is absolutely true that if you only jump halfway across the chasm you will find yourself in the abyss but it is also true that Congress has just barely managed to agree that we need to jump at all. ( to be continued)

[DavidDial]

I think the President sees that if his immediate objective his to change the entire focus of the economy in one Act of Congress he will end up changing nothing at all. He is willing to focus on stopping the downward spiral of an ailing system that, if it continues, will only turn more of the haves into have nots in the hope that it will buy him some time. If he is successful, and I think he will be if he can convince his natural allies to be a little patient, he can use the time he has purchased to gradually convince the more avaricious among us that the social contract is supposed to apply to all of us, not just the upper echelons.

[DavidDial]

Wll his efforts result in equality for all? Not during my lifetime and probably not during his. But will his efforts result in a more perfect union? Yes, I think so. He is really a smart guy. He keeps his cool and when the loonies to his left and right start pulling the ship of state in opposite directions he keeps his eye on the prize and uses his superb communications skills to cajole at least some of them into to pulling together I like to think of him as a radical centrist and he has my vote.

[TommyMcCarthy]

NO TAX CUTS......­..........­..........­.JOBS!
tm

[Elaine Cimino]

I just returned home from an Obama House Party, we read aloud what was eliminated from the Stimulus package, and we are grieving the death of our grandchildren. School lunches for some children are the only meal they are getting according to my daughter is a middle school teacher at King Middle School in Los Angeles. Women at tonight's meeting are also volunteering at a local food bank to prepare cereal packages for children to take with them for the weekend. This stimulus package is shameful cutting the very relief that people need from the bottom up.

President Obama does not need to compromise like this because it is not enough and people are falling further behing and down than anyone in the Senate realizes or even cares.

It takes 12 people to build a wind generator 6 mos. for production and Assembly. 1600 are needed to replace a coal fire plant. The Rust belt can make the steel parts and assembly factories in every county in the nation can make solar and wind renewables. We could put to work 140,000 people here in NM. However, we have the Nuclear dirty-ener­gy-contami­nating-ear­th-killing -wolves at the doors of congress raping the coffers and the souls of the people in this country by getting $32.5 Billion-- this is unacceptable and beyond shameful, especially when children are going hungry. How dare they do this to the American People. Accountability and transparency.

[long333]

Anyone who thing that the cuts from this bill will kill their grandchildren needs an MRI. This fear-mongering will backfire. I heard someone say today live by demagoguery, die by demagoguery.

[URDRWHO]

Take a Mission's trip to Africa. There you will see what starving is!!!! Been there done that.

Fat little kids, who have cell phone carrying parents, that aren't willing to go feed their own kids doesn't pull at my heart. America has a very skewed point of view about starvation. Instead America has a child obesity problem.

My State did a study on the school lunch program. They found a higher percentage than they considered, were getting school lunches born out of convenience. Lazy parents that didn't want to make breakfast or a lunch for their kids.

Sometimes I visit our local schools for early business meetings. I see the kids getting school breakfast and I can stand up and say.....they sure as hell aren't skinny.

The amount of money spent on the Obama and Bush inauguration ceremonies would have fed the kids you are worried about. Have you voiced your concern for how the elite waste our money on their Wagu steak dinners. Doubt it! Open your eyes and see who put us in this situation. It isn't your neighbor. It is thirty years of Dem's and Rep malpractice and economic manipulation. And you want more of it?

Doing good for the poor is driving them out of it...not making it easy for them to stay poor.

[TeddyRoosevelt]

The money going to education is going to states and local districts. It is not being funded into teacher salaries unless the local public school districts make that choice. Teacher reform that Arianna is looking for happens at the local level as agreements are negotiated by the bargaining agency. There is all kinds of evidence that the teacher unions are beginning to accept and support reform measures.
A national teacher reform measure will take longer to create than we have to get funding passed so that schools don't close early this year because governments run out of money.

[jemiltd]

Let's see if I have this straight... President Obama conferred with some of the best economists in this country to put together the right mix of efforts to fix this economic mess, only to have Congress tear it apart, holding their breath until they turn blue, all for their own agendas and interests? What aboutthe people?

[Badbone]

You don't have it straight. The bailout is wrong. Even if your favorite president is for it. Even if "some of the best economists in this country" are for it. It's still wrong. It is still wrong to redistribute wealth like this.

This is how far we've fallen in America. We are actually debating not whether, but how much, money to steal from those that are productive. Makes me wonder why I keep paying my bills. After all, I'm as deserving as anyone for a bailout, aren't I?

[DavidDial]

Badbone, get a grip. Do you use and benefit from using the nation's highways? Do your kids or did you use the nation's educational system? Do you have a business that needs well trained and healthy employees? Can you defend yourself and your family from threats ranging from terrorism to petty street crime or do you need a military and a police force? Can you pay for any of these thiings and the many more you need on your own income or do you need others to pitch in? If you can't do it on your own, which you can't, is the government stealing from those who pay taxes to do it for you or is it a redistribution of wealth that is necessary if we are to have a society from which to derive these benefits? Can you honestly say, as an American, that you haven't, for your entire life, gotten way more out of your citizenship than you have contributed to it no matter how productive you might think you are? Does the fact that being an American of any station means that you get more than you give unless you die defending the country mean that all of us who didn't die defending it stole from those who did? What in the world are you thinking?

[EbonBear]

You make money. That doesn't make you productive. The two are not the same thing.

[desertman]

Call me cynical, but I'm not entirely sure the government is the most responsible steward of the peoples' money. Efforts to date don't inspire much confidence, anyway.

Another report released Friday, this one from the Congressional Oversight Panel, revealed that the government overpaid anywhere between 60-100% for assets they acquired in AIG and Citigroup; assets they acquired on taxpayer's behalf, no less.

The treasury might have dolled out tens of billions of your tax dollars to their buddies on Wall Street for toxic assets, but it's really your long-term interest they have at heart. Are we feeling the warm and fuzzies of Washington's love yet?

If you're still feeling glib, you needn't despair; another stimulus package is on its way. Friday's markets even cheered it in for us.

[URDRWHO]

The best and brightest economists brought us to this cliff. You want more of it?

Economists were all for NAFTA, shipping jobs overseas, etc. Economists call you and me....human capital. In their eyes you are not a worker...you are a liability on the income sheet.

WAKE THE $&$&$& UP!!!!!!!!!!!!! Be it Republican or Democrat stop thinking the party line.

You should care about the "porky" projects. Maybe once the chattering internet class is silenced, we won't even know about the pork.

[JKoos]

Obama, Bush what is the difference? Both believe in spend, spend, spend. Our grandchildren will end up paying for this ludicrous approach. The Bush/Obama regime is going to bankrupt us all.

[desertman]

And when China decides not to buy our debt it will get real interesting.

[URDRWHO]

Ya got that right!!!!! Then people will start to know l hunger. I wonder if the average person knows that China has us by the short hairs. Sure as heck the people that want Obama to get them a new car don't understand.

[dobberdoss]

"Here's a thought: If we are going to spend two trillion dollars (and most likely more) trying to deal with the economic crisis, shouldn't we do it right?"

Problem is Arianna that making "money fall off trees" is not the answer. The only way out is to let it all fall down now so we can rebuild tommorrow using real weath, not more worthless printed 'tender' that will make inflation go through the roof like an certain African country i could mention.

People in your position need to start telling the truth about our economy, particularly on what a giant "ponzi" scheme it is that makes Mandoff's look like a drop in the ocean.

[dobberdoss]

"Here's a thought: If we are going to spend two trillion dollars (and most likely more) trying to deal with the economic crisis, shouldn't we do it right?"

Problem is Arianna that making "money fall of trees" is not the answer. The only way out it to let it all fall down now so we can rebuild tommorrow using real weath not more worthless printed tender that will make inflation go through the roof like an certain African country i could mention.

People in your position need to start telling the truth about our economy, particularly on what a gaint "ponzi" scheme it is that makes Mandoff's look like a drop in the ocean.

[desertman]

Very true. If the horse is dead, beating it won't help. Time to get a new one.

[torrrep]

Arianna, I am by no means a fan of yours but I have to say this was one of the most excellent articles I have seen written to date on Huffington Post. You hit the nail on the head with your analysis of this spending bill. I have been highly critical of many components of it not because I am conservative and not because I didn't vote for Obama. But because many of the provisions in this bill, although appealing as they may sound, do little or nothing to actually fix the economic crisis we now face. I liked your idea about investing more in infrastructure and community works projects. These would create immediate jobs and infuse money into the economy. $550 million for NASA would not create any immediate jobs and the few jobs created would only be available to a select few. Same thing for the hundreds of millions allocated to wildlife habitats and research on global warming. Spending $100,000 dollars to create a $50,000 dollar job makes absolutely no sense. The money needs to be invested in large scale infrastructure projects such as placing all utilities under ground. And reform in the teacher's union tenure policy must be changed to have any hopes of improving education. Great article.I hope to see more like this from you and others here on Huffington Post.

[rlz0422]

A flaw in the model? Mr Greenspan with all due respect......

that is like the old saying " besides that Mrs Lincoln, did you enjoy the play?

[desertman]

I think he knew what he was doing to keep all the plates spinning on his watch. He also knew when he should hand the reins to Bernanke and get out of Dodge.