Obama's Economic Paradox: Can You Have "Bailout" and "Stimulus" at the Same Time?

By now the next phase of the "stimulus-bailout" plan is ready to be implemented. This version totals around $800 billion, plus interest that brings it to over a trillion dollars. Republicans stand aghast in near-unison, lambasting the plan variously as "closet socialism," "larded with pork," and insufficiently stimulative (arguing in essence that "it could take a few years for any benefits to materialize"). President Obama and the Democrats argue (a la George W. Bush, ironically) that the package is necessary to avoid economic collapse. And thus off we go, once again, through the political looking glass...

Perhaps the centerpiece of the current bill (at least for people's pockets in the short-term) is an actual weekly paycheck bump to the tune of about eight bucks. This has been said to offer a few more dollars per person at the end of the week to spend on a movie, a meal, or at the mall. I'm actually betting on liquor sales seeing a spike from this, but no matter -- the money is meant to make its way back into the stream of commerce. This is accomplished in the form of a tax credit (Bush again?), and indeed the bill is laden throughout with tax cuts as a primary means of sparking a stimulus.

Naturally the Republicans are against the whole deal. A president claiming urgency to get a trillion dollar "relief" bill passed with tax cuts and credits all over the place -- yes, I can see how this would be objectionable to them, just as it must have been (or not) way back last October when the former president doled out about $1 trillion with near-apocalyptic "if not..." rhetoric, and how his entire two-term financial plan was essentially based on tax cuts. If, as Emerson once said, "a foolish consistently is the hobgoblin of little minds," the Republicans are sure at least to get the bogeyman vote in future elections.

Beyond Republican bugaboos, however, there is a deeper problem lurking here. Democrats likewise have their own forked-tongue issues on economic affairs, having stood idly by as Bush & Co. looted the candy store, but more to the point is the rhetorical conundrum of simultaneously proposing backward-looking (i.e. "bailout") and forward-thinking (i.e. "stimulus") packages. As Paul Krugman observes, "the Obama administration seems to be ... dragging down its pro-worker stimulus plan by creating a linkage in people's minds to the outrageous bank bailout." While the language of "Recovery and Reinvestment" (the stimulus bill's actual title) perhaps is intended to reconcile the past and future primarily by focusing more on the present, this approach has its own drawbacks of trying to do too much and risking the appearance of political chicanery in the form of a whopping $8 payout.

Yet still a larger paradox exists in all of this, namely the notion of (in the President's words) "turning crisis into opportunity." After Hurricane Katrina, Bush crassly termed his "recovery" plan The Gulf Opportunity Zone. Aside from creepy allusions to Iraq -- some of which were more deeply borne out with companies like Halliburton and Blackwater appearing there after the storm -- this titular turn also reflected the callous indifference to suffering that defined Bush's Katrina policies and seemingly created an even heavier albatross than Iraq around his political neck. While Obama's "crisis into opportunity" notion doesn't quite go all the way there, it's critically important not to be seen as capitalizing on the misery and misfortune of the many who have lost their homes, jobs, pensions, savings, and more in the downward spiral of the past few years.

And this brings me to the final and perhaps preeminent paradox in this whole mess. We seem to find ourselves in a situation where in order to save capitalism we have to abandon its principles; to maintain free markets we must heavily subsidize banks and investment firms; to foster lending we have to give money away. In short, to get out of the economic doldrums we must prop up the very same forces that blew us here in the first place, thus reinvigorating an unsustainable system with an infusion of capital to -- what? -- effectively sustain the unsustainable for a slightly longer period of time. It's like being on a lifeboat with one person bailing out water (aha!) and the other filling it back up at an equal rate, thereby keeping the water level in the boat fixed and the boat afloat in a short-term sense -- while in a broader view it's still sinking, just a tad more slowly.

Is this the best plan our best minds have come up with, to wit, the continuation of an inherently flawed scheme? Granted it's better than the Bush "let 'em rot on rooftops" plan, but it really misses a chance to do something more striking in the process. I suspect we're likely just "turning crisis into more crises slightly postponed" and aren't taking the opportunity to actually get to the root of the problems at hand. People are more open to fresh ideas right now than they've been in a long while, and delivering a "kinder, gentler" Bush Lite recovery plan isn't going to get the economy moving again or (perhaps more importantly) elevate people's spirits. We must, at the risk of being branded a turncoat, simply give up the capitalist illusion that has led us to this precipice in the first place.

Before firing off a nasty retort, consider that America has never actually been a free-market capitalist system, instead broadly devolving upon slavery, sharecropping, industrial serfdom, the welfare state, corporate subsidies, and a host of other un-free methods at various points in our history. While there is a semblance of supply-and-demand logic here that has led to numerous technological innovations and consumer options, the hyper-capacity to manipulate demand in the age of mass media has stripped away whatever "invisible hand" magic that may have taken hold. Entities that desire a "free hand" to pollute, discriminate, exploit, or decimate often couch their aspirations in free-market rhetoric, equating the same with the essence of the nation. But it just ain't so.

If ever there was a time to admit this and move along, it's now. Any remaining pretensions to free-marketeering are out the window with trillions in corporate welfare and a modicum of income redistribution, and we won't right the ship through subsidization alone. If it's opportunity we seek, let's convert the war economy to a green economy; let's give farmers and entrepreneurs incentives to keep their products local and regional; let's make education free and forgive student loan debts so as not to saddle the next generations; let's create a first-class health care system that is accessible to everyone without question or qualification; let's make housing a right and not a commodity; let's undo the damage of the so-called "war on drugs" and turn millions of unnecessary prisoners into contributing citizens; and let's unabashedly create a true public welfare system that provides support and sustenance without creating dependency.

We can and should vigorously debate such notions, both in principle and practice. But if you want to create a stimulus, any or all of these ideas would hold that potential. To the doubters, dead-enders, and deal-breakers, I'd simply point out that attaching oneself to the same processes and players that created this mess is a sure path to political oblivion. No one can claim to have all the answers or see the future, but as a people we've never been afraid to forge ahead regardless. This may in fact be the true American Way, sometimes for good and sometimes for ill, and in any event it sure as heck beats bailing water on a sinking ship. So let's scrap the Titanic and instead try something dramatic.

Comments

[Sonni]

Unfortunately, it isn't enough to have a president that may seek to make some of the changes that you describe. As we have seen, it would take throwing all of congress out on their keisters, in order to make any substantive shift in social, economic and education policy. Can we truly start again with real change? That is the true test of whether America is a "nation of cowards".

[fredfep]

Point One: Revolt? How? Willing to face a depleted uranium-tipped rubber bullets & drone missiles response?

Point Two: All that stuff is great, but unlikely in the Beltway msm culture. To drop the drug wars there would need be a drastic shift. Michael Phelps would be given a 9th gold medal for winning 8 while high. That day has not come,

Point Three: Line Item Veto: Republican sham scam, as unconstitutional as signing statements . The president is not legislator, picking or choosing. That is up to Congress.

Point Four (or 3a.): A filibuster should be 24/7. Make them debate . If they keep blocking the end of debate, make them debate. Llet them go on & on all night and day. If this bank bailout isn't good enough, let them filibuster; the public will blame them, the Republicans will wither away, the complacent, status-quo hugging Beltway msm won't be able to keep propping up the anachronistic, tired, pale, shallow G.O.P. no more.. You dream improbable social re-direction, I dream the end of the Republican party, the impossible dream. Then the birth of another party or two, a truly conservative one (leave the fringe extreme to their well-earned fringe), an actual left of center party who will humor & harbor liberals, and the Democrats, the centrists. Why not three parties, it's not like we're dividing up president & VP anymore.

[Dave27]

FRONTLINE is a must see on PBS tonight.

[noneIn2008]

Do Harry and Nancy have enough faith in our new President to give him the line item veto? Obama would cut the ridiculous and keep the essential. It is time for change.

[Ecologie]

I really like the student loan debt forgiveness idea. Bravo for talking about this. No one ever talks about this!

There are a lot of us under 40 types that are saddled with student loan debt-a mortgage payment within itself. We are the exact demographic that are defaulting on these wacky mortgage loans...in fact, when you are young, have a family and want to buy a home like our parents got to (sans the student loan debt), these student loans drive down our credit score, and gobble up hundreds of dollars a month.... so what type of mortgages do the Student Loan generation get offered to them? The interest only/125% LTV ARM mortgages. The ones people are walking away from...can no longer afford. These loans, for many of us, were the only way we could purchase a house. There is so much focus on deadbeats getting loans but a lot of us are literally indentured just to be able to pretend we are middle class in this country. This is a plan that targets the housing crisis. If we put money back into the pockets of the student loan demographic-it pays off for decades. Freeing up money in this demographic also creates a large pool of buyers for all of these foreclosed homes, which are driving down house prices. Forgiving student loans is a true investment in our future!

[AnnfromCA]

Great article. It's exactly what's driving us all nuts.

[Randall Amster - Huffpost Blogger]

Thanks for the comments and feedback, much appreciated. A couple of quick thoughts: (1) bailout is not stimulus -- Bush gave away a trillion and it got us nowhere, and the money is more likely to be absorbed into the morass and/or spent on corporate junkets than it is to be returned to the hands of actual people; (2) the Republicans have clearly marked out their strategy here -- stand united against Obama and hope he fails; in other words they are betting against the economy improving and thus betting against all of us seeing better times as well; (3) the points made by TakeTheCanolis are all excellent, and it also seems to be the case that one of the things that got us into this mess was the lifting of Glass-Steagall rules in 1999 that allowed investment and retail banking to blur, so we may want to revisit that as well; and finally (4) thanks Kiwi, and yes Chris -- the whole thing is revolting, and maybe the people will soon be revolting too if things don't improve quickly! I suppose increased pitchfork sales could provide a stimulus to the economy, come to think of it...

[GardenerNorCal]

Why is that? That the republicans want this to fail. I am having a real problem understanding just what we are getting for this bailout. On HuffPo today there's an article that the banks are upping interest rates on credit cards...how is that going to help? Won't that just push a consumer economy over the edge. I going out pitchfork shopping today.

[From the Raft]

Republicans bolt!

[adamnb]

I still don't see the paradox; both the bail-out and stimulus are forms of stimulus.

[Viper]

First the bail out part are loans... secondly they are required because american defaulted on their loans stiffing those that gave them cash and the asset securing their loan has dropped more than 50% in many cases... their houses.. leaving many with no reason to make payments on a house whose mortge amount is worth twice what the house is. That reality as created no market for the these investments, banks, pension funds and ete made in Americans homes... well almost .. when l;ehamna was allows to fail they went for 10 cents on the dollar eventhough 90% are still paying on their loans... That would be a 60% annual return at worst for those who bought them.. the rich got richer.

This asset deflation reduces the money supply by the amount of such asset deflation Thuis contracting whats avaliable to be loaned) and must be made up by printing money... there is no option except stopping the deflation and re inflating the asset prices... It is simple math.

Every time a banks assets drop in value by 1 dollar, that 10 daollar in laons they have to call or cant issue.


Regards

[TakeTheCanolis]

Good points, Randall. But I don't see any solution to the banking crisis in your article.

We must restore regulation of the finance industry. That would plug the leaks in the ship. We must nationalize the banks that went bust. Why hand them more money than it would take to buy them out? If we own the banks, we don't have to hope they behave. We can order them to. I was shocked to hear Senator Lindsey Graham (R-SC) support nationalizing banks on ABC this past Sunday (2/15/09).

Bankruptcy judges need to be empowered to change the terms of mortgages in default. A judge should be allowed to change a 30-year loan to a 40-year loan. That would allow the owners to remain in their homes, with smaller payments due each month. That wouldn't cost taxpayers anything.

There is an estimated 60 trillion dollars riding on mortgage credit swaps and other obscure financial instruments. If this debt proves destabilizing to the economy, the government should nullify these transactions. The same was done after the Civil War for debts pertaining to the insurrection. See the 14th amendment.

[constitutionalfreedom]

I fear that our government is locked into the "permanent campaign", it is unfortunate that in a desperate time like now we have both parties refusing to work through the issues in a logical manner. Why for example was the stimulus package pushed through in less than 48 hours? Why didn't the house and senate read the bill?

[adamnb]

The Repubs took their ball and went home. Now there quveching at the results. Obama beat there ass, and will again, so long as they refuse to take part.

[KiwisCanFly]

i like yr thinking, Randall Amster.

[Chris Ferro]

So, lets revolt.