August 31, 2009
Dr. Jared Bernstein
Executive Director - Middle Class Task Force
Chief Economist for The Vice President
The White House
1600 Pennsylvania Ave NW
Washington, DC 20500
Dear Dr. Bernstein,
I read with interest your recent post, entitled "The Recovery Act in Action", on the Briefing Room Blog. I appreciate you taking the time to address a critical area and am particularly excited that effort is being made to communicate these complex issues to the lay citizen. I have a set of questions that go beyond what is captured in this particular effort.
As a supporter of the Administration, I am eager for policy that produces political success. As a business school graduate, I value policy that efficiently achieves desired outcomes. And as a nonprofit administrator, I am excited someone with a social work background is a top economic adviser in the Administration.
You capture and explain the importance of ARRA quite well, culminating in these paragraphs celebrating the legislation.
Now, the President has stressed consistently that as far as we’re concerned, any degree of economic contraction is too much, and even more importantly, any job losses are too many. But the independent findings cited above make the critical point that if you’re only noticing that things are still bad without noticing that they’re getting better, you’re looking at the wrong benchmarks. The question is not, Are we still in hole? Of course we are; it took years to dig in, and it’s going to take a long time to dig out.
The relevant question is, Are we digging out faster thanks to the Recovery Act and our other economic policies? To that question, these independent analysts, and many others, unequivocally answer, "Yes."
I heartily agree that the evidence is overwhelming that infrastructure investments and social safety net spending are critical components of economic stability and recovery. To continue with the digging metaphor, though, two questions arise.
- Are we digging out as fast as we could? Not just faster than without ARRA, but as fast as humanly possible? Just as a dollar received today is more valuable than a dollar received tomorrow, so too is preventing suffering today more valuable than preventing it tomorrow.
- One often hears that the first rule of holes is to stop digging. You lump together 'the Recovery Act and our other economic policies'. I would respectfully disagree with the benefits of some of the 'other economic policies'.
As to the first line of questioning, one of the core observations from those of us who have been concerned about the economy for some time is that there was not (and is not) enough support aimed at the two types of public outlays with the biggest bang for the buck, social safety nets (like unemployment insurance, SNAP/Food Stamps, and health insurance) and infrastructure investments (from roads and rails to libraries and levees to parks and post offices to schools and sewer systems).
Is the Administration committed to substantially increasing the budgetary outlays dedicated to these high ROI projects? After all, the marginal propensity to consume, and thus, the utility of the outlay, is highest for those at the lower income strata. This is one of the silver linings of difficult times; economic efficiency and equity conveniently converge around the same policy options. With the economy in worse shape now than was projected months ago, that would seem to justify the call for larger fiscal stimulus. ARRA was a great start, particularly the parts that were not tax cuts. Let's do some more.
If there is concern about the budget deficit, I would encourage a rethinking of the answer you posted to the second question following up on the Open for Questions exchange regarding military expenses. There is a significant amount of military expenditures that could be redirected to more productive domestic investments, and more broadly, the defense budget has never been held to detailed cost justifications. Why start now for much more valuable domestic spending?
On the second line of questioning, I wonder why this was thrown in there? I understand that working for the Administration, you naturally need to be supportive of everything the Administration is doing in order to be an effective cheerleader of the President's and Vice President's agenda. However, this issue is of a scale and scope that is so large that it calls for a much more specific discussion. The justification for the unprecedented actions of the Fed, Treasury, FDIC, HUD, and others over the past two years was that the financial system was so fragile, capitalism so weak, that the system would collapse absent massive government involvement.
Yet, two years later, the financial services industry is more concentrated, not less. Income inequality is more stratified, not less; wealth inequality is even worse. FHA, Fannie, Freddie, Ginnie, FHLBs, et al, are still involved today backing risky mortgages; in fact, it is possible for someone to buy a house with zero money down. If what we want is to make home ownership affordable, we should just give a large amount of money to every household. It is assets, not debt, that middle class household balance sheets would find most valuable, and one large universal transfer would be more equitable and efficient than small, limited, haphazard ones. Our prison population of average Americans has continued to rise, but most of the key participants of the various frauds that weakened our system and brought us to, using your imagery, the precipice, remain at large. Many of the very people who occupied positions of importance over the past few years continue to occupy key positions today. Despite various invocations of emergency, there has been no articulation of a comprehensive policy for dealing with large corporate bankruptcies nor any meaningful regulation of financial industry companies. Risk, in short, continues to permeate our system.
There is a bipartisan effort in the House to audit the Federal Reserve, the first step in reigning in what has effectively turned into an off-balance sheet liability of the United States taxpayer. The Congressional Oversight Panel and the Special Inspector General of TARP have released detailed reports delving into everything from the improper pricing of assets to the need for comprehensive financial reforms. Even economists working for the Federal Reserve system come to the conclusion that negative equity and adverse life events (such as job losses and medical bills) are what drive problems in housing, not lack of marginal modifications to interest rates or the stock prices of a few large banks. Even the President of the Kansas City regional Fed, Thomas Hoenig, has spoken out, including a speech entitled "Too Big Has Failed" [PDF warning]. And finally, politically, bailouts for the wealthy make for bad politics. Main Street has been light years ahead of Wall Street, recognizing the dangers inherent in the flawed risk management models that make black jack and roulette players look downright conservative in comparison. The majority of Americans like our prosperous representative democracy. We do not want to become a banana republic.
What would it take, in other words, to shift the trillions of dollars spent bailing out the largest corporations, the ones whose incompetent and/or fraudulent management teams caused the crisis in the first place, to the people who are suffering, the ones who create a much larger multiplier when receiving government assistance?
Now, I expect that is not a question that can be answered in one blog post or one letter or one speech. What I ask is that it is a question whose answer is being investigated energetically.
If I may be of assistance in any way, please do not hesitate to make me aware. We have good options available to us and a bright future awaiting us. Thank you for the work you are doing in turning this potential into reality.
Regards,