A chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts

Stay the Course
The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it's déjà vu all over again - literally.

For this is the third time in history that a major economy has found itself in a liquidity trap, a situation in which interest-rate cuts, the conventional way to perk up the economy, have reached their limit. When this happens, unconventional measures are the only way to fight recession.

Yet such unconventional measures make the conventionally minded uncomfortable, and they keep pushing for a return to normalcy. In previous liquidity-trap episodes, policy makers gave in to these pressures far too soon, plunging the economy back into crisis. And if the critics have their way, we'll do the same thing this time.

The first example of policy in a liquidity trap comes from the 1930s. The U.S. economy grew rapidly from 1933 to 1937, helped along by New Deal policies. America, however, remained well short of full employment.

Yet policy makers stopped worrying about depression and started worrying about inflation. The Federal Reserve tightened monetary policy, while F.D.R. tried to balance the federal budget. Sure enough, the economy slumped again, and full recovery had to wait for World War II.

The second example is Japan in the 1990s. After slumping early in the decade, Japan experienced a partial recovery, with the economy growing almost 3 percent in 1996. Policy makers responded by shifting their focus to the budget deficit, raising taxes and cutting spending. Japan proceeded to slide back into recession.

And here we go again.

On one side, the inflation worriers are harassing the Fed. The latest example: Arthur Laffer, he of the curve, warns that the Fed's policies will cause devastating inflation. He recommends, among other things, possibly raising banks' reserve requirements, which happens to be exactly what the Fed did in 1936 and 1937 - a move that none other than Milton Friedman condemned as helping to strangle economic recovery.

Meanwhile, there are demands from several directions that President Obama's fiscal stimulus plan be canceled.

Some, especially in Europe, argue that stimulus isn't needed, because the economy is already turning around.

Others claim that government borrowing is driving up interest rates, and that this will derail recovery.

And Republicans, providing a bit of comic relief, are saying that the stimulus has failed, because the enabling legislation was passed four months ago - wow, four whole months! - yet unemployment is still rising. This suggests an interesting comparison with the economic record of Ronald Reagan, whose 1981 tax cut was followed by no less than 16 months of rising unemployment.

O.K., time for some reality checks.

First of all, while stock markets have been celebrating the economy's "green shoots," the fact is that unemployment is very high and still rising. That is, we're not even experiencing the kind of growth that led to the big mistakes of 1937 and 1997. It's way too soon to declare victory.

What about the claim that the Fed is risking inflation? It isn't. Mr. Laffer seems panicked by a rapid rise in the monetary base, the sum of currency in circulation and the reserves of banks. But a rising monetary base isn't inflationary when you're in a liquidity trap. America's monetary base doubled between 1929 and 1939; prices fell 19 percent. Japan's monetary base rose 85 percent between 1997 and 2003; deflation continued apace.

Well then, what about all that government borrowing? All it's doing is offsetting a plunge in private borrowing - total borrowing is down, not up. Indeed, if the government weren't running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.

Oh, and investors' growing confidence that we'll manage to avoid a full-fledged depression - not the pressure of government borrowing - explains the recent rise in long-term interest rates. These rates, by the way, are still low by historical standards. They're just not as low as they were at the peak of the panic, earlier this year.

To sum up: A few months ago the U.S. economy was in danger of falling into depression. Aggressive monetary policy and deficit spending have, for the time being, averted that danger. And suddenly critics are demanding that we call the whole thing off, and revert to business as usual.

Those demands should be ignored. It's much too soon to give up on policies that have, at most, pulled us a few inches back from the edge of the abyss.
© 2009 The New York Times

Paul Krugman is professor of Economics and International Affairs at Princeton University and a regular columnist for The New York Times. Krugman was the 2008 recipient of the Nobel Prize in Economics. He is the author of numerous books, including The Conscience of A Liberal, and his most recent, The Return of Depression Economics.

Bulldoze the Ghost 'Burbs, Return Them to Nature

Bulldoze the Ghost 'Burbs, Return Them to Nature
The government looking at expanding a pioneering scheme in Flint, Michigan, one of the poorest US cities, which involves razing entire districts and returning the land to nature.

Local politicians believe the city must contract by as much as 40 percent, concentrating the dwindling population and local services into a more viable area.

The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.

Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.

Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.

Most are former industrial cities in the "rust belt" of America's Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.

In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.

"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."

Karina Pallagst, director of the Shrinking Cities in a Global Perspective programme at the University of California, Berkeley, said there was "both a cultural and political taboo" about admitting decline in America.

"Places like Flint have hit rock bottom. They're at the point where it's better to start knocking a lot of buildings down," she said.

Flint, sixty miles north of Detroit, was the original home of General Motors. The car giant once employed 79,000 local people but that figure has shrunk to around 8,000.

Unemployment is now approaching 20 per cent and the total population has almost halved to 110,000.

The exodus – particularly of young people – coupled with the consequent collapse in property prices, has left street after street in sections of the city almost entirely abandoned.

In the city centre, the once grand Durant Hotel – named after William Durant, GM's founder – is a symbol of the city's decline, said Mr Kildee. The large building has been empty since 1973, roughly when Flint's decline began.

Regarded as a model city in the motor industry's boom years, Flint may once again be emulated, though for very different reasons.

But Mr Kildee, who has lived there nearly all his life, said he had first to overcome a deeply ingrained American cultural mindset that "big is good" and that cities should sprawl – Flint covers 34 square miles.

He said: "The obsession with growth is sadly a very American thing. Across the US, there's an assumption that all development is good, that if communities are growing they are successful. If they're shrinking, they're failing."

But some Flint dustcarts are collecting just one rubbish bag a week, roads are decaying, police are very understaffed and there were simply too few people to pay for services, he said.

If the city didn't downsize it will eventually go bankrupt, he added.

Flint's recovery efforts have been helped by a new state law passed a few years ago which allowed local governments to buy up empty properties very cheaply.

They could then knock them down or sell them on to owners who will occupy them. The city wants to specialise in health and education services, both areas which cannot easily be relocated abroad.

The local authority has restored the city's attractive but formerly deserted centre but has pulled down 1,100 abandoned homes in outlying areas.

Mr Kildee estimated another 3,000 needed to be demolished, although the city boundaries will remain the same.

Already, some streets peter out into woods or meadows, no trace remaining of the homes that once stood there.

Choosing which areas to knock down will be delicate but many of them were already obvious, he said.

The city is buying up houses in more affluent areas to offer people in neighbourhoods it wants to demolish. Nobody will be forced to move, said Mr Kildee.

"Much of the land will be given back to nature. People will enjoy living near a forest or meadow," he said.

Mr Kildee acknowledged that some fellow Americans considered his solution "defeatist" but he insisted it was "no more defeatist than pruning an overgrown tree so it can bear fruit again."

Today's Electronics, Tomorrow's Garbage Heap

Today's Electronics, Tomorrow's Garbage Heap
The pile of televisions waiting for recycling at the Eastern Sanitation Yard in Baltimore - many of them wrapped in wood paneling popular in decades past - is likely to get larger today when the nation completes its switch to digital TV.

[ Old televisions, computers and other electronics await recycling at the Eastern Sanitation Yard on Bowleys Lane in Baltimore. (Baltimore Sun photo by Kim Hairston / June 10, 2009) ] Old televisions, computers and other electronics await recycling at the Eastern Sanitation Yard on Bowleys Lane in Baltimore. (Baltimore Sun photo by Kim Hairston / June 10, 2009)
City officials hope so. The rate of electronic waste, or e-waste, is growing, but more than 80 percent of unwanted TVs and computers nationwide are still thrown into the trash, and watchdogs worry that more will end up there. Or that the e-waste, which contains a number of toxic materials, will not be recycled responsibly, a huge problem documented by activists and journalists.

Americans have been creating up to 50 million tons of e-waste in recent years as they upgrade their technology. Now that tens of millions of old TVs have little or no value, they, too, may get tossed.

Local officials aren't exactly sure how much more will come after the switch because all recycling is voluntary in Maryland, but they are ready, said Hilary Miller, Maryland's program manager for recycling and operations. "Many counties report that they have been seeing a lot of TVs coming in, but they don't anticipate being overwhelmed," she said.

Miller said most of the counties contract with in-state recyclers to dispose of their e-waste and officials have visited the facilities. But she acknowledged there isn't a permitting process or official inspection.

The only state law on the subject requires manufacturers selling electronics here to register and pay a $10,000 fee, which goes to counties as grants for recycling programs. Incomplete data for 2008 shows Maryland counties collected more than 7.4 million pounds of e-waste. More than 9 million pounds were collected in 2007.

Baltimore City contributed about a million pounds in 2008, more than double the amount in previous years, according to Tonya Simmons, recycling coordinator. It's hauled to Computer Donation Management Inc. in Southwest Baltimore, where electronics are broken down or refurbished. Some are given to charity.

"We have them pick up electronics three times a week now from the five city drop-off centers, and if we need them more, we make a phone call," she said. "Our goal is to keep this stuff out of the landfill."

That's a tough task, according to the Electronics TakeBack Coalition, which says the nationwide rate of recycling was about 18 percent for the 27 million TVs and 206 million computers disposed of in 2007. And e-waste is the nation's fastest growing municipal waste stream. Consumers bought 500 million electronic items last year, according to industry data.

Barbara Kyle, the coalition's national coordinator, said recycling goes up when there are strong laws and outreach, such as in Minnesota, where manufacturers must collect the same weight they sell in a year. Also helping are take-back programs launched by at least a half dozen major producers.

Keeping e-waste from being exported to poor countries overseas is even harder because federal laws are weak and enforcement is lax, Kyle said. For individuals to ensure proper recycling, they would have to follow each load through the process. Investigators have done that and often found the worst case scenario: e-waste in the bare hands of poor adults and children, who rip apart and burn it for gold, copper and other valuables while exposing themselves and the ground to mercury, lead, flame retardants, cadmium and other toxic substances.

"It's a big problem, frankly," Kyle said. "Proper disposal means not exporting it."

Federal law does not ban exporting, and those in the industry say not all exporting is bad. And federal law does cover export of lead-filled cathode-ray tubes, or CRTs, found in TVs and computer monitors. The law requires exporters to get permission from the Environmental Protection Agency and the receiving country before shipping. But if the CRTs are going to be reused, the exporters need only notify the EPA. Even this isn't always done, according to an August report by the Government Accountability Office.

Kyle said there is a cost to proper recycling and consumers should be wary of for-profit and even nonprofit groups that take items for free. Baltimore City and surrounding counties, for example, pay 5 cents a pound to have e-waste recycled.

The coalition and the Basel Action Network keep a list of companies pledging responsible recycling, and there are plans for a certification program next year. Kyle is also pushing for products to be designed with recycling in mind.

That is something the industry is supporting, according to congressional testimony last year by Eric Harris, associate counsel for the Institute of Scrap Recycling Industries Inc. He said disassembling e-waste is difficult. But many in foreign countries clamor to recycle it, responsibly and otherwise, because pay is good for raw materials, particularly in Asia, where many electronics are made. The group said producers should recycle their own household e-waste, and work on better design.

Dell already is, according to Mark Newton, senior manager of environmental sustainability there. The company takes back its own brand from consumers through a mail and drop-off system that includes some Goodwill stores. It has a global network of recyclers that it polices.

The company also is working on better design, largely by reducing materials and parts. Newton said the company has also reduced packaging and its carbon footprint by buying energy from renewable sources. He said some of the efforts save money and some, like the take-back program, are costly. (Dell makes the program profitable by selling services such as data scrubbing to commercial customers.)

But ultimately, Newton said, the equipment has Dell's name on it, and the company is trying to "find every way to get this stuff back."

House GOP energy plan declares that impact of global warming ‘shall not be considered for any purpose.’

House GOP energy plan declares that impact of global warming ‘shall not be considered for any purpose.’

House Republicans today introduced their alternative energy plan. Developed by the Republican American Energy Solutions Group, the American Energy Act is billed as an “all of the above” energy program. But as The Wonk Room’s Brad Johnson notes, the legislation looks more like an attempt to legislate the threat of global warming “out of existence.” Indeed, the bill specifically states that at no point in implementing their energy plan can the effects of global warming on the environment “be considered for any purpose”

WSJ column's falsehood: Bush admin did not make claims about jobs "saved or created"

WSJ column's falsehood: Bush admin did not make claims about jobs "saved or created"
Criticizing the Obama administration, a Wall Street Journal column included the false claim that the Bush administration never touted its initiatives in terms of how many jobs would be "saved or created." In fact, Bush's Agriculture Department did so repeatedly.



In a June 9 Wall Street Journal opinion piece, News Corp. vice president William McGurn, a former speechwriter for George W. Bush, wrote that Tony Fratto, a former Bush communications aide turned CNBC on-air contributor, "sees a double standard at play" regarding the Obama administration's statements about the number of jobs the economic stimulus program has "saved or created." McGurn wrote that Fratto told him: "We would never have used a formula like 'save or create.' ... To begin with, the number is pure fiction -- the administration has no way to measure how many jobs are actually being 'saved.' And if we had tried to use something this flimsy, the press would never have let us get away with it." In fact, Bush's Department of Agriculture repeatedly stated that its economic initiatives had "saved or created" a specific number of jobs, or would in the future.

Fratto made a similar claim in a June 2 CNBC.com blog post titled, "The White House 'Jobs-Saved' Deception," writing: "If I -- or even my predecessors in the Clinton Administration -- had tried to pull off this ridiculous gimmick we would have been run out of town. I don't even believe it's possible to look back and accurately measure the 'job-saving' impact of Bush or Clinton Administration policies, let alone to measure in real time, or project into the future."

In fact, examples of the Bush administration touting initiatives in terms of jobs "saved or created" include:

* June 24, 2004, remarks by then-Agriculture Secretary Ann M. Veneman (retrieved from Nexis, emphasis added):

Our Rural Development programs also help communities with infrastructure such as electricity, water and telecommunications and with economic development assistance. We have estimated that our rural development programs have saved or created more than 500,000 jobs just since the Bush Administration took office in January of 2001. Recently we have seen more positive numbers showing that the U.S. economy created nearly a quarter of a million jobs last month alone for a total of 1 million jobs created in the last three months and about 1.5 million jobs in the past nine months.

* A quotation from Mike Johanns -- who replaced Veneman as agriculture secretary -- in a March 24, 2005, Agriculture Department news release (emphasis added):

Agriculture Secretary Mike Johanns today announced the selection of 26 loan and grant recipients in 14 states that will receive $9.2 million in rural business development funds.

"I applaud the local community leadership for their efforts to secure these investments, which are needed to create economic opportunities and improve the quality of life available in their community," said Johanns. "These funds are part of the Bush Administration's ongoing efforts to spur economic development in rural areas and will help save or create more than 1,800 jobs."

The grants and loans are awarded through USDA Rural Development to electric and telecommunications cooperative organizations, which in turn provide loans or grants to support local economic or community development efforts. These funds are also part of an important leveraging effort. The $9.2 million in USDA investments will be matched with $59.7 million in additional investments to support a variety of businesses and community ventures, including community facilities and infrastructure, improving access to local medical care and other projects that encourage a favorable climate for jobs and growth.

Bailing out the big US banks has done nothing to improve them

Bailing out the big US banks has done nothing to improve them
With all the talk of "green shoots" of economic recovery, America's banks are resisting efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details - and the banks will muster what muscle they have left to ensure that they have ample room to continue as they have in the past.

The old system worked well for the banks so why should they embrace change? Indeed, the efforts to rescue them devoted such little thought to the kind of post-crisis financial system we want, that we will end up with a banking system that is less competitive, with the large banks that were "too big to fail" even larger.

It has long been recognised that the US banks that are too big to fail are also too big to be managed. That is one reason the performance of several has been so dismal. When they fail, the Government engineers a financial restructuring and provides deposit insurance, gaining a stake in their future. Officials know that if they wait too long, zombie or near-zombie banks - which have little or no net worth, but are treated as if they were viable institutions - are likely to "gamble on resurrection". If they take big bets and win, they walk away with the proceeds, if they fail, the Government picks up the tab.

This is not just theory; it is a lesson learned, at great expense, during the savings and loan crisis of the 1980s. In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. Sometimes, the government must provide additional funds, or a new investor must be willing to take over the failed bank.

The Obama Administration has, however, introduced a new concept: "too big to be financially restructured". The Administration argues that all hell would break loose if we tried to play by the usual rules. Markets would panic. So, not only can't we touch the bondholders, we can't even touch the shareholders - even if most of the shares' existing value merely reflects a bet on a government bail-out.

This judgement is wrong. The Obama Administration has succumbed to political pressure and scare-mongering by the big banks and, as a result, has confused bailing out the bankers and their shareholders with bailing out the banks.

The Obama strategy's current and future costs are very high - and so far, it has not achieved its limited objective of restarting lending. The taxpayer has had to pony up billions, and has provided billions more in guarantees - bills that are likely to come due in the future.

Rewriting the rules of the market economy - in a way that has benefited those that have caused so much pain to the entire global economy - is worse than financially costly. Most Americans view it as grossly unjust, especially after they saw the banks divert the billions intended to enable them to revive lending, to payments of outsized bonuses and dividends.

This ersatz capitalism, where losses are socialised and profits privatised, is doomed to failure. Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know that they can gamble with impunity - and, with the Federal Reserve making funds available at near-zero interest rates, there is ample money to do so.

Some have called this "socialism with American characteristics". But socialism is concerned about ordinary individuals. By contrast, the US has provided little help for the millions of its people who are losing their homes. Workers who lose their jobs receive only 39 weeks of limited unemployment benefits, and are then left on their own. And, when they lose their jobs, most also lose their health insurance.

America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance, and now to cars, with no end in sight. In truth, this is not socialism, but an extension of long-standing corporate welfarism. The rich and powerful turn to the Government to help them whenever they can, while needy individuals get little social protection.

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed.

This raises another problem with America's too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate, and then to have taxpayers pay for the clean-up. Their hope is that it will work again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.
© 2009 The Age

Joseph E. Stiglitz is University Professor at Columbia University. Among many books, he is the author of Globalization and Its Discontents. He received the Nobel Prize in Economics in 2001 for research on the economics of information. Most recently, he is the co-author, with Linda Bilmes, of The Three Trillion Dollar War: The True Costs of the Iraq Conflict.

Fox mischaracterized NASA report to deny humans cause global warming

Fox mischaracterized NASA report to deny humans cause global warming

On the June 5 edition of Fox News' Glenn Beck, guest host and Fox News senior judicial analyst Andrew Napolitano mischaracterized a year-old NASA report on solar variability to deny that humans are causing global warming. Claiming that NASA "made a remarkable discovery," Napolitano referred to a June 4 DailyTech article headlined, "NASA Study Acknowledges Solar Cycle, Not Man, Responsible for Past Warming," and said: "So, basically -- are you ready for this? -- the sun heats the Earth." However, as the DailyTech article itself acknowledged, in its May 7, 2008, report, NASA does not dispute that human activities are responsible for global warming. In fact, it said the opposite, noting that while "[t]he sun has powered almost everything on Earth since life began, including its climate," greenhouse gases now have a "significant influence on Earth's climate."