Tuesday, April 14, 2009

Econ 101

Obama gave a speech today. We all know he’s good at speeches but for this one he dropped the soaring and inspiring prose and settled into the role of an economics professor and explained in simple terms why he was doing the things he’s doing to get the economy going again. All very good and, unfortunately, very necessary for the stupid American public who are getting mad about things that they don’t even understand.

Obama is doing what any smart guy would do, looking at history and learning it’s lessons. The best example we have of our situation is The Great Depression.

Portrait shows Florence Thompson with several ...Image via Wikipedia

Very easy to look at the things Hoover did, all of which caused a deeper and worse depression. And look at what FDR did that started us back on the road to being able to live.

The first thing Hoover did, and which he is most known for is - nothing. He just stood there and said there was nothing he COULD do, the economy would correct itself. As we can see, Republicans have followed ideology over reality for over 75 years. FDR showed (and this is actually Keynesian economics, FDR didn’t invent it) that spending at a time when only the government has the muscle for any kind of big spending, is the necessary thing for a completely stagnant economy. Another thing Hoover got raked over the coals for was raising taxes, which was like throwing gasoline on a fire. This is why Obama hasn’t raised taxes for the rich yet like he said he was going to. He’ll just wait for the Bush tax cuts to expire next year and hope the recovery is far enough along that it won’t hurt.

This I have some doubts on, that raising the top tax rate from 36% to 39% is going to cause much of a problem. It might even be stimulative as the rich might want to make business investments to lower their taxes. Keep in mind that we have a marginal tax, which means the percentage increases with quantity - the 39% kicks in at amounts over $400,000. And that rate is ONLY paid on income over that limit, not below it. Still, I can understand being cautious and won’t fault Obama for not wanting to risk raising taxes right now.

But where I do find fault is what Obama said about not nationalizing the banks the way Paul Krugman has been saying he should. I kind of felt like Obama couldn’t justify that either and gave the least amount of explanation on that part. I think he is just staying away from what most of the country sees as socialism. But Krugman actually IS an economics professor at Princeton, unlike Obama who only plays one in speeches, and he recently won the Noble Prize in Economics, no small feat.

First we need an explanation of what Krugman means by nationalizing the banks, he doesn’t mean for the government to start running banks, they aren’t in the banking biz and shouldn’t be. It means the government steps in and seizes a failing bank and pretty much guts it, getting rid of it’s toxic assets, shareholders and officers. Then they sell it and let new management come in and start fresh. The best part of this is that it throws the assholes out on the street who brought the entire world’s economy to it’s knees. The bailout is giving these very same assholes billions of dollars to do what they want with, like give themselves million dollar bonuses and buying company jets. I think this is the single worst thing Obama is doing, letting the same guys remain in their positions to wreck more havoc. The big disadvantage to nationalizing is that all the shareholders suffer 100% loss, no chance of ever getting it back. With all the IRA’s out there right now that could mean a big hit to a lot of middle class people, not just rich guys.

That kind of hit could be worse than raising taxes in today’s economic climate. That’s probably what Obama is worried about, although I’m sure he’s more worried about looking like a socialist.
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