Is The Public Ahead of the Pundits in Knowing How to Solve the Economic Crises?

Pardon me while I try to catch up on my essential reading with Driftglass, the master of sublime blog commentary. Don't stop with this essay. He's a gifted thinker/writer and well worth the time you'll spend noodling around his blog and gulping down his prose (trying not to bleed to death as his knife-edged words slide down your throat). And why did AIG get the last shot of billions? It was important, that's why.

American International Group Inc. appealed for its fourth U.S. rescue by telling regulators the company's collapse could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers' stake in the firm.

Dean Baker, the co-director of the Center for Economic and Policy Research (CEPR) and one of my favorite economists, is always dead on. (Emphasis marks are inserted for your heightened enjoyment - Ed.)

The Washington policy debates of the last week would almost make a casual observer believe that the nation's political leadership is in fact nostalgic for the good old days of the Great Depression when the country suffered double-digit unemployment for a decade. The two big news items last week were a batch of absolutely horrible economic reports and the release of President Barack Obama's budget. The media almost completely ignored the former and focused its attention primarily on the latter. So, let's start with the bad news. As can be expected, much of the bad news centered on housing. The National Association of Realtors reported that existing home sales fell below 4.5 million for the first time since the mid-90s. They also reported that the median house price dropped another $5,400 in January or 3.1%. Since July, this series shows a drop in the median home price of 18.9%. Other data also showed house prices in a free fall, most notable the commerce department's series on new home sales, which showed a drop of 10% in the median price between December and January. With vacant housing units at record levels, and many potential home buyers no longer having the equity in their current homes for a down payment, it is difficult to see how this free fall stops any time soon. Housing isn't the only sector that's plummeting. Investment fell at a 28% rate in the fourth quarter, the sharpest rate of decline in more than 50 years. New orders have fallen more than 5% in each of the last two months. Along with the collapse of these sectors, the number of new unemployment claims just keeps rising. Last week, it was 667,000 new claims. February may show more than 700,000 jobs lost for the month in the report released on Friday. The unemployment rate is likely to hit 8% for the month, and it could well be over 9% by the summer. While this bad news was flowing, President Obama released the first budget of his presidency. It is an ambitious document. The proposal calls for directly confronting powerful interest groups in order to eliminate important sources of waste in the budget. For example, the budget eliminates subsidies to private insurers in Medicare and drug companies in Medicaid. The saving will go toward financing healthcare reform. He also proposes to eliminate the fund managers' tax break that allowed managers of hedge and equity funds (some of the richest people in the country) to pay tax at just a 15% rate. Obama proposes to have these Wall Street tycoons subject to the same tax rates as everyone else. There are many other areas where the budget turns to long-neglected areas, most importantly a proposal to establish a cap and trade system to provide incentives to reduce greenhouse gas emissions. It is not clear that Obama can accomplish the full agenda laid out in his budget, but there is no doubt that he hopes to accomplish a great deal in his term in office. Remarkably, much of the discussion of the budget did not focus on Obama's agenda, but rather his deficit targets. In particular, many commentators questioned whether he would reach his deficit target for 2012 because the economy might be weaker than his budget assumes. The pundits' concern on this point should have caused people to throw their television sets, radios and newspapers out the window. Let's suppose that the pundits are correct and the economy sinks farther and later grows more slowly than the Obama administration assumed in planning its budget. Would the pundits have Obama therefore cut more spending and raise more taxes? This would be close to crazy. With the economy plummeting, the first priority of the administration and Congress must be to boost the economy. If the unemployment rate is 12% when Obama's first term ends, he can forget about getting re-elected, even if the budget is balanced. On the other hand, if he has managed to bring the unemployment rate down to a reasonable level, no one other than a few Washington pundits will be bothered by the deficit that might have been necessary to achieve this result. The electorate is well ahead of the punditry on this issue. The federal government is the only force capable of turning the economy around in the near future and sustaining growth. The public recognizes this fact and will demand good economic policy even as the punditry continue to push policies that would throw the economy into another depression. Even if they have very large megaphones, the punditry are thankfully still a very small minority and unlikely to get their dream.

Baker is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. Suzan _____________________

Increase Taxes On Those Who Gained from Iraq Invasion

Now here's some economic recovery news we can use (and actually benefit from individually and as a country). And quite an impressive legal/ethical rationale to justify fresh impeachment charges for at least Dick Cheney if not the whole bunch. And I must say that even though John McCain doesn't believe in economists (except for his buddy, Phil Gramm, of course), I do. Too bad only publishers like Truthout will run this article by Nick Mottern, the director of ConsumersForPeace.org, which is Part II of the series. Click here for Part I. (Emphasis marks are mine.) This is my favorite sentence. "Following a precedent in World War II excess profits tax law, a base line for measuring profit on the oil imports could be an average of profits over several years prior to the invasion."

Hastings-on-Hudson, New York - Based on an analysis of economist Dean Baker, co-founder of the Center for Economic and Policy Research, we estimate about 25 percent of oil company profits since the 2003 invasion of Iraq can be traced to the war's impact on world oil prices. On this basis, the excess war profit for ExxonMobil alone, between 2003 and 2008, would amount to about $40 billion. A 25 percent excess war profits tax imposed on the Big Five oil companies - ExxonMobil, Shell, BP, Chevron and ConocoPhillips - covering the first five years of the war would capture almost $90 billion. This estimate takes into account that Shell and BP are not American companies and that excess profits taxes would be only on profits from their US operations. As discussed in Part I, there is justification for focusing the tax on the Big Five because of their size compared to their smaller competitors. The Big Five had combined profits of $120 billion in 2005, compared to about $31 billion for the next 20 largest oil firms combined, according to a 2007 report from the James W. Baker Institute for Public Policy at Rice University. The report noted the Big Five "also dominate the US gasoline market with roughly 62 percent of the retail market and 50 percent of refining capacity." The Rice report found that the Big Five, unlike the smaller firms, have been spending a high proportion of their windfall profits on stock buybacks to enrich management and large stockholders. They were spending less, compared to their smaller competitors, on dividends, exploration, development and acquisitions. The Big Five and other oil companies have been anxious for passage of an Iraq oil law that could lead to very favorable long-term production agreements, dramatically expanding their oil reserve holdings, the basis of their profit and survival. The prize in Iraq is the third largest proven oil reserve in the world under the control of an occupied government compliant to Western oil companies. The US Energy Information Agency notes that extraction costs for Iraq are among the lowest in the world. The Big Five and other oil companies have been importing oil from Iraq since before the invasion, purchasing it through that nation's oil company. Indeed, in late 2002, just prior to the invasion, US oil companies doubled their Iraqi imports to compensate for a drop in Venezuelan shipments. In April 2008, imports from Iraq to the US were slightly below the level at the time of the invasion. The following companies, along with the Big Five, imported Iraqi oil into the US in January 2008: Flint Hills Resources, Koch Supply & Trading Company, Marathon Petroleum, Tesoro, Total and Valero. The Big Five and Valero are constant importers of Iraqi oil, month to month; imports by the other firms are less regular. While the current oil imports are simply an extension of pre-invasion business, the fact of the invasion raises significant ethical, legal and war-profit issues, particularly because the invasion was a violation of international law. The invasion and occupation mean that oil that was being legitimately purchased from an independent Iraqi government entity prior to the invasion has become oil being purchased from an occupied government by firms in league with the occupier, raising questions about fairness in terms and price. The invasion also means US military forces have been, and continue to be, used to secure Iraq's oil fields for exploitation by major oil companies that might otherwise not been given these rights. The ethical and legal issues are brought into sharp focus by the controversy that has arisen around the occupied Iraqi government's announced intention to award no-bid oil service contracts to ExxonMobil, Shell, BP, Chevron and France's Total, clearly a sign of favoritism. The wide publicity given to the sweetheart deal appears to have caused some Iraqi politicians to stall the awarding of the service contracts. Reuters reported Ali Hussain Balou, head of the Iraqi Parliament's Oil and Gas Committee, "demanded an explanation from Oil Minister Hussain al-Shahristani on plans to offer a series of short-term technical support contracts worth $500 million each to a handful of Western oil majors without competitive bidding." One could argue, therefore, imports of oil from Iraq to the US should be barred on ethical grounds. However, another approach, which recognizes the pre-existing oil trade between the two countries and the mutual benefit of that trade, would be to impose a 95 percent excess war profits tax on all oil imported from Iraq for as long as any US military forces, including military contractors, are on Iraqi soil. Following a precedent in World War II excess profits tax law, a base line for measuring profit on the oil imports could be an average of profits over several years prior to the invasion. This tax would cover oil now being imported into the US from Iraq and any expansion of imports. For the Big Five, this tax would be added to the excess war profits tax applied to their annual profits across the board. The top priorities in the use of revenue generated by these taxes should be: the restoration of human services to the Iraqi people; the rebuilding of the Iraqi economy; aid to families of Iraqi war victims; and providing US veterans and their families, particularly the families of war casualties, with adequate income, health care and jobs.

Enjoy the weekend (if you can with the price of oil over $147 a barrel)! Suzan _________________________________