I had submitted the following economic analysis and plan to the Obama-Biden transition team on November 23, 2008, when the transition to the new administration began. It would be interesting to take a measure of where the President’s economic team is relative to my analysis:
SUMMARY PULSE OF THE U.S. ECONOMY:
10 PER CENT UNEMPLOYMENT PROJECTED TO FALL BACK TO PRE-CRISIS LEVELS ONLY BY 2016, PROJECTED GROWTH RATE OF 2-2.5 PER CENT BY MID-2011, INFLATION AT 5 PER CENT YEAR-ON-YEAR CHANGE IN THE CONSUMER PRICE INDEX (CPI), WAGE AND EMPLOYMENT UNCERTAINTY, HIGHER WALL STREET BONUSES, POSSIBLE FINANCIAL CORRUPTION AROUND THE WORLD.
In this memo first, I outline the design principles the economic plan must subscribe to in all time horizons: the immediate term, the medium term and the long term and second, I list the specific economic objectives the new administration must hope to accomplish (or prepare the ground to accomplish) in the first 2 years through the fiscal years 2010-’11.
The extent of government involvement in the economy must be limited to catalyzing eventual self-sustainability in forward-looking growth areas. In any time horizon, government ownership of any part of the economy, with the exception of the provision of pure public goods such as foreign affairs, national defense, treasury and money supply operations and markets supervision and regulation of the various economic sectors, must be avoided.
Open global markets principle.
As an extension of the catalysis principle to international economic policy, the purpose of U.S. international economic engagement must always be to advance our nation’s core principles of open economies around the world within in a democratic political order, both democracy and open economies being parallel, not sequential goals. To this end, U.S. foreign aid must work in coordination with the World bank and other international aid agencies and must be primarily catalyzing in nature to create self-sustaining emerging markets as had been the case with India, Brazil, Russia and China (though not quite democratic yet). Catalysis should not mean addiction. Our domestic and foreign incentive structures for international trade, from tax policies to trade agreements, must spread the eggs in various baskets, not concentrate them in one basket. For example, oil and Chinese imports are examples of what not to do: a serious lack of diversification in trade and energy policies leading to vulnerable dependencies and considerable domestic economic distress.
Regulatory oversight principle.
The regulatory structure must strive to persuade businesses to better plan strategically so that a commitment to continuous innovation at the firm level smoothes the business cycle as a matter of better planning and that this planning, for global U.S. corporations, does not compromise domestic economic activity in favor of foreign markets. The building of a win-win global value chain must be the objective and outcome of regulatory policies and laws. Primarily, regulation must ensure that financial market behavior is never unmoored from the real sector either domestically or abroad.
The regulatory structure must ensure that income and jobs are always created at all education and income levels, for high school graduates to Ph.Ds and that the government is not at fault in depriving access to education. Regulating education, similar to regulating healthcare, is a pure public good, but education itself is not a pure public good. Meaning, the government must neither aspire to provide education nor healthcare but must create a regulatory structure that ensures the provision of equal and universal education and healthcare access by the markets.
Time consistency principle.
All immediate term actions must be consistent with objectives over the medium to long term. The plan must include the process of preparation for the medium to long term objectives beginning now, reflecting the recognition that the medium and long terms are but a series of short terms.
Price stability principle.
The plan must ensure, in coordination with the nation’s independent central bank, The Federal Reserve System, to ensure that economic activity and the government’s role in it always ensures stable prices. Any deviation from the central bank’s acceptable target range of price stability must return to the target level within the central bank’s forecast horizon of 3 years from the point in time of the beginning of persistent deviation from the target range of price stability, the acceptable target range being 1-3% CPI (0-1% CPI being the deflationary zone and 3-4% CPI being the inflationary zone). It would be preferable if going forward the Federal Reserve declares explicitly the above implicit targets it uses in monetary policy making, to further improve communications and transparency and to better shape market expectations of the economy.
Budget balance principle for exchange rate stability.
The plan must aim to keep the total stock of national debt within a range of % of GDP, the preferred range being 40-60% of GDP at all times under price stability and healthy growth. If the total stock of national debt is not within this range under exceptional circumstances as is the case now, the economic plan must ensure that there is legislative commitment in the form of budget rules to bring the total stock of national debt within the target range in 2 presidential terms (or 8 years). This commitment will help trigger the necessary government reforms at the appropriate times to continually maintain a size of government that is transparent, efficient and effective.
Economic objectives — Immediate term (before the Inauguration and through the first 100 days)
Preventing job losses from the failure of the auto industry.
WHERE THE ECONOMY IS: UNEMPLOYMENT HAS RISEN
Preventing the escalation of the financial crisis to states and localities.
WHERE THE ECONOMY IS: THE FINANCIAL CRISIS HAS DEEPENED
Stopping preventable foreclosures.
The presidential transition, amidst widespread speculation about the depth of the impending recession, appears to be causing profound anxiety among most observers, and this anxiety-talk could be worsening expectations.
We have had many recessions since the Great Depression and not all recessions become depressions. The dust of self-reflection has settled on the dust bowl in nearly a century since the onset of the Great Depression and we know a lot more about the economy and therefore history does not have to repeat nor should there be anxiety that it could.
It is imperative that the markets calm down and get some clarity on the elementary concepts of prices.
We began this roller-coaster journey with reflation due to the rising non-core prices of oil and food. Meaning, inflation was on the rise until it reached levels unacceptable to any G7 central bank except Japan.
Now, having turned down from the reflationary peak, we have been disinflating and we are, as we speak, in a period of disinflation, not deflation, returning to levels of inflation acceptable to the G7 central banks, again except Japan.
The overshooting of inflation due to the overzealousness in non-core prices, combined with the housing-induced financial crisis has led to a fall in growth, which in turn has led to this episode of disinflation.
The markets which overshot are correcting themselves, albeit in a chaotic fashion and the purpose of government interventions so far has been to calm this chaos.
Central banks do not like the process by which they are returning to their inflation targets of around 2% inflation. Slowing growth is not a policy tool but this is the reality we have found ourselves in.
Looking forward from now into 2009, well-structured and forward-looking fiscal stimuli, around the world, in the G20, can lead once again to stable prices and normal growth rates. It is likely that the global economy is making that turn at the moment and any comparisons to the Great Depression, which was a case of acute deflation, are entirely gratuitous.
Such fiscal stimuli, both current and proposed, albeit belated, to the combined tune of $2T are already in the works in the United States, European Union and China for the rest of 2008 and into all of 2009.
Worrying does not pay bills. Sensible actions do. After all, the current Congress and the White House have a job to do until 01/20/2009 and stay in session if necessary given the exceptional circumstances, to
get things done.
Therefore, first things first.
How much cash on hand do Ford and GM have, assuming the status quo on employment levels, before they are forced to default on their operating expenditures and payments to their suppliers?
Can they carry on through one month after the inauguration? Or do they need the money already approved to be released. This is currently legislation that is separate from either the housing package or the economic stabilization package, only being hobbled by political impasse.
Second, many observers may be correct in lamenting the untimely lame-duck period in the political process during a crisis, but can the Congress and the White House approve the diversion of funds from the economic stabilization package and the prior housing bill to deal with a better structured fiscal stimulus immediately to improve short-term expectations of the economy on both real spending and the foreclosures during the transition and in fact, until the new president presents his budget to the Congress?
There is at least $400B that is immediately available for stimulus spending, putting together the unused funds in the prior housing bill and the economic stabilization package.
Some things that could become a part of such a modification of criteria for using funds in the already approved legislations are:
Payment streams on loan guarantees, with a working group to evaluate loan guarantee requests both to avert foreclosures and to help the business loan market. This will help both the consumers and the financial markets.
The FDIC appears to be on the right track, but there could be tranches (to use the lingo of the markets that they are used to) or mortgage groupings, each of which require a different kind of government intervention:
(A) Already foreclosed on properties walked out on by the homeowners.
Action: The payment streams have to be met by the government on the notes in limbo on the books of the financial institutions, while it works to bring them into the market as viable properties again with the state and local governments.
(B) Foreclosing mortgages.
Action: Either these have to be moved into category (A) if they cannot be saved or if they can be saved the government must modify the recent housing bill so that it can pay the underwater amount to the financial institutions in return for restructuring the note as a fixed rate mortgage at the current market value of the house to keep the mortgage-paying homeowner in the house who then forfeits his or her option to later on enter category (A) to mitigate moral hazard along
with accepting a moratorium on equity withdrawals even if property values rise (potentially the government can also place a delayed claim on home equity at a payment level comfortable to the homeowner after the market recovers to recoup the underwater payment it made to the financial institution at the time of restructuring the mortgage). The restructurings have to be limited to primary residences.
(C) Healthy mortgage assets held by the GSEs, still a majority of them, can be divested and spun off from government conservatorship as a private housing bank with the option to become a BHC over the next 5 years and the GSE mandate can be changed to serve the needs of forward-looking housing loan purchases seeded by government money to catalyze the market place.
(D) Obviously, the government bears no responsibility for the non-conforming mortgages above the current $730,000 or so limit.
WHERE THE ECONOMY IS: FORECLOSURES HAVE NOT ABATED. GSE reform is at a standstill and the Secretary of the Treasury prefers to leave them intact.
Buying state and local debt to infuse funds into states that request them and to prevent a creep of the financial crisis into state and local debt.
Bridge, road and other infrastructure repairs.
FY 2008-2009 spending, until 09/30/2009, on transition costs on infrastructure and energy reforms toward medium and long term objectives, noting that this objective may not get all the funding it needs from the currently available funds and that future expenditures in this area may need to be part of future budgets.
If the Congress can get this done before Thanksgiving, they can come back to town for the Inauguration after what will be a well deserved break for the returning members and a hopeful beginning to look forward to for the new members.
The American people will be thankful.
WHERE THE COUNTRY STANDS: IN DESPAIR
Economic objectives — Short term, Year 1 (end of the first 100 days to 09/30/2010, the next fiscal year)
Restructure the auto industry by aiding forward-looking M&A activity in the auto market, bringing together American hybrid and plug-in car manufacturers such as Tesla Motors and the Big Three, with a focus on retooling for natural gas, gas-electric and plug-in hybrid cars.
WHERE THE ECONOMY IS: WIDESPREAD ADOPTION OF ELECTRIC CARS IS AT LEAST A DECADE AWAY BEGINNING IN 2011-2012.
Revamp financial regulation along the lines of the U.K. FSA as a twin of the Federal Reserve.
WHERE THE ECONOMY IS: THE REFORM IS NOW BEING DEBATED AND I HAVE STREAMLINED THE ABOVE PROPOSAL ON THIS BLOG.
Enact a GHG tax structure, domestic and international (to induce China and India into the global climate change treaty) and create a cap and trade system in the FY 2009-2010 budget for energy diversification and climate change to prepare for Copenhagen in December 2009. Both the GHG tax and cap and trade system will be overseen jointly by the DOE and EPA. Negotiate and sign the global climate change treaty in Copenhagen in December 2009.
Eliminate gasoline taxation in the United States and enact a tariff on oil imports to ensure price competitiveness of oil alternatives.
WHERE THE ECONOMY IS: ENERGY POLICY HAS BEEN SIDELINED WITH THE EXCEPTION OF A FEW INCENTIVES IN AMERICAN RECOVERY AND REINVESTMENT ACT AND THE FEDERAL BUDGET WITH NO INVESTMENT IN SIGHT YET. See a related blog post of mine here.
Economic objective — Short term, Year 2 (FY 2010-2011)
Create a United States Investment Bank (along the lines of the European Investment Bank) as a GSE (superseding all the existing GSEs) to catalyze private sector activity in green-electronic housing, infrastructure (including high speed rail, power grid and a national contingency energy infrastructure to replace the SPR), energy, education and healthcare.
WHERE THE ECONOMY IS: NO MOVEMENT ON THIS FRONT WHERE THE MOST JOBS RESIDE See a related blog post of mine here:
Encourage state and local governments to change zoning laws (Green Work-Life Zones to minimize commutes by leveraging advanced telecommunications technologies such as CISCO’s Telepresence) and construction codes to mandate green building standards gradually, initially with incentives and later with penalties, over the period of a decade.
WHERE THE ECONOMY IS: THERE IS NO MOVEMENT ON THIS FRONT. THERE IS AN INTERAGENCY PROGRAM TO LOOK INTO GOVERNMENT ENERGY EFFICIENCY TO WHICH I HAD SUBMITTED THIS COMMENT IN MORE DETAIL THROUGH THE FEDERAL RESERVE IN 2009 BUT WAS SUSPENDED FROM WORK FOR COMPLAINING THAT MY COMMENT WAS ATTRIBUTED TO ANOTHER EMPLOYEE WHO WAS REWARDED. See a related blog article of mine here.
Create a road map for the representation of EU consolidation on the G7 and integration of emerging markets into the G7 over time to enable better coordination of global financial markets supervision and regulation.
WHERE THE GLOBAL ECONOMY IS: The G7 has been expanded to the G20 in Pittsburgh in 2009.
Accordingly, reform the IMF and World Bank to carry out the road map.