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What's Ahead for the Economy and Politics in 2010

Just about everything you'll hear coming out of Washington starting now is really about November's mid-term election. The gravitational pull of the midterms was already apparent last year, as Republicans marched in perfect lockstep to vote against whatever the President and Dems proposed (Republicans always have authoritarian discipline on their side, which is why they're Republicans) but you haven't seen anything yet.

The Dems have enough votes to enact health care -- the hurdle Bill Clinton failed to jump, contributing to the Republican takeover in 1994 -- but when it's enacted, expect the spin machines on both sides to be at full throttle. And because health care legislation won't be implemented for another three or four years (depending whether the House or Senate versions prevail), Americans won't be able to test the veracity of these wildly divergent claims. So don't count on health reform to help Dems next November -- nor harm them, either.

Foreign policy is just as unlikely to tip the scales. Sad to say, absent a draft most American families will read about American deaths in Afghanistan much the way they've absorb the U.S. body count in Iraq -- as news items rather than personal tragedies. Nor will Iran's nuclear capabilities, North Korea's missile launches, Pakistan's tumult, or Yemen's terrorists have much electoral effect -- unless terrorists commit an atrocity in America or on American travelers. Needless to say, China's decision about whether and how much to revalue its currency, although important, will affect the votes of about three Americans (and I think I know all of them).

Issue Number One -- the overriding concern that will determine more than anything how many seats the Dems lose next fall -- is jobs. If unemployment is 10 percent or more next November, the Dems are in danger of losing the House and will almost certainly be short of the 60 votes they need in the Senate.

But why would employment be 10 percent or above next November? Surely, you say, there are enough signs of recovery that we can count on a lower rate. Don't be so sure. Here are likely scenarios, with my probabilities:

Double-dip recession (10 percent likelihood). The commercial real estate market craters, carrying with it hundreds of regional banks and exposing how much junk is still on the books of major Wall Street banks. This triggers a long-awaited "correction" in the Dow and pushes the nation into another recession. Job losses rise. By November, the unemployment rate is back over 10 percent.

Stalled recovery (20 percent). Fearing inflation and overly confident of the strength of the recovery, the Fed stops buying up debt instruments and starts raising rates. These acts choke off the recovery. Unemployment remains at 10 percent.

Jobless recovery (40 percent). The stimulus remains in full force, the Fed keeps interest rates low, firms replace inventories and expand production. But with the average workweek hovering around 33 hours, employers don't add new jobs; they just have current workers put in more hours. Result: No drop in unemployment.

Solid recovery (20 percent). Demand surges, employers decide to expand capacity. But they don't add American jobs. Now that foreign workers have access to much of the same equipment and can be linked up to the U.S. so cheaply through the Internet, employers outsource abroad. Result: No drop in unemployment.

Strong recovery (10 percent). The recovery is strong enough for employers to start hiring American workers. Many jobless Americans who have been too discouraged to look for work to begin looking again. But because the BLS household survey (on which the official level of unemployment is based) depends on how many Americans are looking for work, the paradoxical result is for unemployment to remain in double digits.

In other words, I think the chances of unemployment being 10 percent next November are overwhelmingly high. But although voters are acutely sensitive to the rate of unemployment, they're also influenced by the direction employment is heading. If it looks like jobs are coming back, they may forgive a high absolute level of unemployment -- even one as high as 10 percent. But if it looks like jobs aren't coming back, that we may be stuck with a high level of joblessness for years, voters will take out even more of their anxieties on Democrats next November.

The irony, of course, is that Republicans want to cut spending and reduce the deficit. If they had their way, we'd have double-digit unemployment as far as the eye can see.

2009: The Year Wall Street Bounced Back and Main Street Got Shafted

In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: "This sucker could go down." Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that "if we do not do this, the trauma, the chaos and the disruption to everyday Americans' lives will be overwhelming, and that's a price we can't afford to risk paying."

In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other people's money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Street's exuberance.

But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.

It is commonplace among policymakers to fervently and sincerely believe that Wall Street's financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.

Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.

It's easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.

But if 2009 has proved anything, it's that the bailout of Wall Street didn't trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can't get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs' decision, made with an eye toward public relations, to defer bonuses for its 30 top players).

The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That's because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top.

President Obama and his economic team have been telling Americans we'll have to save more in future years, spend less and borrow less from the rest of the world, especially from China. This is necessary and inevitable, they say, in order to "rebalance" global financial flows. China has saved too much and consumed too little, while we have done the reverse.

In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up -- had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share -- most Americans would not have felt the necessity to borrow so much.

The year 2009 will be remembered as the year when Main Street got hit hard. Don't expect 2010 to be much better -- that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we'll be in a recovery. I hope they're right. But I doubt it. Too many Americans have lost their jobs, incomes, homes and savings. That means most of us won't have the purchasing power to buy nearly all the goods and services the economy is capable of producing. And without enough demand, the economy can't get out of the doldrums.

As long as income and wealth keep concentrating at the top, and the great divide between America's have-mores and have-lesses continues to widen, the Great Recession won't end -- at least not in the real economy.

Slouching Toward Health Care Reform

"Don't make the perfect the enemy of the better," says the President and congressional insiders when confronted with the sorry spectacle of a health-care bill whose scope and ambition continue to shrink, and whose long-term costs to typical Americans continue to grow. They're right, of course. But by the same logic, neither the White House nor congressional Democrats will be able to celebrate the emerging legislation as a "major overhaul" or "fundamental reform." At best, it's likely to be a small overhaul containing incremental reforms.

Real reform has moved from a Medicare-like public option open to all, to a public option open to 6 million without employer coverage (still in the House bill), to a public option open only to those same people in states that opt for it, or about 4 million (the original Harry Reid version of the Senate bill), to no public option but expanded Medicare (the Senate compromise) to no expanded Medicare at all (the deal with Joe "I love all the attention" Lieberman).

In other words, the private insurers are winning and the public is losing.

Pharmaceutical companies are winning as well. Yesterday, proposals to allow US pharmacies and wholesalers to import prescription drugs from Europe and Canada were defeated in the Senate. No matter that American consumers pay up to 55% more for their prescription drugs than Canadians, or that the measure would have saved the government at least $19.4 billion over ten years (according to the Congressional Budget Office). Big Pharma's argument that the safety of such drugs couldn't be assured was belied by the defeat of another proposed amendment that would have allowed drug imports only if their safety and economic benefits were certified by the Secretary of Health and Human Service.

Doctors and hospitals are also winning. More and more of the putative "savings" from health care reform ("savings" should really be understood as projected costs that are under the wildly-escalating costs projected without such savings) rely on contraints on future Medicare spending. But the details of such constraints keep vanishing, while ever more of the messy work of coming up with them is assigned to a so-called Medical Advisory Board that will supposedly recommend them later on. What no one wants to admit is that Congress never actually implements promised Medicare savings. When crunch time comes, it caves in to the AMA and the AARP. In a few years time, when boomers swell the ranks of seniors, and the political power of the AMA and AARP together rival that of Wall Street, the cave-ins will be boggling.

Meanwhile, opponents of abortion are winning, too. Ben Nelson (a Nebraska Democrat who enjoys being the spoiler even as much as Joe Lieberman) is holding out for even more restrictions.

The political reality right now is that Harry Reid will do anything to get sixty votes -- which means Lieberman, Nelson, and even Olympia Snowe are able to use extortion on behalf of Big Insurance, Big Pharma, the AMA, and abortion foes. The President, meanwhile, remains eerily above the fray. Having closed deals months ago with Big Insurance, Big Pharma, and the AMA -- in order to get their support in exchange for guaranteeing them big profits -- his only apparent interest is keeping the deals going while helping Reid corral sixty votes for just about anything. (The deals have caused some awkwardness for the White House. Drug importation would have cost Big Pharma far more than the $80 billion price tag it agreed to, forcing the White House to oppose importation even though the President had publicly supported it during his presidential campaign last year, and even though John McCain supported yesterday's amendment.)

Is the effort worth still worth it? Yes, but just. Private insurers will have to take anyone, regardless of preconditions. And some 30 million people who don't now have health insurance will get it. But because Big Insurance, Big Pharma, and the AMA will come out way ahead, the legislation will cost taxpayers and premium-payers far more than it would otherwise. Cost controls are inadequate; in fact, they barely exist. If Wall Street's top brass are "fat cats," as the President described them last weekend, the top brass of Big Insurance, Big Pharma, and the AMA are even fatter. While they don't earn as much, they're squeezing the public for even more.

We are slouching toward health-care reform that's better than nothing but far worse than we had imagined it would be. Even those of us who have seen legislative sausage-making up close, even those of us who never make the perfect the enemy of the better, are concerned. That two or three senators are able to extort as much as they have is appalling. Why hasn't Reid forced much of the bill into reconciliation, requiring only 51 votes? Why has the President been so cowed? In all likelihood, the White House and the Dems eventually will get a bill they can call "reform," but they will not be able to say with straight faces that the reform is a significant improvement over the terrible system we already have.

How a Few Private Health Insurers Are on the Way to Controlling Health Care

The public option is dead, killed by a handful of senators from small states who are mostly bought off by Big Insurance and Big Pharma or intimidated by these industries' deep pockets and power to run political ads against them. Some might say it's no great loss at this point because the Senate bill Harry Reid came up with contained a public option available only to 4 million people, which would have been far too small to exert any competitive pressure on private insurers anyway.

To provide political cover to senators who want to tell their constituents that the intent behind a robust public option lives on, the emerging Senate bill makes Medicare available to younger folk (age 55), and lets people who aren't covered by their employers buy in to a system that's similar to the plan that federal employees now have, where the federal government's Office of Personnel Management selects from among private insurers.

But we still end up with a system that's based on private insurers that have no incentive whatsoever to control their costs or the costs of pharmaceutical companies and medical providers. If you think the federal employee benefit plan is an answer to this, think again. Its premiums increased nearly 9 percent this year. And if you think an expanded Medicare is the answer, you're smoking medical marijuana. The Senate bill allows an independent commission to hold back Medicare costs only if Medicare spending is rising faster than total health spending. So if health spending is soaring because private insurers have no incentive to control it, we're all out of luck. Medicare explodes as well.

A system based on private insurers won't control costs because private insurers barely compete against each other. According to data from the American Medical Association, only a handful of insurers dominate most states. In 9 states, 2 insurance companies control 85 percent or more of the market. In Arkansas, home to Senator Blanche Lincoln, who doesn't dare cross Big Insurance, the Blue Cross plan controls almost 70 percent of the market; most of the rest is United Healthcare. These data, by the way, are from 2005 and 2006. Since then, private insurers have been consolidating like mad across the country. At this rate by 2014, when the new health bill kicks in and 30 million more Americans buy health insurance, Big Insurance will be really Big.

In light of all this, you'd think the insurance industry would be subject to the antitrust laws, so the Justice Department and the Federal Trade Commission could prevent it from combining into one or two national behemoths that suck every health dollar out of our pockets (as well as the pockets of companies paying part of the cost of their employees' health insurance). But no. Remarkably, the Senate bill still keeps Big Insurance safe from competition by preserving its privileged exemption from the antitrust laws.

From the start, opponents of the public option have wanted to portray it as big government preying upon the market, and private insurers as the embodiment of the market. But it's just the reverse. Private insurers are exempt from competition. As a result, they are becoming ever more powerful. And it's not just their economic power that's worrying. It's also their political power, as we've learned over the last ten months. Economic and political power is a potent combination. Without some mechanism forcing private insurers to compete, we're going to end up with a national health care system that's controlled by a handful of very large corporations accountable neither to American voters nor to the market.

The President's Job's Initiative Doesn't Measure Up

Barack Obama is trying once again for balance. On the one hand, he wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn't want to set off more alarm bells about the budget deficit. Otherwise, conservative Democrats might join forces with Republicans to block heath care. So what does he do? A little bit more stimulus spending, but stimulus spending that doesn't look like more stimulus because it's not really adding to the deficit. It's coming out of savings from money already authorized to be spent on the bank bailout. Hmmm?

No president in modern times walks a tightrope as exquisitely as this one. His balance is a thing of beauty. But when it comes to this economy right now -- an economy fundamentally out of balance -- we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.

States and cities, for example, are estimated to be $350 billion hole this year and next. They can't run deficits so they're wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees. That's a huge anti-stimulus package roughly as big as the remaining direct spending in the old federal stimulus package. Which means, Obama's "new" stimulus, announced today, is about all we have, and it's not nearly enough.

The word in Washington is we're out of the woods. The rate of unemployment dipped from 10.2 percent in September to 10 percent in October. In our nation's capital, a one-month trend marks a turnaround. Don't believe it for a moment. The real story of October was the increasing number of Americans who dropped out of the labor force, too discouraged even to look for work.

Main Street is hurting worse than ever. Ten percent unemployment translates into roughly 18 percent of our workforce unemployed or underemployed. Housing markets are in terrible shape: One quarter of homeowners are paying more each month than their houses are worth; the rates of tardy mortgage payments continue to rise. Thirty percent of American households contain someone who has lost a job and can't find another, and yet almost all households are dependent on more than one wage earner in order to make ends meet. A quarter of all American children are now dependent on food stamps.

There is no reason to tolerate this degree of misery. We know exactly what to do. The government has the fiscal tools to do it. Start by bailing out state and local governments (if Congress would prefer to call it a loan and require payback over the next five years, fine). Renew unemployment and COBRA benefits. Increase federal spending on infrastructure. If we have to, hire people directly. The package should be $400 billion over two years.

We don't know exactly how much the President is proposing to spend, but sources tell me it's in the range of $70 billion, redirected from the $200 billion in TARP savings. The President's small, calibrated attempt to balance a stimulus with deficit reduction will in fact make the deficit worse over the long haul. It postpones the day when we're back to near full employment, when almost all Americans who need a job get paychecks on which they pay taxes. This isn't really balance at all. It prolongs the economic imbalance.

Worrisome Thoughts on the Way to the Jobs Summit

Most ideas for creating more jobs assume jobs will return when the economy recovers. So the immediate goal is to accelerate the process. A second stimulus would be helpful, especially directed at state governments that are now mounting an anti-stimulus package (tax increases, job cuts, service cuts) of over $200 billion this year and next. If the deficit hawks threaten to take flight, the administration should use the remaining TARP funds.

Other less expensive ideas include a new jobs tax credit for any firm creating net new jobs. Lending directed at small businesses, which are having a hard time getting credit but are responsible for most new jobs. A one-year payroll tax holiday on the first, say, $20,000 of income – which would quickly put money into peoples’ pockets and simultaneously make it cheaper for businesses to hire because they pay half the payroll tax. And a WPA style program that hires jobless workers directly to, say, insulate homes.

Most of this would be helpful. Together, they might take the official unemployment rate down a notch or two.

But here's the real worry. The basic assumption that jobs will eventually return when the economy recovers is probably wrong. Some jobs will come back, of course. But the reality that no one wants to talk about is a structural change in the economy that's been going on for years but which the Great Recession has dramatically accelerated.

Under the pressure of this awful recession, many companies have found ways to cut their payrolls for good. They’ve discovered that new software and computer technologies have made workers in Asia and Latin America just about as productive as Americans, and that the Internet allows far more work to be efficiently outsourced abroad.

This means many Americans won’t be rehired unless they’re willing to settle for much lower wages and benefits. Today's official unemployment numbers hide the extent to which Americans are already on this path. Among those with jobs, a large and growing number have had to accept lower pay as a condition for keeping them. Or they've lost higher-paying jobs and are now in a new ones that pays less.

Yet reducing unemployment by cutting wages merely exchanges one problem for another. We'll get jobs back but have more people working for pay they consider inadequate, more working families at or near poverty, and widening inequality. The nation will also have a harder time restarting the economy because so many more Americans lack the money they need to buy all the goods and services the economy can produce.

So let's be clear: The goal isn’t just more jobs. It's more jobs with good wages. Which means the fix isn’t just temporary measures to accelerate a jobs recovery, but permanent new investments in the productivity of Americans.

What sort of investments? Big ones that span many years: early childhood education for every young child, excellent K-12, fully-funded public higher education, more generous aid for kids from middle-class and poor families to attend college, good health care, more basic R&D that's done here in the U.S., better and more efficient public transit like light rail, a power grid that's up to the task, and so on.

Without these sorts of productivity-enhancing investments, a steadily increasing number of Americans will be priced out of competition in world economy. More and more Americans will face a Hobson's choice of no job or a job with lousy wages. It's already happening.

The Housing Crisis and Wall Street Shame

One out of four homeowners is now under water, owing more on their homes than the homes are worth. Why? The biggest single factor behind the housing crisis is rising unemployment. According to the latest ABC-Washington Post poll, one out of every three Americans has either lost their job or lives in a household with someone who has lost a job. Today it takes two and sometimes three incomes to buy the groceries and pay the mortgage or the rent. So if one of those incomes is gone, a homeowner can't make the payment.

The scourge of unemployment is splitting America into three groups: (1) the third just mentioned, whose households are in danger of losing their homes and whose kids are surviving on food stamps (that's up to one in four children in America today); (2) the vast majority of Americans who are managing but worried about keeping their jobs and homes; and (3) a small number who are taking home even more winnings than they did in the boom year 2007.

Prominent among category (3) are Wall Street bankers, many of whom are now concluding their most profitable year ever. Goldman Sachs is so flush it's preparing to give out bonuses in a few weeks totaling $17 billion. That will mean eight-figure compensation packages for lots of Goldman executives and traders. JPMorgan Chase is rumored to have a bonus pool of around $5 billion. The three other major Wall Street banks are ratcheting up their compensation packages so their "talent" won't be poached by Goldman or JPMorgan.

Wall Street is booming again in large part because the rest of America -- categories (1) and (2), above -- bailed it out to the tune of $700 billion last year. The Street has repaid some of that but, according to the bailout program's inspector general, much of it is gone forever. For example, the taxpayer money that bailed out giant insurer AIG went directly through AIG to its "counterparties" like Goldman Sachs -- to whom Tim Geithner, according to the inspector general, gave away the store. As Goldman Sachs prepares to dole out some $17 billion to its executives and traders, it's worth noting that Goldman received $13 billion a year ago from the rest of us via AIG and Geithner, no strings attached.

Which brings us back to homeowners who are falling further behind. The $75 billion federal program designed to bribe banks to modify mortgages has been a bust. No one knows the exact number of mortgages that have been modified (that will be reported next month) but housing experts I've talked with say it's a tiny fraction of the number of homeowners in trouble. Seems that the big banks can't be bothered. "Some of the firms ought to be embarrassed," Michael Barr, the assistant Treasury secretary for financial institutions told the New York Times.

Barr says the government will try to use shame as a corrective, publicly naming institutions that have moved too slowly. But the banks have done almost nothing to date. "We've made dramatic improvements, and we continue to try to get better," says a spokesman for JPMorgan Chase, but as a practical matter JPMorgan has done squat.

Shame? If we've learned anything over the last year, it's that Wall Street has none. Ten months ago Wall Street lobbyists beat back a proposal to give bankruptcy judges the right to amend mortgages in order to pressure lenders to reduce principle owed, just like Wall Street lobbyists are now beating back tough regulations to prevent the Street from causing another meltdown.

Shame? For Wall Street, it all comes down to PR, at minimal cost. Goldman Sachs, attempting to preempt a firestorm of public outrage when it dispenses its $17 billion of bonuses, is setting up a crudely conceived $500 million PR program to help Main Street.

Shame won't work. Only political muscle and courage will. Congress and the Obama administration should give homeowners the right to go to a bankruptcy judge and have their mortgages modified.

And while they're at it, resurrect the Glass-Steagall Act that used to separate investment from commercial banking, so Wall Street can't continue to use other people's money to gamble.

Finally, before Goldman hands out $17 billion in bonuses, claw back the $13 billion Goldman took from AIG and the rest of us and add it to the pool of money going for mortgage relief.