Friday Night Stimulation

The Senate finally reached a compromise on the stimulus package and we should see it passed by both houses at some point in the coming week. I can’t resist the urge to have an I-told-you-so moment about the politics here: the final bill will probably pass without any Republican support, and it will emerge from aggressive back and forth on the Senate floor today, NOT from the “postpartisan” charm offensive President Obama was so psyched about last week. Obama gets points for fast learning, though: his tone was full of red meat today.

Obama’s leadership style was a topic of discussion at a panel I attended last night about the economic challenges we face. Common criticisms were
–Obama does not yet recognize that the rest of his domestic agenda is never going to happen because all political (and real) capital for his first term will get spent on the stim
–Obama trumps the previous crowd in the quality of the experts he’s got BUT he has a problem actually making decisions that use their expertise effectively because the experts are all competing prima donnas. We should thus expect a lot of waffling on his economic policy.

The panel was overall pretty impressive:
BusinessWeek’s Steve Adler
CNBC’s Steve Liesman
NYTimes’ Floyd Norris
Credit Suisse’s Neil Soss
and author Bill Holstein
and they made some good points:

1. In doctrine and in practice, market-worship is over. In practice, we’ve replaced it with some nationalization policies, but still without a doctrine, a rationale, for what we’re doing. The real danger isn’t the fact of this, but the lack of a new doctrine to explain it, which would also tell us just how far this process can and will be allowed to go.

2. Globalization and trade: because of our highly integrated, global economy and America’s especially high trade deficits, any economic growth comes with a growth in imports. By definition, imports (money going out of America for goods from elsewhere) is a negative number within GDP. To make sure the drag isn’t too devastating, to make sure that the new stimulated consumption fuels recovery, there has to be a really solid stimulus in each country so everyone starts buying from us too. All these international stimuli need to be pro-market; if everyone goes protectionist and just tries to quarantine their national economy, no one will get out. The good news is coming mostly from China, where, by virtue of having government control of industry, they can be fast and furious.

3. Tax cuts vs. spending is a somewhat silly debate: if people take their tax cuts and pay off loans they have defaulted on [mortgage or credit card], it’s not spending the way a railroad is spending, but it does get some money back to the financials, which might be stimulative.

4. From an audience member: Executive compensation is also a silly debate. Just do what Credit Suisse has done–take your own free-market advice and reward the execs who got us into this mess with hefty bonuses in a new currency called mortgage-backed securities. This gives them a chance to prove that these things have real value, and gets them off banks’ books fast.

My own take: contrary to popular rantings these days, bonuses are not a bad thing. Originally, they tied compensation to performance, so you only got one when you did a good job. Then, after Enron, people were rightfully uptight about executive abuses so the government capped executive salaries, which prompted companies to turn bonuses into a regular payment that was raised every few years, just like a salary, without having to record it as a salary on their accounting books. That meant executives no longer had to do right by shareholders to get the bonus, and made it a few million dollars easier for them to destroy shareholder value as they’ve now done. It’s the abuse of Wall Street performance culture, not the failure of it as a principle.

5. Stop ranting about the culture of consumption. There is nothing inherently wrong with an economy driven by consumer spending and debt when the two are in a reasonable balance. We’re borrowing about 5% of GDP and spending about 70%; compared to what happens at many companies these days, that’s not a whole lot of leverage. Plus, people have been wolf-crying that we were on the verge of profligate degeneracy since the Industrial Revolution.

6. The panel ended stumped over the role of the media. How much is the doom and gloom on the news driving the economy further down? How much is the media responsible for not scrutinizing derivatives or the housing market when the bubble was growing? Are we to report what people tell us and what we can verify, so it’s not our fault, or are we to be advocates, conscious of the economic effect our work can have? And how much of the media’s obsession with macroeconomic pessimism is driven by the dire state of the media business?