I want to focus on some incorrect and inflammatory statements by Dr. Goolsbee this morning:

Chris Wallace:  I also want you to talk about the clash between policy and profits.  The governments wants General Motors to make small cars, fuel-efficient cars, while all the indications are, that according to the market, the cars they make most profit on are SUVs and pickup trucks.  So which takes preference?  Profits for the taxpayer shareholders, or environmental policy?

Dr. Goolsbee:  The President made totally clear in his remarks, and he specifically said we are not going to be in the business of telling General Motors or anybody else what kind of cars to make, where they should open their plants, or anything of the sort.  The President made clear we want to get out of this as quickly as possible.  We are only in this situation because somebody else kicked the can down the road, and that’s really an understatement.  They shook up the can, they opened the can, and handed to us in our laps.  Senator Shelby knows that to be true.  When George Bush put money in to General Motors, almost explicitly with the purpose, how many dollars do they need to stay alive until January 20th, 2009?  There was no commitment to restructuring, to making these viable enterprises of any kind. They made none of the serious sacrifices.  And Republicans in the Senate attached a list of conditions, they opposed George Bush’s intervention, because they said the unions had not made the following sacrifices.  In the Obama plan, it asked more and received more from the unions and from the other stakeholders than the people that objected to the bailout last November asked for.  So we have finally put them on that path.

This is incorrect.  I will bite my lip, refrain from commenting on the tone, and focus on the facts.

History

At 3:30 pm on Sunday, November 30, 2008, a quiet meeting occurred at the Treasury Department in Secretary Hank Paulson’s office.  Present for the Bush Administration were Treasury Secretary Paulson and Commerce Secretary Carlos Gutierrez, White House Chief of Staff Josh Bolten, Deputy COS Joel Kaplan, White House Legislative Affairs chief Dan Meyer, Treasury Legislative Affairs head Kevin Fromer, and me.  Present for the incoming Obama Administration were Deputy COS-designate Mona Sutphen, NEC-designate Dr. Larry Summers, Dan Turullo (now a Fed Governor), and WH Legislative Affairs-designate Phil Schiliro.  We had requested the meeting.  They agreed and asked that it be held outside the White House.  It appeared to us that they were quite concerned about leaks, and about the risk of creating a public impression that they were working closely with us.

At that meeting, we (the Bush team) floated a proposal to establish an auto czar.  President Bush would create a new position called a Financial Viability Advisor (FVA) through an executive order.  The President would instruct the FVA, for any auto manufacturer that sought a “bridge loan,” to evaluate that firm’s restructuring plan for viability.  If after 60 days (which the FVA could unilaterally extend for another 30) the firm did not have a plan to achieve viability, then the FVA would produce his own plan to make that firm viable.  The draft executive order was explicit that the FVA could include a Chapter 11 bankruptcy in his plan.  We invited the Obama team to suggest names for the Financial Viability Advisor, so that it would be someone with whom the new President would be comfortable.

Under the Bush team’s proposal to the Obama team, the current Secretary of the Treasury (Paulson) would provide bridge funding from the TARP, and he would state that, as a matter of policy, no further TARP funding would be made available except in support of (1) a plan certified as viable by the FVA, or (2) the FVA’s own plan.

The key to success of this plan was that the Obama team would publicly link arms with us and agree that they would continue the Paulson policy statement when they took over after January 20th.  Thus, the auto company’s stakeholders would know that they had no wiggle room, and that they had no chance of getting additional funding from the next Administration.  The Obama team would voluntarily commit itself to be bound by the restriction self-imposed by the Bush team.

Remember that this was one of two huge issues going on at the time.  The bigger issue was the financial crisis, and we were nearing the limit on the $350 B of available TARP funds.  We were concerned that another too-big-to-fail institution might fail before January 20th without Treasury having the funds available to prevent a systemic collapse.  So our proposal to the Obama team was a package deal:  we will announce the above process for autos, and we will ask Congress for the second $350 B of TARP funding, if the President-elect publicly supports us on both.  They would join with us in convincing Congress to approve the last tranche of TARP funding, since we would need help with Congressional Democrats.

We saw two huge economic issues that posed grave risks to the economy and to a smooth transition.  We proposed to work together with the incoming Administration in a way that we thought minimized these risks and would have positioned the new President as well as possible on January 20th.  GM and Chrysler would not be in liquidation, and there would be a strict, tight, and enforceable deadline (of about March 1) and process for GM and Chrysler to become viable or to have time to prepare for an orderly Chapter 11 process.  We would have a cushion in case another major financial institution failed in the last eight weeks, and the next President would not have to be bothered with having to ask Congress for the last $350 B from the TARP.

The Obama team were polite and professional.  They listened carefully and gave little reaction in the meeting.  We concluded based on their questions in that meeting that they were leaning against the proposal, because they did not want to be bound by the judgment of a Financial Viability Advisor – they wanted the ability to make decisions in the White House.  They also appeared to want to avoid being bound by our strict definition of viability.  (We defined a viable firm as one that would, under reasonable assumptions, have a positive net present value without additional taxpayer assistance.)

Dr. Goolsbee was not in this meeting.  I do not know if he was aware of it, either back in November or this morning.

Despite multiple efforts to get the Obama team on board, they did not take up our proposal, nor did they suggest any modifications.  At the end of that week we gave up on that approach and began to negotiate a bill with Speaker Pelosi, Chairman Barney Frank, and Chairman Chris Dodd that would provide bridge loans from previously appropriated non-TARP funds.  Senate Republicans blocked that bill.  Congress adjourned for the year and went home.  In the last week of December, GM and Chrysler told us they would file under Chapter 11 in early January if they did not get loans from the TARP.  They also told us, as did countless outside experts, that they were not ready for such a filing, and that Chapter 11 would lead to near-immediate liquidation.  We estimated that about 1.1 million jobs would be lost if this happened.

Confronted with a choice between loaning TARP funds to GM and Chrysler, and allowing both to liquidate in the weeks before his successor took office, President Bush authorized loans from the TARP to GM and Chrysler.  We had warned Senate Republicans earlier that month that the President would face this choice if legislation failed.  This was (and still is) a politically unpopular decision, and was the least worst of two bad options.  Based both on his public comments and what I saw privately, President Bush wanted to give the firms a limited amount of time and a hard back end to prepare for and, if necessary, to force an orderly Chapter 11 process.  He also knew that President-elect Obama would be facing tremendous challenges in his first days in office.  Despite their different political parties and policy perspectives, President Bush stressed that we needed to provide his successor with the time and space he would need in the opening weeks of his Presidency.

Structure of the December loans to GM and Chrysler

In the last few days of December, Treasury loaned $24.9 B from TARP to GM, Chrysler, and their financing companies.

According to the terms of the loan (see pages 5-6 of the GM term sheet), by February 17th GM and Chrysler would have to submit restructuring plans to the President’s designee (and they did).

Each plan had to “achieve and sustain the long-term viability, international competitiveness and energy efficiency of the Company and its subsidiaries.”  Each plan also had to “include specific actions intended” to achieve five goals.  These goals came from the legislation we negotiated with Frank, Pelosi, and Dodd:

1. repay the loan and any other government financing;
2. comply with fuel efficiency and emissions requirements and commence domestic manufacturing of advanced technology vehicles;
3. achieve a positive net present value, using reasonable assumptions and taking into account all existing and projected future costs, including repayment of the Loan Amount and any other financing extended by the Government;
4. rationalize costs, capitalization, and capacity with respect to the manufacturing workforce, suppliers and dealerships; and
5. have a product mix and cost structure that is competitive in the U.S.

The Bush-era loans also set non-binding targets for the companies.  There was no penalty if the companies developing plans missed these targets, but if they did, they had to explain why they thought they could still be viable.  We took the targets from Senator Corker’s floor amendment earlier in the month:

1. reduce your outstanding unsecured public debt by at least 2/3 through conversion into equity;
2. reduce total compensation paid to U.S. workers so that by 12/31/09 the average per hour per person amount is competitive with workers in the transplant factories;
3. eliminate the jobs bank;
4. develop work rules that are competitive with the transplants by 12/31/09; and
5. convert at least half of GM’s obliged payments to the VEBA to equity.

If, by March 31, the firm did not have a viability plan approved by the President’s designee, then the loan would be automatically called.  Presumably the firm would then run out of cash within a few weeks and would enter a Chapter 11 process.  We gave the President’s designee the authority to extend this process for 30 days.

In another error this morning, Dr. Goolsbee claimed the “Obama plan, it asked more and received more from the unions and from the other stakeholders than the people that objected to the bailout last November asked for.”  As I wrote last Monday (Understanding the GM bankruptcy), I have seen no convincing evidence that GM workers will now be paid competitive compensation with transplant workers, nor that the work rules are competitive with the transplants.  The negotiations led by the Obama team did meet the Corker targets for the unsecured debt holders and the retiree benefits, but current workers still look to have received a relatively good deal.

Chronology

November 30:  Bush team proposes joint solution to Obama team.

The following week:  Obama team declines to respond.  Bush team begins negotiations with House and Senate Democrats.

Mid-December:  Bush team negotiates compromise legislation with House and Senate Democrats.  Senate Republicans block the legislation.  Congress goes home.

Late December:  President Bush authorizes the above-described three month loans to GM and Chrysler.

January 20:  President Obama takes office.

Mid-February:  GM and Chrysler submit their first viability plans, per the terms of the Bush-era loans.

End of March:  President Obama says GM and Chrysler have failed to develop viable plans, as required by the Bush-era loans.  He gives Chrysler 30 more days, and GM about 60 until the end of May.

End of April:  Chrysler files Chapter 11 with a pre-packaged plan negotiated largely by the Obama Administration.

June 1:  GM does the same.  Chrysler emerges from Chapter 11.

Responding to Dr. Goolsbee

Let’s again examine Dr. Goolsbee’s claim:

We are only in this situation because somebody else kicked the can down the road, and that’s really an understatement.  They shook up the can, they opened the can, and handed to us in our laps.  Senator Shelby knows that to be true.  When George Bush put money in to General Motors, almost explicitly with the purpose, how many dollars do they need to stay alive until January 20th, 2009?  There was no commitment to restructuring, to making these viable enterprises of any kind.  They made none of the serious sacrifices.

Even if Dr. Goolsbee was not privy to the quiet discussion we had with the senior Obama team last November, the public record refutes his claim:

1. The Obama team declined to respond to the Bush team’s offer to work together to create a joint process that would have resulted in a resolution by March 1st or April 1st, rather than by June 1st for Chrysler and maybe September 1st for GM.
2. We then worked with the Democratic majority to enact legislation that would have limited funds to be available only to firms that would become viable.
3. After Congress left town for the holidays without having addressed the issue, President Bush was faced with a choice between providing loans and allowing these firms to liquidate in early January, which would have further exacerbated the economic situation for the incoming President.  President Bush chose to provide the loans.
4. We provided GM and Chrysler with sufficient funds to get to March 31st, not January 20th, and in those loans we gave the incoming Administration the ability to extend them for 30 more days.
5. The loans were conditioned on restructuring to become viable, with a precise definition of viability, specific restructuring goals, and quantitative targets.
6. The Obama Administration followed the restructuring process laid out in the Bush-era loans.  They are now measuring that deal against the targets established in the Bush-era loans.  The only changes the Obama team made were that they extended GM for 60 days rather than 30, and the Obama Administration directly inserted themselves into the negotiations as the pre-packager.

Dr. Goolsbee’s comments this morning were both inflammatory and incorrect.

Dr. Goolsbee gets it wrong on the auto loans

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Auto loans, part 3: the Bush approach
2. Auto loans, part 4: Chrysler gets an ultimatum, GM gets a do-over
3. Auto loans: a deadline looms

I did my first TV interview at the beginning of 2008 shortly after being promoted.  At first it was stressful, and it took me a while to get used to it.  Now that I’m on the outside, I do an occasional interview on CNBC, Fox, or CNN.  Today I’d like to describe the mechanics of doing a TV news interview from the North Lawn of the White House.  Even though I had worked in the White House for more than five years before my first on-camera interview, I did not know any of this until I actually had to do it.

Today is Jobs Day:  the first Friday of the month, when the Labor Department releases the monthly employment report.  The employment report is generally the most important economic data point of the month, and the business news channels (CNBC, Bloomberg, and Fox Business) always cover it.  They always ask for someone from the Administration to comment on the data and what it means for the economy and the policy agenda.  I see the Vice President’s economic advisor, Jared Bernstein, is doing CNBC now.  In 2008, CEA Chairman Dr. Ed Lazear and I typically did this duty.

The jobs report is released at 8:30 AM on Friday.  As with all economic data releases, Administration officials are embargoed from talking about it publicly for one hour after the release.  This gives the markets time to process the data without the Administration’s viewpoint.

For each show broadcasting at 9:30 AM, a network producer negotiates with a staffer in the White House press shop.  For us it was Eryn Witcher, a top-notch professional with prior experience in TV news who now works as the communications director at Stanford’s Hoover Institute.  Eryn would negotiate with the producers and set Ed and/or me up with interviews.

Ed and I would talk the night before about the upcoming data and what we might say about it on the air.  We were among a handful of officials who got the data reports before they were released, so that we could advise the President.  Ed and his staff also used that data to prepare the daily “economic data memos” that the President received each morning.

We would generally watch the CNBC commentary immediately after the data release (at 8:30 AM sharp) to see if we had missed anything, and to take a temperature check on the initial market reaction and expert analysis.  We would generally be prepped by Ed’s chief of staff, Pierce Scranton, who had an uncanny ability to predict what questions we would be asked, and coached us on how to give a short effective answer.  If he wasn’t fighting other fires, Deputy Press Secretary Tony Fratto would also sit in the prep session.

A little after 9 AM someone would do my makeup in my office.  Around 9:15 Eryn and I (or Eryn and Ed) would walk out to the North Lawn.  You need a good TV tie (no busy patterns), straight collar (I was often scolded for button down collars), and American flag pin.  After a while I got my own earpiece that I would bring out with me, so I wouldn’t have to use the common one that everyone else uses.  It’s also nice to know you won’t lose the earpiece during the interview.

Each network has a TV camera set up in an area on the North Lawn next to the driveway from Pennsylvania Avenue to the West Wing entrance.  The networks semi-permanently set up shop there in 1998 during the Monica Lewinsky scandal, and the gravel-filled area became known as Pebble Beach.  It was refurbished during the Bush Administration with slate and the cameras and tripods are covered with heavy green canvas when they’re not being used.  It is now referred to as Stonehenge, to which it bears a vague resemblance.

The cameras are in a long line next to each other.  Each is set up so that the person on air has the north entrance to the White House residence in the background.  Because of the different camera positions, each has a slightly different angle on the White House.  On the night of a big Presidential speech from the White House, try quickly switching channels and you can see the different angles.

Here’s a diagram for CNBC (roughly).  As always, you can click on the picture for a larger view.

The West Wing is the square building in the lower-left (southwest) corner.  The residence is in the lower-right corner, and that’s Pennsylvania Avenue up top.

The blue box surrounds Stonehenge with all the TV cameras.  When you’re on CNBC you stand at the red dot, facing the camera at the orange dot.  The yellow line shows the camera angle, extended to capture the north entrance to the Residence in the background.

If you look closely, to the right (east) of the blue box you can see the driveway that heads south from the Northwest Appointment Gate to the West Wing entrance.  Visitors with appointments in the West Wing walk up this driveway, and you can occasionally see them passing behind someone being interviewed on TV (especially on the evening news broadcasts).  If they’re walking from left to right on your screen, they’re arriving at the West Wing.  Right to left, they’re leaving.

About 9:15 AM Eryn and I would walk out to Stonehenge.  We would greet the cameraman and a producer, and I’d get miked up.  All the producers I met were friendly and professional, and the cameraman are universally great.  I would stand at the red dot facing the camera.  My earpiece cord would clip to the back of my jacket collar.  The cameraman would connect an audio cable to that cord, and there’s a small box at about waist high with a volume dial.  He attaches a tiny microphone to my lapel and I’m all set.

The cameraman then adjusts the camera for the shot.  I’m generally looking at myself on a monitor below the camera:  tie is straight, flag pin is upright.  (Left and right are reversed from what you’re used to in a mirror.  That takes getting used to.)  Around 9:25, I’ll hear audio of the show in my earpiece, and then a voice:

Voice 1:  Mr. Hennessey, this is [Bob] at CNBC headquarters.  Can you hear me?

Me:  Yes I can, Bob.

Voice 1:  And you can hear the program?

Me:  Yes.

Voice 1:  Great.  Can you count to ten for me, please, so we can do an audio check?

Me:  1,2,3,4,5,6,7,…

Voice 1:  That’s perfect.  Thank you.

After another minute, another voice, the producer for my segment of the show.

Voice 2:  Mr. Hennessey, this is [Tom].  We’re going to a commercial break, and will be going to you in about 2 minutes.  You’ll be interviewed by [Erin / Mark / Erin & Mark].

Me:  Sounds great.  Thank you.

During my first few interviews, the substance wasn’t that difficult for me.  I had been prepping principals for interviews and writing talking points for more than 13
years, now I just had to do the talking.  The hard parts were the nerves and the physical mechanics:

• Look at the camera lens.  Don’t let your eyes wander.
• Smile.
• Try not to “um” and “you know” too much.
• Slow down.
• Relax.

Also, TV moves very quickly.  Long answers don’t work, so I had to train myself to make my point in one or two sentences, rather than four or five.  (That’s difficult for me.)  If you go on too long, you’ll start hearing the anchor trying to jump in and move things along.  And before you know it, you’re done.

After the interview, you unmike, thank the cameraman and producer, and you’re done.  If you have another interview, you move down the line and repeat.  If not, head inside, take off the makeup, and get feedback from your colleagues and friends who email that they saw you on TV.

I only did a few in-studio interviews, and guest hosted CNBC’s Squawk Box once.  I was blown away by the ability of the anchors to multitask, and how quickly they think and react.  While one of them is talking on camera, another is checking market news or data on their screen, or scanning email.  Their producers are talking to them in their earpieces, and they are talking on camera with each other and the guests.  The coordination, reaction times, ability to adapt and improvise, and teamwork among the anchors and their producers are amazing.  Beginning that day, and ever since I have developed tremendous respect for those business news anchors hosting live fast-moving discussions.  I have enough trouble doing a single five minute segment, and they do it for 2-3 hours five days a week.

Working in the West Wing: Doing a TV news interview on the North Lawn

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Working in the West Wing: Senior Staff
2. The Real West Wing Tour Guide
3. CNN interview today

Everyone wants to know when the U.S. economy will start growing.  I will focus on a related question:  when will the stimulus law begin to have a significant positive effect on U.S. economic growth?  And could it have come sooner if the Administration had done something different?

I believe the Administration made an enormous mistake in its legislative implementation of the stimulus.  As a result, the boost to GDP will come six to nine months later than it needed to (maybe more).  Given the President’s desire to do a large fiscal stimulus, and given his policy preferences, he could have had a different bill that would have been producing significant GDP growth beginning now, rather than in the middle of next year.  That’s a huge mistake with real consequences for the U.S. and global economies.

To illustrate this point, let me classify four types of fiscal stimulus:

1. a permanent tax cut;
2. a temporary tax cut;
3. one-time checks to people independent of their tax liabilities; and
4. increased government spending through federal and state bureaucracies:  infrastructure, energy spending, etc.

There is of course a fifth option:  no fiscal stimulus law.

If you’re going to do a fiscal stimulus (big if), the best kind is a permanent tax cut.  It is effective, efficient, and fast:

• effective – People spend a large proportion of a permanent tax cut.  This is derived from Milton Friedman’s “permanent income hypothesis.”
• efficient – People spend their own money on themselves, so they waste very little of it, and they spend it on things that matter to them.  Again, see Milton Friedman.
• fast – Checks are delivered quickly, and people spend most of their own money soon after they get the check.

This was part of the short-term logic behind the 2003 tax cut, which we designed to foster both short-term and long-term economic growth.  I also have a strong general policy preference for lower taxes rather than more government spending, but that’s a separable question from how it works as short-term stimulus.

In 2008 we knew we could not get a Democratic Congress to enact a permanent tax cut.  Q:  Do you then go for a temporary tax cut, or do nothing?  The President thought the risks of an economic slowdown in 2008 were significant enough that it made sense to pursue a (second best) temporary tax cut with the Congress.

Like the 2003 law, the 2008 law got the bulk of its short-term GDP boost by advancing tax refunds from the year to come, and delivering them as checks from the IRS to taxpayers.  As in 2003, the checks were delivered to taxpayers in the summer (mid-June to early-August), and consumers immediately started spending a portion of their rebates.

Because the 2008 law was a temporary tax cut, taxpayers spent a smaller proportion of it than anyone would have liked.  While designing the law, we assumed about 1/3 would be spent, and much of that fairly quickly.  The rest would be saved, which is also good but doesn’t help short-term GDP growth.  Economists agree that GDP in Q3 and Q4 of 2008 was higher than it otherwise would have been because of the 2008 stimulus law.  It was efficient, fast, yet only partially effective, with a smaller GDP boost than we would have liked:

• efficient – People were again spending their own money on themselves.  You get very little waste, and people know what they want and need.
• fast – Checks were delivered quickly, and much of the spending that did occur happened in Q3, with some in Q4, and with very little left by Q1 of 2009.
• only partially effective – Because it was a temporary tax cut, people saved a lot of their checks, as we expected.  Still we got a GDP bump in Q3 and Q4, and in retrospect we certainly needed it.

The 2008 law was mostly (2) from my list above – a temporary tax cut.  Some of the money went to (3), checks to people who didn’t pay income taxes.  This was necessary to reach a compromise with a Democratic Congressional leadership that placed a high priority on the distributional effects of the law.  Speaker Pelosi insisted that poor people who owed no income taxes still get “rebate” checks, and that high-income taxpayers get nothing.  So the 2008 stimulus law was mostly (2) with a little bit of (3).

Now fast forward to January of 2009, when President Obama proposed an enormous fiscal stimulus.  The President’s mistake was in largely deferring to Congress on the composition of the stimulus bill. Rather than allowing Congress to pump hundreds of billions of dollars through slow-spending and inefficient bureaucracies, the President should have insisted that Congress instead send all the funds directly to the American people and let them spend it quickly and efficiently.  Given his policy preferences, he could have directed a large share of those funds to poor people who don’t pay income taxes.  He could have again mislabeled these payments as “tax cuts,” or just correctly labeled them as one-time entitlement payments.  I would not have liked that policy, but it would have generated a faster macroeconomic boost than what he allowed Congress to do instead.

Let’s compare the two scenarios.  The enacted 2009 stimulus is:

• effective (eventually) – Most of the spending through government bureaucracies will (eventually) increase GDP.  Some of the funds transferred to State governments will be used to offset State spending or tax cuts that otherwise would have occurred, so there’s a loss.  But clearly the proportion of the $787 B that will eventually increase GDP will be high, and much higher than if all the funds were given to individuals and families.
• inefficient – It will be inefficient in two senses.  The spending represents the policy preferences of legislators (and all their ugly legislative deals and compromises), rather than the choices of hundreds of millions of Americans who presumably know better how they would like money spent on them.  The spending will also be wasteful, and we are starting to see signs of this in the press.
• s-l-o-o-o-w – CBO says that $25 B of spending had gone into the economy by May 22nd.  That’s less than 4% of the total budgetary impact of that bill.  Other news reports suggest that about $40 B is in the economy if you include the revenue side.  Remember that almost all of the 2008 stimulus was in private hands by August 1.  We will get very little GDP boost from fiscal stimulus in Q3 of 2009, and not much in Q4 either.  The stimulus will begin to ramp up in Q1 of next year, and be in full swing by Q2 and Q3 of 2010.

Had the President instead insisted that a $787 B stimulus go directly into people’s hands, where “people” includes those who pay income taxes and those who don’t, we would now be seeing a stimulus that would be:

• partially effective but still quite large – Because it would be a temporary change in people’s incomes, only a fraction of the $787 B would be spent.  But even 1/4 or 1/3 of $787 B is still a lot of money to dump out the door.  The relative ineffectiveness of a temporary income change would be offset by the enormous amount of cash flowing.
• efficient – People would be spending money on themselves.  Some of them would be spending other people’s money on themselves, but at least they would be spending on their own needs, rather than on multi-year water projects in the districts of powerful Members of Congress.  You would have much less waste.
• fast – The GDP boost would be concentrated in Q3 and Q4 of 2009, tapering off heavily in Q1 of 2010.

Why did the President not do this?  Discussions with the Congress began in January before he took office, and he faced a strong Speaker who took control and gave a huge chuck of funding to House Appropriations Chairman Obey (D-WI).  I can think of three plausible explanations:

1. The President and his team did not realize the analytical point that infrastructure spending has too slow of a GDP effect.
2. They were disorganized.
3. They did not want a confrontation with their new Congressional allies in their first few days.

I think the Administration now recognizes this problem.  Last month when they released a CEA paper “Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009,” the paper danced around the timing of job growth and government outlays in 2009 and 2010.  Tips for reporters:  (1) ask the Administration to give you OMB estimates of quarterly cash flows for the stimulus law, and (2) ask them to give you the quarterly GDP and job growth estimates behind this CEA paper.  I know the first one exists, and I’d bet heavily the second does as well.

Fortunately, CBO Director Doug Elmendorf just gave a presentation titled “Implementation Lags of Fiscal Policy” to the IMF’s conference on fiscal policy.  All of the following data are from his presentation.

The final 2009 stimulus law broke down like this:

The problem is that only 11% of the first line (discretionary spending) will be spent by October 1 of this year.  In contrast, 31-32% of the entitlement and tax cuts lines will be out the door by that time.  (I have questions about the speed of the entitlement part.  The bulk of that is Medicaid spending, and it’s not clear to me that a Federal payment to a State means the cash is immediately flowing into the private economy.)

If we extend our window to October 1, 2010, then less than half the discretionary spending will be out the door, while almost 3/4 of the entitlement spending and all of the tax cuts will be out the door and affecting the economy.  The largest part of the stimulus law is therefore also the slowest spending part.  This is fine if you’re trying to increase GDP growth over the next 2-4 years.  If you’re going for short-term GDP growth, it makes no sense.

Director Elmendorf drills down further into discretionary spending and shows that defense spending happens quickly, highways and water extremely slowly:

• If you allocate $1 to defense spending, 65 cents has been spent within one year.
• If you allocate $1 to highway spending, 27 cents has been spent within one year.
• If you allocate $1 to water projects, only 4 cents has been spent within one year.

In fact, the infrastructure spending in the stimulus law will peak in fiscal year 2011, which goes from October 1, 2010 to September 30, 2011.  That’s too late from a macro perspective.

The Director further points out that the 2009 stimulus law created many new programs.  This slows spend-out, as it takes time to create and ramp up the new programs.

The Administration has made much of working with federal and state bureaucracies to find “shovel-ready” projects to accelerate infrastructure spending.  All of my conversations with budget analysts suggest this claim is tremendously overblown, and Director Elmendorf asks, “Is this practical on a large scale?”

The 2009 stimulus law will increase U.S. economic growth.  But the actuals are matching the budget analysts’ projections for the speed at which that effect will occur.

I would not have liked a stimulus law that would have given cash to people who didn’t pay income taxes.  But from a macroeconomic perspective, we need the faster economic growth now.  Had the President and his team insisted on giving money to people (taxpayers or not) rather than to bureaucracies, we would be seeing a huge growth spurt in Q3 and Q4 of this year.

It is sad that instead we have to wait until the middle of next year because the White House deferred to Congressional desires to spend on infrastructure.  This strategic mistake was avoidable, and the recovery will be delayed because of it.

Will the stimulus come too late?

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. A bipartisan economic booster shot
2. A “second stimulus”?
3. Stimulus 2008: a need for speed

10-second macroeconomic review

GDP    = Consumption + Investment + Government spending + Exports – Imports

= C + I + G + X – M

In January the President proposed, and in February Congress enacted, a bill that was short-term macroeconomic stimulus.  We wanted that stimulus policy to be big, fast-acting, an efficient use of taxpayer dollars, and an effective stimulus to broad-based economic growth.  We let taxpayers keep more of their wages, assuming that they would spend some of those refunds, thereby increasing consumption (C).  We also temporarily cut taxes on business investment in an attempt to increase investment (I).  The idea is that these two actions would quickly increase GDP.  Millions of American workers and families and thousands of firms can react quickly to a change in their financial status.

This strategy appears to be working.  We’ve got evidence from multiple sources suggesting that people are spending some of their stimulus checks, and that this is helping to support increased consumption.  It’s harder to tell how much firms are taking advantage of the investment incentives, because it’s hard to measure that in real time.

In yesterday’s Wall Street Journal, Professor Martin Feldstein writes that the stimulus was a “flop”.  Specifically, he argues that the recent GDP data show that the boost to consumer spending from the rebates was small relative to the overall size of the rebates.  He estimates that $12 billion was spent out of a total of $78 billion in rebates paid out by the end of June.  The core of his argument is that we didn’t get a lot of bang for the buck – only a small bump to GDP for a large loss of revenue for the government.

We disagree with this analysis.  First, we think the stimulus bang is bigger than $12 B.  Prof. Feldstein assumes that the growth in consumer outlays would have been flat had there been no stimulus.  He then observes that consumer outlays actually grew by $12 billion more from Q1 to Q2 than they did in the prior quarter, and attributes that to the stimulus.  Many observers think that, without the stimulus, consumer outlays would have grown more slowly in Q2 than in Q1.  If this is the case (and we believe it is), then the effect of the stimulus is bigger than $12 billion.

In addition, we have felt only part of the bang so far.  The stimulus enacted in February will have ongoing impacts in the upcoming months.  Almost all the cash to consumers is out the door, but the resulting boost in consumer spending has not yet reached its full effect.  We anticipate that the past stimulus law is continuing to increase GDP in the 3^rd quarter, with a diminishing amount in the 4^th quarter of this year.  Monetary policy works with an even “longer lag” – the evidence suggests that when the Fed cuts interest rates, it takes about a year for half of the economic effect to take hold.  So there’s more bang left in the remainder of this year from past actions on both the fiscal and monetary sides.

Allowing people to keep more of their money for one year is better than not doing so at all, so the loss of government revenue is actually a good thing if that money stays in the hands of the taxpayers who earned it, even if we can only get Congress to agree to do that for one year.  We agree with Marty that the stimulus would be more effective if we had been able to enact a permanent tax cut, rather than a temporary one.  Legislative realities forced it to be temporary.  Permanent is better than temporary, and temporary is better than nothing.

On the second stimulus question, the following interchange from May 19^th is instructive.  Our deputy press secretary Scott Stanzel talked with a White House reporter at the “daily gaggle”:

Q    Scott, is the administration looking any more closely at a second economic stimulus package?  The Commerce Secretary was on Late Edition over the weekend, and didn’t directly and definitively shoot that idea down.

MR. STANZEL:  Well, what’s in the second stimulus package that you’re talking about?

Q    Well, just — I’m saying that many in Congress say we need a second economic stimulus package.

MR. STANZEL:  Right, but what’s in that?  That’s the thing.  The idea of the second stimulus has become sort of this catch-all phrase for adding a lot of additional government spending, or doing things that Democratic leaders in Congress may have wanted to do previously, but are now — would want to sort of put under the umbrella of a stimulus package.

Before last Thursday, there was no second stimulus proposal.  Now there’s a proposal from the Chairman of the Senate Appropriations Committee, Senator Byrd (D-WV), but we have seen no indications that House or Senate Democratic leaders have signaled support for that proposal.

For more than two months we were asked to comment on something that did not exist.  What does exist is pent-up demand in Congress to spend more money, and then to label that spending as a “second stimulus.”  We anticipate that demand will only increase as we get closer to an election.

Congressional advocates for increased government spending this Fall have been arguing, in effect, that we should expand (G) in the equation above, and that doing so will increase economic growth.

But trying to stimulate short-term economic growth through increased government spending has a few problems:

1. It’s slow. – Construction projects take years to plan and build.  History shows that only about 27¢ of each dollar is spent in the first year.
2. It’s often funneled through States. – Infrastructure spending and increased federal funds for programs like Medicaid result in transfers from the Federal government to State governments.  This transfer doesn’t actually increase GDP, it just shifts money from one level of government to another.  It’s more like putting in motion 50 potential stimulus packages, each of uncertain efficacy and speed.  Some States might try to spend the funds quickly.  Others might shift money around and use the Federal dollars to pay down debt, or wait until their State legislature convenes next year to allocate the funds.  There’s also a danger that providing States with aid during challenging economic times will encourage states to spend irresponsibly during boom years, counting on Federal bailouts when times are tough.

You can make other arguments for spending more taxpayer funds on roads and bridges, but it’s a highly inefficient tool to stimulate immediate economic growth.  Many of the advocates for a so-called “second stimulus” know that spending taxpayer funds on roads and bridges is popular with voting constituents.

There’s an important philosophical difference between the first stimulus (which was overwhelmingly bipartisan) and current Congressional attempts to increase government spending.  The first stimulus proposed by the President looked at the economy as a whole, and tried to design a package that would help spur growth across the entire economy.  Ideas being bandied about for a so-called “second stimulus” tend instead to take a constituency-based approach:  they try to identify who is hurting, or who is politically powerful, and funnel government funding to them.  Advocates then claim that these funds will stimulate broad-based economic growth.

We think that the first stimulus was both more fair and more effective by providing taxpayer rebates to more than 100 million Americans and broad-based business investment incentives to thousands of firms.  And we think that there’s more economic bang still left from those recently implemented policies.

In summary:

• We think the stimulus is working and increased Q2 consumption and GDP.
• The effects of the first stimulus are not yet complete.  Most of the cash is out the door, but we think there will be increased consumption effects this quarter, and a diminishing amount in Q4.
• For many, “second stimulus” is code for “allow Congress to increase politically popular government spending shortly before Election Day, and call it macroeconomic stimulus.”
• Increased government spending is slow and ineffective macroeconomic stimulus.

Thanks to Donald Marron, the newest Member of the Council of Economic Advisers, and to the CEA team for their help with his note.

A “second stimulus”?

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Will the stimulus come too late?
2. A bipartisan economic booster shot
3. Enacting President Bush’s stimulus proposal

I’d like to zoom out a bit and discuss how food prices interact with policy.

Let’s consider the following questions:

• How much are food prices increasing?
• Why are food prices increasing?
• What kind of effect is this having in the U.S., and what are we doing about it?
• What about overseas effects?
• What did the President announce today?
• Is the ethanol mandate contributing to the increase in food prices?

How much are food prices increasing?

Much of the increase in food prices worldwide is due to increases in grain prices.  Since March of last year:

• wheat prices are up 146%
• soybean prices are up 71%
• corn prices are up 41%
• and rice prices are up 29%.

Why are food prices increasing?

• Increased demand in “emerging markets” (like China) accounts for about 18% of the rise in food prices.  As people in poor countries get richer, they consume more meat.  Since it takes a lot of grain to produce a little meat, as the proportion of meat in diets increases, the demand for grains increases.
• Rising energy costs have increased the cost of growing food, accounting for up to another 18% of the increase.
• Bad weather has harmed wheat harvests, especially in Australia, China, and Eastern Europe.
• Dollar depreciation accounts for a portion of the increase in U.S. food prices.
• Increased biofuel production has increased the demand for corn, but accounts for only 3% of the overall increase in global food prices.

What kind of effect is this having in the U.S., and what are we doing about it?

Food price inflation in the U.S. is up 4.5% over the year that ended in March, only slightly faster than the overall inflation rate of 4.0% (CPI).  Certain staples are up by greater percentages:  milk is up 23% over the same period, bread is up 16%, and eggs are up 35%.

Obviously, this inflation hurts, and family budgets get squeezed.  On average, Americans spend about 14% of their total expenditures on food.  But grain price increases don’t affect American food prices as much as they do food prices in developing countries, because grain prices are a relatively small portion of total food expenditures in the U.S.  About half of all food dollars in the U.S. are spent dining out, and Americans eat more heavily processed food.  Service costs (waiters, chefs) and food processing costs account for a large proportion of U.S. food spending.

There are two big federal programs that spend money on food.  The U.S. government spends about $40 B a year on food stamps, helping about 28 million people this year.  The food stamp program automatically adjusts to food price increases.  In addition, the President’s budget proposes some changes to expand the food and vegetables component of food stamps, and to keep savings and combat pay from reducing eligibility for food stamps.  These proposed changes would increase spending by about another $½ billion over the next five years.

The Women, Infants, and Children (WIC) program will spend about $6 B this year on about 8.6 million people.  This year we have increased funding for WIC by more than 18%.  And in mid-April we transferred about $150 M from a reserve to account for higher costs in WIC.

What about overseas effects?

Let’s look at Mozambique as an example of a developing country, and compare it to the U.S.

• Americans spend on average 14% of their total expenditures on food.  In Mozambique, it’s 68% for those making under $1 a day.
• Food prices have increased 4.5% over the past year in the U.S., and 15.4% over the past year in Mozambique.
• The effect of one year of current food price inflation therefore means that an American has, on average, 0.5% less income to spend on other things.  But in Mozambique, one year of current food price inflation squeezes out 10% of their income.

This is why international food experts talk about a food crisis – poor countries are acutely affected by grain price increases.

What did the President announce today?

To address this problem, two weeks ago my administration announced that about $200 million in emergency food aid would be made available through a program at the Agriculture Department called the Emerson Trust.  But that’s just the beginning of our efforts.  I think more needs to be done, and so today I am calling on Congress to provide an additional $770 million to support food aid and development programs.  Together, this amounts to nearly $1 billion in new funds to bolster global food security.  And with other food security assistance programs already in place, we’re now projecting to spend nearly — that we will spend nearly $5 billion in 2008 and 2009 to fight global hunger.

This funding will keep our existing emergency food aid programs robust.  We have been the leader for providing food to those who are going without in the past, and we will continue to be the leader around the world.  It will also allow us to fund agricultural development programs that help farmers in developing countries increase their productivity.  And of course this will help reduce the number of people who need emergency food aid in the first place.

In addition, the President reiterated his call on Congress to support his proposal to allow U.S. dollars to be spent in poor countries to buy food from local farmers.  This makes U.S. taxpayer dollars go farther to help more people, and it helps develop local agricultural infrastructure.  (Teach a man to fish…)

Countries are moving in two different directions in response to higher food prices.  Some are moving in the right direction:  eliminating tariffs, permitting genetically modified foods, and increasing food assistance for their poor citizens.  Others are moving in the wrong direction, restricting exports and imposing price controls on specific goods.  These wrongheaded policies ultimately hurt the people who need the food, by restricting efficient trade and causing supply shortages.

Is the ethanol mandate contributing to the increase in food prices?

Right now it is not, because the price of oil is high, and other policies are supporting demand for ethanol.  I’ll explain.

• Increased global demand for biofuels is increasing the price of food, but only a little.  Our experts think about 3% of the global food price increase is a result of increased demand for biofuels.
• Two of three U.S. ethanol policies are contributing to that increase (the subsidy and the import tariff).
• But the mandate is not now big enough to affect ethanol demand, because oil prices, the ethanol subsidy, and the import tariff together produce more ethanol than the mandate requires.
• Given other ethanol policies and current market conditions, the ethanol mandate therefore is not affecting the price of corn or other food.

We have three domestic policies that affect ethanol supply and demand:  the 51¢/gallon tax credit (subsidy) for ethanol blended into fuel, the 54¢/gallon ethanol import tariff, and the renewable fuel standard (RFS) mandate.

Our experts tell us that, given today’s high oil prices, the current RFS mandate is not “binding”.  In other words, given the existence of the subsidy and the tariff, fuel blenders would be choosing to buy the same amount of ethanol as they are right now, even if the mandate did not exist.  As evidence, the mandate in law is for 9B gallons of ethanol to be blended into fuel this year.  But fuel blenders are blending about 9.15 B, more than this year’s mandate.  When oil is in the $110-$120 range, and ethanol is subsidized 51¢/gallon, you don’t need the government to tell you to buy ethanol, you do it because it’s cheaper than blending gasoline.  If the subsidy weren’t in place, it would be a different story:  the mandate probably would be binding and would be distorting fuel blending decisions.  And the mandate could bind in the future, if the price of oil drops substantially, or in future years as the mandate increases.  It could then affect the price of corn and other grains.  But the President’s action last year, which was to propose an increased mandate, is not increasing the amount of ethanol used this year, and therefore is not now increasing fuel or food prices.

Our experts believe that increased use of corn to produce biofuels in the United States accounts for about 19% of the increase in the global price of corn.  That’s 19% of the 41% increase in the price of corn over the last year, meaning that corn prices are about 8% higher in the U.S. as a result of increased domestic demand for ethanol.  Corn is obviously only one of many grains, and grains are a subset of food, and food spending also includes food processing costs and the service costs of a waiter and cook if you go out to eat.  When our experts combine all these factors, they conclude that increased worldwide use of biofuels has increased food prices by about 3%.

While increased demand for biofuels are responsible for some of the corn price increase, this does not mean that the increased RFS mandate is responsible for the 8% increase. Regular gasoline can contain up to 10% ethanol, and fuel blenders have to make a decision about how much ethanol to substitute for gasoline into a gallon of fuel (between zero and ten percent ethanol).  There are two reasons why a blender might substitute more ethanol in place of gasoline:

1. the RFS mandate in the law requires him to use more ethanol;
2. or ethanol is less expensive than gasoline.

Let’s look at $116 oil (this morning’s opening price).  That’s $116 for a barrel of West Texas Intermediate Crude (WTI), which is the really good stuff.  Refiners use a mix of good and not so good stuff, so that on average the price they pay for oil run through their refinery is about $6 a barrel less than the WTI price.  A barrel of oil contains 42 gallons, so crude oil costs 110 ÷ 42 = $2.62/gallon.  Add in refining, distribution, and marketing costs of roughly 50¢/gallon to turn oil in to gasoline (it varies a lot), to get about $3.12 per gallon of gasoline, before taxes.

Now let’s turn to ethanol.  Corn is currently trading for around $6/bushel.  Estimates vary, but the break-even price for corn, which is the price per bushel a blender would be willing to pay to produce a gallon of ethanol and just break even, is currently above this price.  This means that a fuel blender has an incentive to substitute ethanol for gasoline, no matter what the government tells him to do.  It’s rational for this fuel blender to go all the way up to 10% ethanol in the fuel he sells, the maximum that U.S. vehicles can tolerate without modification.

So yes, increased ethanol usage has made corn about 8% more expensive over the past year.  But it has not affected wheat prices, which have recorded the biggest grain price increase.  And the higher U.S. ethanol prices right now are driven not by the higher renewable fuels government mandate, but instead by market forces that are looking for alternatives to $100+ oil.  In contrast, the ethanol subsidy (51¢ per gallon) and the ethanol import tariff (54¢ per gallon) are subsidizing ethanol production relative to food production.  Note that these two policies have been in effect since long before the President took office.

Conclusions

• World grain prices are up.  Way up.  Especially for wheat.
• U.S. food prices are up, but by a lot less, because raw inputs account for much less of our total spending on food.
• More meat-eating in developing countries, higher energy costs, bad weather, the $, and increased demand for biofuels all contribute to higher food prices.
• Poor countries are more severely affected by grain price increases than rich countries like the U.S.
• The President’s recent and new proposals total almost $1 B of new money to bolster food security.  When combine with pre-existing plans, the U.S. will spend about $5 B this year and next to fight world hunger.
• Other nations can make the situation worse by raising protectionist barriers or imposing price controls.  Either can cause a supply shortage.
• Increased demand for biofuels is contributing to the higher price of corn and soybeans, and that is in part attributable to subsidies in U.S. law.  But the expanded ethanol mandate (“Renewable Fuel Standard”) has little to no effect on the current ethanol price, because the high world oil price creates a market incentive for fuel blenders to choose ethanol over gasoline.

Food prices & food aid

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Why are gas prices high, and what can we do about it?
2. The Farm Bill will be vetoed
3. More oil supply

This traditionally is released a week after the President’s Budget.  It describes the state of the U.S. economy, and also discusses in more detail a range of economic policy issues.  As the ERP is written by professional economists on the CEA staff, it’s quite substantive.  Topics covered this year include the U.S. macroeconomic picture, credit and housing markets, export growth, health care, tax policy, the Nation’s infrastructure, alternative energy, and improving economic statistics.

In addition, Dr. Lazear spoke to reporters yesterday about the ERP, and about the Administration’s economic forecast.  Here are some of the most significant quotes from that press briefing.  While normally I try to explain our policies, I can’t do better than Eddie has done for himself, so I present his quotes without further ado.

On the economy

CHAIRMAN LAZEAR:  Going forward, most forecasters expect the first half of 2008 to have slow, but positive, growth, followed by a pick-up in the latter half of the year.  The stimulus package just passed by Congress that will be signed by the President shortly should help ensure against risks in the economy.

This year’s most significant economic events revolved around housing and credit markets.  An apparent under-pricing of risk was revealed first in mortgage markets, and later in a variety of credit markets.  The President was quick to respond to these issues by focusing on borrowers through programs like FHA Secure, suspension of the tax liability on mortgage write-downs, and HOPE NOW programs.  Additionally, the Federal Reserve acted to pump liquidity into the market.  Some credit markets have become more stable since the acute tightening that occurred in the summer.

Are we in a recession?

Q    [D]o you think we’re going to go into a recession or are in a recession right now?

CHAIRMAN LAZEAR:  The answer is, I don’t think we are in a recession right now, and we are not forecasting a recession.  We are forecasting slower growth.  There’s no denying that the growth that we had in the fourth quarter of last year was significantly lower than the growth that we had in the third quarter.  Now I just remind you that we had similar growth rates in the first quarter of last year, and those similar growth rates were followed by two very strong quarters.  So these things are somewhat volatile.

I am not suggesting that we expect that in this quarter we’ll see the same kind of growth that we saw, say, in the third quarter of last year — we’ve had some issues, obviously, in terms of credit tightening, in terms of the housing markets.  And that’s the reason why the President was very active in pushing through the stimulus package, which we’re very pleased about.  I think we got that in record time.  We think that’s insurance against risks on lower economic growth, and we think that will help a good bit.  We think it should help immediately, because businesses will build those expectations into their plans, and we expect that will help the economy even in the very near term.

Should people be worried even if we’re not in a recession?

Q    I know you’re not forecasting a recession, but a lot of Americans look at the fourth quarter figures, they look at the stock market, they look at the shrinkage in the job figures in the fourth quarter, and they say, well, I’m worried about it.  Are they wrong to be worried about it?

CHAIRMAN LAZEAR:  Well, we look at those numbers too, and that was the motivation, of course, behind the stimulus package, because of the concerns out there — and it wasn’t just the public’s concerns, it was our concern that there are some factors that suggest some potential weakness in the economy.  We were worried about lower growth, and as a result of that, we decided that it was the right time to act.

We believe that the stimulus package that was voted on last week will be quite effective in ensuring against these downside risks, and we think that they will keep the economy from slipping into lower levels of growth.  And again I think that our forecasts are realistic, they’re consistent with what you’re seeing out on the street, as well.  I think this is — we’re moving in the right direction.

I should also mention, by the way, that the Federal Reserve has also acted to change their monetary policy stature over the last few weeks, and in a pretty aggressive way, and that will also contribute, we think, to the economic picture.

Is the Administration willing to consider a second stimulus bill?

Q    Congress is planning to advance a second stimulus package in a few weeks.  First of all, given the timing, would you even agree that it would be a stimulus package?  And whether or not it has a stimulative effect, is the administration willing to consider additional measures?

CHAIRMAN LAZEAR:  We think the proposal that we put out a few weeks ago, and it was acted on last week, is the right thing to do.  We think 1 percent of GDP is about the right number — it’s slightly higher than 1 percent, but we think that’s an effective stimulus.  We think it will have the desired effect.  And that was the policy that we thought was appropriate.  We still think that policy is appropriate and we’ll stick with that.

Does your forecast assume spillover from the housing problems into other financial markets or economic sectors?

Q    Back in March, the great debate was, will this housing crisis spill over into any other sector, and economists were divided, and of course by August we knew it was spilling into the financial sector.  Now, if you pick up the papers you’re reading about corporate debt market seems to be under pressure.  Is your forecast assuming no more spillover, or have you actually taken into effect possible spillover into corporate debt and other marketplaces?

CHAIRMAN LAZEAR:  Well, when you say “spillover,” I guess I would say that’s still a debatable point.  The fact that we saw some distress in other credit markets does not necessarily mean that it was a spillover from the housing market.  It could have been, but it could also be a reflection of the same underlying phenomenon.  I think most market observers believe that most of what we’ve seen in terms of credit markets reflects the under-pricing of risk that occurred over the past couple of years, that happen to have shown up first in mortgages.

Okay, so it showed up first in subprime.  That doesn’t mean that subprime necessarily was the cause of what we saw in other markets.  It’s just a reflection of the same forces perhaps showing up there first.  And my guess is that will be something that will be debated by academics for the next 10 years to come.

Is it over?  You know, who knows whether it’s over.  I think the good thing that has happened in credit markets is that many firms have recognized their losses and, in addition to that, they’ve been able to raise capital.  I think that’s the most encouraging sign — that firms have suffered some distress and financial markets, no question about it, but after they’ve declared those losses they’ve been able to go out and raise capital and to start again.  And that’s what’s most important, I think, going forward.

The Economic Report of the President

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. A bipartisan economic booster shot
2. What caused this financial mess?
3. Rose Garden Statement by President Bush on the Economy

The people’s trust in their government is undermined by congressional earmarks — special interest projects that are often snuck in at the last minute, without discussion or debate. Last year, I asked you to voluntarily cut the number and cost of earmarks in half. I also asked you to stop slipping earmarks into committee reports that never even come to a vote. Unfortunately, neither goal was met. So this time, if you send me an appropriations bill that does not cut the number and cost of earmarks in half, I’ll send it back to you with my veto. (Applause.)

And tomorrow, I will issue an executive order that directs federal agencies to ignore any future earmark that is not voted on by Congress. If these items are truly worth funding, Congress should debate them in the open and hold a public vote. (Applause.)

Here is the Executive Order that the President signed this afternoon.

If you’re interested in perusing earmarks, go to OMB’s excellent earmark website.

You can search bills from 2005.  OMB is updating the database for more recent laws.

I suggest you try searching for “museum” in the “Search Earmarks full text” box.  I got 273 results.

Here are results of a few other searches:

“genome”       $1.2 M for trout genome mapping at West Virginia University in Morgantown, WV and the Agricultural Research Service in Leetown, WV  (in report language)

“dinosaur”       $99,000 for environmental improvements for preservation of the dinosaur collection in Pittsburgh, PA.  (in the law)

“hockey”         $129,000 for the American Hearing Impaired Hockey Association in Chicago, IL  (in report language)

“paint”            $1.5 M for a Virtual Reality Spray Paint Simulator System and Training Program at Fakespace Systems in Marshalltown, IA  (in report language)

In addition, the huge “omnibus” appropriations bill the President signed at the end of last year contained these two earmarks in report language:

• $846,000 for a Father’s Day Rally Committee
• and $178,600 for New York City’s American Ballet Theater

There are three components to our new policy on earmarks:

1. a veto threat if an appropriations bill does not cut the number and cost of earmarks in half from 2008 levels;
2. direction to agencies that they should ignore earmarks in report language in future bills; and
3. direction to agencies that any “phonemarks” be ignored unless they are put in writing to the Agency.  The Agency must then publish the written request on the internet within 30 days.  A “phonemark” is when a Member of Congress or Congressional staffer calls an agency and presses for funds to be spent on a particular project, generally within that Member’s district or State.

Veto threat

Using our definition of an earmark, last year’s appropriations bills and the accompanying committee reports contained a total of 11,737 earmarks, which combined spent a total of $16.872 B of taxpayer money.  This is the baseline against which we will measure the President’s threat to veto any bill which does not cut both the number and $ amount of earmarks at least in half.  (Technical note:  The actual comparison with last year will be done on a bill-by-bill basis.)

Last year the President called on the Congress to meet this threshold.  This year he’s backing that call up with a veto threat.

Executive action

The new executive order defines an earmark as spending provided by Congress where the purported Congressional direction:

1. “circumvents otherwise applicable merit-based or competitive allocation processes”;
2. or “specifies the location of the recipient”;
3. or “otherwise curtails the ability of the executive branch to manage its statutory and constitutional responsibilities pertaining to the funds allocation process.”  (I’ll skip the explanation of this.)

Here’s some general appropriations language in a law:

For necessary expenses of activities authorized by law for the National Oceanic and Atmospheric Administration … $2,856,277,000.

The bill includes a further subdivision of $709 million for the National Marine Fisheries Service, a subdivision of NOAA.  So far, so good.

The report language, however, includes the following text:

These funds are distributed as follows:

• …
• Oyster Hatchery Economic Pilot Program, Morgan State University, MD                                $470,000
• Papahanaumokuakea Marine National Monument Fishery Assistance, HI                            $6,697,500
• Southern New England Cooperative Research Institute, RI                                                     $1,339,500”
• …

About 80% of earmarks are of this form – they’re in report language, which is not actually part of the bill signed into law by the President.  These earmarks are instead incorporated into the “report” that accompanies the bill, more formally known as the “Statement of Managers”.  The President focused a spotlight on report language earmarks, because they are never subject to a vote in Congress.  If a Member had wanted to amend this bill to strike the $470K of spending for the Morgan State Oyster Hatchery Pilot program, he could not have done so.  There’s nothing to amend, since this earmark wasn’t actually in the bill.

But the earmark has a practical effect, even though it’s not part of the law.  Why?  Imagine you’re the person running the National Marine Fisheries Service.  You are not legally required to spend this $470K as the report says you should.  But if you don’t, next year when you’re coming to Congress to get your $709M (plus inflation), the Member or staffer whose earmark you ignored might cut your funding.  And since report language is generally written by those staffers who actually determine what your top-line number is next year, you have a tremendous incentive to do what they “recommend” in the report.

The President’s executive order now instructs you to ignore those report language earmarks.  You have been directed to give money to the Oyster Hatchery Pilot Program only if it merits that funding based on an objective, transparent, and merit-based funding process.

I’ll extract some key language from the Executive Order.

(T)he head of each agency shall … ensure that … agency decisions to … expend funds are based on the text of laws, and in particular, are not based on language in any report of a committee of Congress … or any other non-statutory statement or indication of views of the Congress, or a House, committee, Member, officer, or staff thereof

In other words, follow the words of the law, not what some other person or document claims is the intent of the law.

(T)he head of each agency shall … ensure that … agency decisions to … expend funds for any earmark are based on authorized, transparent, statutory criteria and merit-based decision-making …

Some earmarked projects will still get funding because they qualify on the merits.  The process is important here – they will be getting the funds because they are projects that succeed in a merit-based competition based on transparent (public) criteria, not because they have a powerful supporter.

(T)he head of each agency shall … ensure that … no oral or written communications concerning earmarks shall supersede statutory criteria, competitive awards, or merit-based decision-making.

An agency shall not consider the views of a house, committee, Member, officer, or staff of Congress … to carry out an earmark unless such views are in writing …

A “phonemark” is when a Member of Congress or Congressional staffer calls an agency and presses for funds to be spent on a particular project, generally within that Member’s district or State.  No more phonemarking.  You’ve got to put it in writing…

All written communications from the Congress … recommending that funds be … expended on an earmark shall be made publicly available on the Internet by the receiving agency, not later than 30 days after receipt of such communication …

… and then your letter will be made public.  Transparency is key.

Note that the Executive Order has no sunset date – it is now permanent policy.  A future President could modify it or repeal it, but they would then be weakening President Bush’s action to limit earmarks.

Earmark reform (State of the Union follow-up)

© 2010 Keith Hennessey - Your guide to American economic policy

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1. Defense earmarks
2. Economic highlights of the State of the Union address
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