Very unpleasant unemployment numbers Friday (8.1% unemployed). These numbers, if they are at their peak, would be the 3rd highest rate of unemployment since WW2 only surpassed by the peak unemployment of 10.8% in 1982 and 9.0% in 1975. But I fear its going higher.
I think the solution to the current mess can be shown in how the US reacted in the second quarter of the last century.
Below are the US GDP and spending numbers between 1925 and 1950.
Year GDP Govt Spending
1925 90.6 10.37
1926 96.9 10.78
1927 95.5 11.22
1928 97.4 11.46
1929 103.6 11.70
1930 91.2 12.06
1931 76.5 12.19
1932 58.7 12.44
1933 56.4 12.62
1934 66 12.81
1935 73.3 14.78
1936 83.8 16.76
1937 91.9 17.22
1938 86.1 17.68
1939 92.2 19.05
1940 101.4 20.42
1941 126.7 24.35
1942 161.9 45.58
1943 198.6 92.71
1944 219.8 109.95
1945 223.1 118.18
1946 222.3 79.71
1947 244.2 57.73
1948 269.2 55.08
1949 267.3 62.71
1950 293.8 70.33
From the numbers above you can deduce the following:
- GDP fell DRAMATICALLY from 1929 to 1933 by 46%. Now that is a GREAT depression. The U.S. GDP has not fallen anywhere close to that level this time around.
- U.S. did not reach the 1929 GDP number again until 1941.
- FDR's increases in spending in his first 2 terms was able to move the GDP up at a pretty good clip. That analytical information seems to put cold water on the GOP talking point that FDR's spending didn't help us out of the depression. For whatever truth is in that statement its a reflection of the size of the hole, not on the efforts of FDR to get us out of the hole.
- However, from 1940 to 1950, the GDP tripled due to massive government spending. And after WW2, govt spending shrunk dramatically, but the US GDP kept right on going. Ironically, the US ended up in 1945 in better financial shape than after the end of WW2 than with our debt levels lower as a percentage to GDP than before the war. This is the Krugman argument that we haven't spent nearly enough money on a stimulus package.
Based upon that here's what Obama needs to do
1. Federal Government
A. Beef up the IRS - You can't be having all your potential nominees having tax problems. Exactly how many people haven't been paying their taxes?
B. For the love of God, take the "Kick me sign off the US's back". Corporations are jerking the US around and the US is not getting a good deal with what we are buying (or loaning). Buy the toxic assets for 10 cents on the dollar in exchange for loans. Don't just be giving the money away. When Harry Truman was faced with a crisis, he threatened to draft all the mine workers in the Army and take over the mines. I'd like to see the U.S. have some teeth.
2. President Obama
A. Have regular conversations at the White House on various topics and invite various people to participate. I would be encouraged if he brought in economists, legislators, business owners, labor leaders and historians from both political persuasions to just talk thru the issues. But only invite those who will listen and not grandstand afterwards. No need to invite pundits who are long on opinions, but frequently short on facts.
B. Have some fireside chats. When FDR entered World War 2 he encouraged all Americans to buy a map so they could follow along with his frequent updates. I realize that Ross Perot gave pie charts a bad name, but I think if he explained with charts and graphs the predicament of the country we would all have a better understanding of where we are.
3. Administration
A. Fill up the Treasury Department
And can you appoint someone other then people appointed by Robert Rubin
4. Congress
It is coming up on 6 months and there have been no hearing on the financial standards for corporations. How long does it take?? My suggestions
A Mandatory that you rotate accounting firms every 3 years. And the accounting fees are paid by the government which in turn is paid for by additional fees on the finance companies.
B Greatly regulate hedge funds. Prevent companies from selling shares for a few days so that the hedge funds can hold voting rights for a majority of shares.
C Regulate/tax credit default swaps
D Break up all those companies that are "too big to fail"
E More restrictive rules on short selling. You can not have hedge funds gathering around viable companies like sharks and driving them out of business with short selling.
How about hearings on health care, education? Pin the opponents of reform down, by asking tough questions on their practices to prove they provide fewer services to fewer people at higher cost.
5. Stimulus 2
A. Have govt allow all homeowners to refinance to a 4% 40 year mortgage with the first 5 years assumable to a new buyer. Primary homes only. Qualified buyers with homes that are no more than 10% under water.
For homeowners that are just a little underwater make it 4 ½%. That would seem to make more sense as it would open up a ton of short term jobs (appraising, writing contracts) and it would allow everyone to free up money that they are currently paying to the banks. Banks might not like it, but they should have a short-term cash infusion because of all the deals that they are making. And limit the contracts that qualify so that a mortgage broker doesn't put people in worse loans. And limit the closing cost fees that can be charged.
6. Health Care
I have yet to see what Obama is going to do about cost containment of the system. It seems that the best way to contain it is to not make every medical procedure a decision point. A consumer must know the price before going in
7. Colleges
Obama should challenge the colleges to throw open their doors to allow 50% more students to attend during this crisis. And lower tuitions by 50% (now I’m getting dopey, huh). How can they do that? Just require all college professors to teach .... That is their occupation, its not running around the world digging up bones or publishing papers or filling out grant applications. Studies show that college professors teach less now then ever before, but students are called upon to pick up their salaries.
Another idea is to require that 6% of endowment money go to the college’s general fund instead of the customary 3%.
Harvard University’s budget is $3 Billion dollars. And with that money they graduate about 10,000 students a year (graduate and undergraduate).
8. Wall Street
I am an investor. However, when I listen to the Jim Cramers of the world they don’t seem to acknowledge that they are the ones who caused this mess. Then they are first in line with their hand out and, of course, free advice. They insist upon being fixed first BEFORE health care, education and energy. Wall Street is suppose to be a barometer of the American economy, now it seems to want to be the American economy. That is so wrong and that mindset is what caused the problem. Instead of pumping up the virtual economy (do Wall Street analysts actually contribute to the GDP), why not fix the real economy? FIRST. That in the end that is what will really help Wall Street the most; solid earnings on a good foundation.
US Government doesn’t need to regulate farming, engineering, law or medicine as they have very little impact upon the global economy. However, finance has the potential to destroy like a nuclear bomb. Finance needs to be regulated like never before and the government should be extracting extra fees from this "golden" goose because of this current crisis.
And how would Wall Street react if instead of another tax cut, they got a permanent cost cut due to health care. Now if Obama can get meaningful health care cost containment, that would cause the market to spike 5,000 points. However, I don’t know if that is Obama's plan.