Parts to Wholes: the Socionomic Systems Nexus

Economic Symptoms

Rust sleeps: The travails of Detroit Detroit may be the archetypal down-and-out rust-belt city, but to call it “dying” masks a more complex reality. Greater Detroit still has three to four million residents, a world-class university next door in Ann Arbor and the bone structure of a great city, as a car-industry consultant with the ear of a poet put it over lunch one day. Why, then, the relentless focus on its failings? Nearly everyone you meet is either weary or angry at seeing their home town made the butt of jokes on late-night television and the subject of anguished political commentary. But no one denies that the region’s property market is abysmal, its finances a mess and its industrial base shrinking at an alarming rate. Instead, Michiganders, despite being self-deprecating to a fault, make a point their countrymen won’t want to hear: Detroit is no longer the nation’s worst-case scenario, but on its leading edge, the proverbial canary in the coal mine. “It’s like the rest of the country is getting to where Detroit has been,” said Peter De Lorenzo, who writes the acerbic and very funny Autoextremist.com blog. That means that smug mock-horror is no longer the appropriate reaction to the frozen corpse. Instead, get ready for a shock of recognition. The numbers tell an even more compelling story: the UAW and the Detroit carmakers are in rare unity in pointing out that wages account for only about 10 per cent of the companies’ total costs. Their inability to compete rests on a number of factors other than wages, including consumers’ unwillingness to credit GM or Ford with making cars these days as good as, or even better than, Toyota’s or Honda’s, according to rankings from Consumer Reports magazine and JD Power’s Initial Quality Studies. If Detroit’s designers and engineers are doing an objectively better job, the fault may lie with their marketing and public relations chiefs. Or perhaps too many Americans have bad memories of clunky old cars. In one of the most vivid illustrations of the so-called quality gap bedevilling Detroit, the Pontiac Vibe and Toyota Matrix small cars are made on the same assembly line, at a GM-Toyota joint venture plant in California, but the latter model sells for at least $1,200 more than the former. But this problem pales next to what is arguably the industry’s biggest burden: America’s lack of universal healthcare. GM has more than twice as many retirees on its books than it does active workers. Healthcare costs alone account for a gap of $1,500 between the price of a Detroit vehicle and a Japanese one, and are the main reason Detroit cannot compete with the Japanese on lower-margin small cars. In 2007, the UAW signed away many of its remaining perks in a contract negotiation with the Big Three, agreeing to pay new hires lower wages of as little as $14 an hour and to assume management of retirees’ healthcare in exchange for lump-sum payouts from the carmakers. Analysts said that the concessions would have made GM, Ford and Chrysler competitive by 2010. But then petrol prices spiked, Wall Street staggered, world car markets collapsed, and now all bets are off. Detroit’s crisis, in other words, is the result of both bad choices and worse luck. With or without bail-out aid, the carmakers are shedding tens of thousands of jobs, and heading toward failure. Detroit is bracing itself.

• Wilbur Ross interviewed by the Financial Times on GM’s bankruptcy, the outlook for the auto industry and government financial and other policies.
• Ross on PPIP and other financial rescue programs
• Ross on Distressed Investing in gaming, automotive, forcing bank failures (nationalization), the housing outlook and mortgage re-financing.

Watching Us Save, One Cart At A Time While much of America's retail landscape sits idle during this recession, these workers have a reason to warm up: even as Americans cut spending, business at Wal-Mart has never been better. That gives Wal-Mart managers like Sprague a unique opportunity. For her, peering into shopping carts is like reading economic tea leaves, yielding anecdotal measures of consumer confidence and a front-line view of precisely how consumers are reining in expenses. Wal-Mart managers are often the first people to sense a recession is coming because they'll notice an increase in items discarded near cash registers, a signal that anxious shoppers are reconsidering purchases. In her store, Sprague has seen another barometer of spending discipline: an increase in the number shoppers carrying grocery lists, many of which get dropped along the aisles. "Yesterday I picked up four of them," she says while walking toward the meat department. Even when they reach the registers, customers remain nervous about money. They've become far more likely to shop on paydays, so Sprague recently rejiggered the work schedule to bring in extra cashiers on the 1st and 15th of each month. Cashiers are now constantly hitting the subtotal key (to help customers see a running tally as they scan items) and voiding items to get the final bill under a certain dollar amount. "[Customers are] making buying decisions at the register after [they've] already shopped off a list," Sprague says. While managers like Sprague watch national data for signs the economy is bottoming out, they're also watching in-store indicators of consumer confidence. Frieson, the senior VP, says a rebound in sales of adult apparel and jewelry will signal to him that the economy is turning up. He's also tracking the percentage of sales that come from groceries versus general merchandise; when more than 40 percent of revenue in a store like Westminster's is coming from groceries, it's a sign people are buying only essentials. "Look in the carts—the carts really tell the story," Frieson says.

In Slumping Economy, a Shift in Shopping Habits PACO UNDERHILL, author, "Why We Buy": We cannot sustain the juggernaut of consumption that we have had here in the United States over the past decade. PAUL SOLMAN: But you want us to be spending as much, don't you? PACO UNDERHILL: I want you to be spending what you can afford. We have Americans out there whose credit card debt exceeds their annual income. We have an entire generation of Americans with little or no fiscal discipline or financial knowledge. Our houses are too big. Our cars are too big. Our debts are too big. Our bellies are too big. Now it's time to go on a diet. PAUL SOLMAN: Do you think that because many of us can't afford to shop as much now, we feel more isolated? PACO UNDERHILL: I think so, yes. And many Americans are deeply frightened. They are frightened because they are facing things that most of them have never thought of in the context of their lifetime. We also know that there is something in our culture called shopping sickness. One of the fundamental issues I think we're trying to discover as consumers is that there are no acquisitions that are transformational. Acquiring that iPod or that tube of lipstick or that Maserati doesn't change us into anyone other than what we were to start out with and that, therefore, our relationship to consumption here has to be more real.

Strategic Economic Outlook

IMF Says Global Recession Is Deepest Since Great Depression The global economy is in the grips of a deepening recession that isn't likely to turn around until sometime next year, the International Monetary Fund said. The IMF, which had been slow to apply the word to the current downturn, also released a new definition of global recession. Overall, the world economy is now expected to contract 1.3% this year -- a sharp reduction from the IMF's January estimate of 0.5% growth for 2009 -- and then grow just 1.9% in 2010, well below the global growth rate before the economic crisis hit. "By any measure," the IMF's twice-yearly World Economic Outlook concluded Wednesday, "this downturn represents by far the deepest global recession since the Great Depression." Treasury Secretary Timothy Geithner said that "only 17 of the 182 economies followed by the IMF are expected to grow faster this year than they did last year. Some 71 -- including 30 of the world's 34 advanced economies -- are expected to shrink." Ahead of a gathering of Group of Seven finance ministers and central bankers this week, as well as the spring meetings of the IMF and the World Bank, the IMF urged global leaders to keep up the momentum that began at the Group of 20 summit this month. The fund is anticipating that G-20 countries will pursue fiscal-stimulus measures totaling about 2% of gross domestic product this year and 1.5% next year, but said that may not be enough. "It is now apparent that the effort will need to be at least sustained, if not increased, in 2010, and countries with fiscal room should stand ready to introduce new stimulus measures as needed to support the recovery," the IMF said. That's likely to be a subject of debate at the G-7 meeting; European leaders thus far are resisting U.S. pressure to pursue additional stimulus measures. Advanced economies, which are expected to contract 3.8% this year and see no growth in 2010, should also continue to pursue rate cuts and unconventional monetary measures to support demand and counter deflationary pressures, the fund said.

• Europe's Outlook Challenges Recovery

Three Scenarios for Economy's Path There is no doubt where the economy is now. "By any measure, this downturn represents by far the deepest global recession since the Great Depression," the International Monetary Fund declared Wednesday. But there's more than the usual uncertainty about where it is going. The key is the U.S. Even though its slice of the world economy is smaller than it once was, it's still huge. The U.S. led the world into the abyss, and it will lead the world economy out of it. But how fast and when? The alphabet can help to imagine the possibilities and the path of the economy. There's the letter V: the kind of quick rebound that usually follows a deep recession. Or U: a longer recession and slow recovery. There is L: years of painfully slow growth. And W: a temporary upturn as the economy feels the jolt of fiscal stimulus that quickly wears off. Finally, there's the big D, not the shape but another Great Depression. With history a guide, consider three starkly different scenarios. But the Federal Reserve caused the deep recessions of the 1970s and 1980s when it put its foot on the brake to stop inflation; it ended them when it let up. This time, Fed has its foot to the floor and the economy is still slowing. And so much stock-market and housing wealth has evaporated that a quick turn in consumer spirits seems unlikely. Plus, the repair of the banks remains far from complete, restraining lending. The odds of the V: 15%. If one asked a roomful of economists two years ago to put odds on a repeat of the Great Depression, nearly all would have said zero. In early March, The Wall Street Journal posed the question to about 50 forecasters -- defining depression as a decline in output per person of more than 10%, four times worse than the decline the IMF anticipates. On average, they put odds at one in seven; several put them above one in four. "This is a Depression-sized event," says economic historian Barry Eichengreen of the University of California at Berkeley, citing the global decline in industrial production and world trade. The big difference: In 1929, governments dithered, or worse. In 2009, they've rushed to the rescue. The odds of the big D: 20%. For a decade after its stock market and real-estate bubble burst in 1990, Japan bumped along at an annual growth of just 0.5%. It was dubbed the Lost Decade, and it could happen here. The recession ends but the economy plods along, growing too slowly to bring down unemployment for years. As the IMF observed this week, recoveries following recession caused by financial crises are "typically slower." Those following recessions that occur simultaneously across the globe "have typically been weak." An unfolding depression could scare Congress to act boldly, but the L is less ominous -- and perhaps more likely as a result. There would be months when the economy appeared to be strengthening so the temptation to wait-and-see would be strong. Put the odds of the L at 55%. That adds to 90%. So put 10% odds on the U, less pleasant than the euphoric V but far less painful than a Lost Decade. That's the rough consensus of economic forecasters; it means U.S. unemployment grows for another year and a half. Bottom line: The odds favor a long slog.

'I'm Not Dr. Doom. I'm Dr. Realist.'  You think the Obama administration is on the right track with the stimulus packages and Chairman of the Federal Reserve Ben Bernacke pumping money into the system? Yes, I have to give credit to the administration. Within 30 days of coming to power, they did an $800 billion stimulus package, a new program to deal with mortgages and foreclosures, and also a bank plan that, when Treasury Secretary Tim Geithner came with details, made the markets rally sharply.  Again, the glass is only half full because in order to do things with speed, they did not do them perfectly. Each one of these three programs has some flaws. The fiscal stimulus could have been more front-loaded. For the mortgages, eventually you are going to need the reduction of the face-value principal of the mortgages. And on the banks, I believe the PPIP [Public-Private Investment Program] plan can work for banks that are solvent. But . . . after the stress tests, it is going to be obvious that even some of the largest banks are so fundamentally in trouble that you cannot buy their toxic assets. You need to take over these banks on a temporary basis, clean them up and then sell them back to the private sector. How do you feel about the deficit that the Obama administration is building up? In the short term I am supportive of it, because if we didn't have these fiscal deficits, the recession would become a depression. I think we need to stimulate demand in a situation in which every component of aggregate demand is sharply falling -- consumption, residential, inventory, exports. On the other side, I do agree that this is not a free lunch. What is going to fuel the next growth cycle? That is a difficult question because the periods of high growth in the United States in the last 25 years have been characterized by an asset and credit bubble. The real estate bubble of the '80s ended up with pain in the [savings-and-loan] crisis. Then came the tech bubble, which ended up in another crash and led to a recession. And now we have this more generalized housing and credit bubble, which ended up in a big disaster. . . . We have to switch our capital into things that are more productive and more stable in terms of social growth. That is going to be a challenge. And the potential growth rate might fall to a much lower rate.

5 rules for post-recovery investing The Great Depression was long enough and painful enough to form the habits of a generation. The members of that generation became dedicated savers, avoiding debt, paying in cash and keeping both eyes focused on the long run. The current downturn, what I call the Great Recession, since it is already the longest recession since World War II, will do the same. In the new world that emerges after the recovery, people will save differently, spend differently, look at debt differently and think about the future differently. Differently how? Well, no one is exactly sure. It's awfully hard to figure out a change like this in the midst of it. But be sure of this: Every company in the global economy that doesn't have its head stuck in the sand is trying to figure out this new world. And for investors, getting it right -- owning shares in the companies that are in tune with this emerging world and avoiding the shares of those that do business as if nothing has changed -- will be the difference between profit and loss in the decade ahead. The Congressional Budget Office predicts the U.S. economy won't return to full-trend growth until 2015. And full-trend growth -- sustainable economic growth without rising inflation -- even then isn't going to be what it was before the global financial crisis. The Federal Reserve, which I'd place among the optimists on this issue, says full-trend growth isn't going to be the 3% annually of the pre-crisis economy but more like 2.5% or even as low as 2%. Harvard University economist Dale Jorgenson, who taught Fed Chairman Ben Bernanke, projects just 1.6% annual growth through 2030. If Jorgenson is anywhere near correct, the Great Recession would make the Great Depression seem like a picnic to many people.

Policies: Taxes, Regulation, Housing, Autos

Tax Fantasies of the Right and Left In thinking about taxes, let's start with a few hard realities: About 20 percent of household income is paid in federal taxes -- income taxes, payroll taxes, excise taxes, corporate taxes. There's no reason that number cannot rise to 23 or 24 percent once the current recession has passed without hurting long-term economic growth. Indeed, we've had that level of taxation before in the United States, as recently as 2000, and many other prosperous and growing economies do, as well. At the same time, it's not a good idea to try to raise all that extra money just from households with annual incomes of more than $250,000. That may have been a winning campaign promise for candidate Obama, but it makes for lousy economic policy. A quick back-of-the-envelope calculation suggests that balancing the budget solely on the backs of those making more than $250,000 a year would almost surely require pushing marginal income tax rates well above 50 percent. That's a level at which taxes begin to discourage people from working and investing. Almost certainly, it is a level that would prompt them to invest significant time and money to find new ways to evade taxes. A lot of liberals make the argument that its okay to soak the rich because the rich have captured nearly all the income growth in the past couple of decades. There's no disputing that income inequality has increased. But it's also important to remember that there is only so much a progressive tax code can do to counteract the market. With the top 10 percent of households already paying 55 percent of the total federal tax bill, we're hitting against that limit. Rather, it's probably time to consider ways of tinkering with the market so that it doesn't produce such unequal outcomes. That might include boosting workers' skills and bargaining power, or breaking up the oligopolies that allow lawyers and investment bankers and hedge-fund managers to earn so much more than everyone else.

So what's the "right" level of taxation?

Before Tea, Thank Your Lucky Stars THE link between success and luck is stronger than many people think. Analysis of this connection provides a useful framework for weighing the issues raised around the country at recent “tea parties,” where orators in high dudgeon bemoaned their “crippling” tax burdens. Responding to President Obama’s plan to let the Bush tax cuts for top earners expire in 2010, one protester’s placard read, “Spread your own damn wealth around!”  Other protesters contended that the tax system already strains the vital connection between individual effort and reward and warned that further tax increases might destroy it. But these accusations don’t withstand scrutiny. The current system is much fairer than many people believe, and the president’s proposal will make it both fairer and more efficient. Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success. It helps to be talented and hard-working, of course, yet some people enjoy spectacular success despite having neither attribute. (Lip-synching members of boy bands? Money managers who bet clients’ retirement savings on subprime-mortgage-backed securities?) Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events. Even in markets where luck plays no role, minuscule differences in performance often translate into enormous differences in salaries. As economists have only begun to realize, pay differences often vastly overstate differences in performance — not only in traditional winner-take-all labor markets like entertainment and sports, but also in more conventional arenas. In law, consulting, investment banking, corporate management and a host of other occupations, the ablest performers are often paid hundreds or even thousands of times as much as others who perform nearly as well. Another important message of recent research is that a person’s salary depends far more on where she is born than on her talent and effort. The president’s proposal is modest: raising the top marginal tax rate from 35 percent to 39.5 percent, its level when Bill Clinton left office and well below the corresponding level in most other industrial countries. There has never been a shortage of talented people willing to work hard for success — even in countries with top rates much higher than 50 percent. And the president’s proposal would not cause such a shortage in 2010. It would, however, promote more efficient provision of public services, in much the same way that contingent fee contracts often promote more efficient provision of services in the private sector. For example, when lawyers are willing to waive fees unless their client wins, wrongfully injured accident victims often gain legal representation they couldn’t otherwise afford. Similarly, when government levies higher tax rates on the wealthy, we can provide public services that the wealthy and others greatly value but that would otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes payable only if we’re lucky enough to end up among life’s biggest winners. Financially successful tax protesters seem blissfully unaware of how incredibly fortunate they are. To borrow from the late Ann Richards and her description of the first President Bush, they were born on third base and thought they’d hit a triple.

• Obama’s rescue plan explained

Akerlof and Shiller: Good Government and Animal Spirits The principal long-term result of the current financial crisis should be improved financial regulation. After the immediate crisis is over, we need to restructure our fragmented system. This process will take years to complete since, if properly done, it should get at the heart of the regulatory structure. This is not as radical as it sounds, for while many observers equate U.S.-style capitalism with unconstrained free markets, the story is more complicated. Americans have long understood that for the economy to work well, government must play an important supporting role. They've also long understood the important role that self-regulatory organizations (SROs), such as trade associations and exchanges, play in cooperation with government regulation. An understanding of animal spirits -- the human psychology and culture at the heart of economic activity -- confirms the need for restoring the role of regulators as guiding hands in a healthy, productive free-enterprise system. History -- including recent history -- shows that without regulation, animal spirits will drive economic activity to extremes. The debate about the proper role of government in the economy goes far back in American history. At the beginning of the 19th century, the Democrats were fiercely opposed to government intervention, while the Whigs thought that the government should provide the backdrop for a healthy capitalism. On the federal level, this would mean support for a bank of the United States and a system of national roads, as part of the "American System" advocated by Henry Clay starting in the 1820s and supported by John Quincy Adams. Andrew Jackson and later Martin van Buren were against such federal government intrusions. Controversy about the proper relationship of the government and the economy has continued since then. The recent economic turmoil has brought back to the table many questions that had been considered settled. People are seeking new answers, urgently. Public antipathy toward regulation supplied the underlying reason for this failure. The U.S. was deep into a new view of capitalism. Americans believed in a no-holds-barred interpretation of the game. We had forgotten the hard-earned lesson of the 1930s: Capitalism can give us real prosperity, but it does so only on a playing field where the government sets the rules and acts as a referee. Contrary to a widespread impression the current situation is not really a crisis of capitalism. Rather we must recognize that capitalism must live within certain rules. And our whole view of the economy, with all of its animal spirits, indicates why the government must set those rules. It may be true that in the classical economic paradigm there is full employment. But with animal spirits, waves of optimism and pessimism cause large-scale changes in aggregate demand. Since wages are determined partly by considerations of fairness, these changes in demand do not translate uniformly into shifts in prices and tend to cause shifts in employment. When demand goes down, unemployment rises. It is the role of the government to mute those changes.

Matters of Principal TO stanch the hemorrhage of foreclosures, we don’t need another bailout. What we need is a fix — and the wisdom to see what is in our own self-interest. An avalanche of foreclosures is coming — as many as eight million in the next several years. The plan announced by the White House will not stop foreclosures because it concentrates on reducing interest payments, not reducing principal for those who owe more than their homes are worth. The plan wastes taxpayer money and won’t fix the problem.  For subprime and other non-prime loans, which account for more than half of all foreclosures, the best thing to do for the homeowners and for the bondholders is to write down principal far enough so that each homeowner will have equity in his house and thus an incentive to pay and not default again down the line. This is also best for taxpayers, who now effectively guarantee the securities linked to these mortgages because of the various deals we’ve made to support the banks. For these non-prime mortgages, there is room to make generous principal reductions, without hurting bondholders and without spending a dime of taxpayer money, because the bond markets expect so little out of foreclosures. Typically, a homeowner fights off eviction for 18 months, making no mortgage or tax payments and no repairs. Abandoned homes are often stripped and vandalized. Foreclosure and reselling expenses are so high the subprime bond market trades now as if it expects only 25 percent back on a loan when there is a foreclosure. The taxpayers need not and should not be responsible for making up the difference between the payments due bondholders before a loan is modified, and those due after modification. Why? Because the bondholders and the banks, the ultimate beneficiaries of homeowner payments, will be better off if mortgages are modified correctly and foreclosures stopped. The government “owes” them nothing more than that.

“This Time They Are More Interested”

How the U.S. Will Save GM and Chrysler So what is the final rescue plan likely to look like? For starters, it will certainly require that workers accept a wage and benefit package that would bring labor costs down to the levels of Toyota and Honda plants in the United States. In February, the UAW took a big step in that direction by accepting a two-tiered wage structure that cut the pay of new hires roughly in half. But with the government insisting that labor costs come down immediately, unionized workers will have to accept immediate reductions in base pay, along with increased cost sharing for their health insurance. Even that's probably not enough, however. The generous defined-benefit pension plan that UAW workers have always gotten will need to be replaced by company contributions to individual 401(k) plans. And to reduce the tens of billions of dollars that both GM and Chrysler have committed to fund a new retiree health plan, the government is likely to insist that benefits be trimmed and that half of the money come in the form of stock in the new companies. Both companies will also have to lay off tens of thousands of additional employees as they eliminate brands, close more plants and outsource more non-core functions. Chrysler's product line will be reduced to Jeeps, minivans and trucks, along with a new line of passenger cars using Fiat-designed platforms and engines. GM, meanwhile, will be left with its Chevrolet, Cadillac and Buick nameplates, along with GMC trucks. Going through bankruptcy would allow both companies to bypass state laws and dramatically reduce the number of dealerships without having to take the time and bear the expense of buying back the franchises from their owners. Still unresolved, however, will be the tricky question of what to do about the hundreds of thousands of cars now on those dealers' lots. The worst outcome would be to force the dealers to dump them on an already depressed market at deep discounts. The toughest negotiations will be with the GM bondholders and Chrysler bankers, who have already been told by Rattner & Co. that nearly all of what they get will be in the form of stock in the new company, rather than cash (which they don't have) or new debt (which the Treasury is eager to minimize). The only question now is how much of the new companies they will own. Given the amount of money it is likely to put into the automakers, the government will be entitled to more than half of the stock of the reorganized companies. Then there is the union's health fund, which will probably be entitled to stakes of 20 to 25 percent, reflecting not only the reduced cash payments it will receive but also all the other concessions made by active and retired workers. At Chrysler, there's also the matter of Fiat's contribution of technology and management services, which it offered for a 20 percent share. That leaves only about 10 to 15 percent of each company. Bankers and bondholders will kick and scream and call it unfair, but in the end they'll take it because, like everyone else in this adventure, they'll conclude that it's better than the alternative. And that's the way GM and Chrysler will be saved.

• GM Plan to Give U.S. Ownership

Long-term Strategic Policy

Why Obama Is Leaving the Reagan Era Behind When It Comes to Economic Policy Reagan's economic legacy didn't end there, though. Economists generally agree that the sky-high tax rates of the 1970s needed to come down, and that Reagan's policies helped lay the foundation for the economic boom that followed, including the 18 million jobs created during his presidency. But because Reagan never made any real effort to cut spending in his second term and kept his tax cuts in place, his policies also had some decidedly negative consequences. "Reagan's fiscal policy was certainly a stimulus to the economy, and if that stimulus had been removed after the economy got back to full employment, then I would have found very little to criticize," says Benjamin Friedman, an economist at Harvard who was an outspoken critic of Reagan in the 1980s. "When the economy is at less than full employment, government deficits are a good idea. That's why they're a good idea now. What's a bad idea is keeping the government in significant deficit when the economy has recovered." Deep red. But keeping the government in deficit is exactly what Reagan did. Despite his years of lip service to balancing the budget, total discretionary spending had climbed almost 16 percent by the time he left office, dwarfing the Carter budgets he had once criticized. Revenues, limited by Reagan's tax cuts, were never able to keep pace. The result was a spiraling national debt that nearly tripled during his two terms, hitting $2.7 trillion.Some of Reagan's aides, including William Niskanen, the former chairman of Reagan's council of economic advisers, believe there is a simple explanation for these growing deficits: Reagan's tax cuts simply did not do what supply-side economists said they would do. Because the cuts didn't substantively increase tax revenues, they didn't allow Reagan to shrink the deficit. They also didn't decrease the size of government by choking off spending. "The 'starving the beast' hypothesis is understandably popular among politicians--that you can have tax cuts without a deficit increase--but it's just empirically wrong," says Niskanen, now chairman emeritus of the Cato Institute. "That idea has destroyed for several decades the traditional Republican commitment to fiscal responsibility."This, many historians believe, may be Reagan's real legacy. "The combination of military spending, tax cuts, and ultimately a failure to control most domestic spending led to a fiscal straitjacket by the end of the decade," says Zelizer.

Obama asks for ideas on curbing federal spending Think you can do better than your federal boss? President Barack Obama wants to know how. Obama on Saturday announced a plan for federal workers to propose ways to improve their agencies' and departments' budgets. The president said employees' ideas would be key as his Cabinet officials cut millions from the federal budget and trim the deficit. "After all, Americans across the country know that the best ideas often come from workers, not just management," Obama said in his weekly radio and Internet address. "That's why we'll establish a process through which every government worker can submit their ideas for how their agency can save money and perform better. We'll put the suggestions that work into practice." Obama's pitch comes at the end of a week focused on federal spending. On Friday, Democrats in Congress neared a deal on Obama's budget proposal and inched closer to passing a bill that would result in some $500 billion in deficits. To confront that perception, Obama earlier in the week ordered officials to identify $100 million in savings to achieve over time — a relative pittance against the broader plan, his aides later acknowledged.

Only 1 way out of big economic hole Check 'em off. President Obama's first 100 days: done. Now get ready for the hard part: the next 1,000 or so days. That's about how long the United States and the rest of the world have to turn the anemic economic growth that now seems likely into the kind of strong economic growth we need to pay down the huge pile of debt we've created in our efforts to stave off a global financial meltdown. Without growth higher than is now projected, the burdens of this crisis will linger for a generation in the form of lower living standards and higher interest rates, taxes and inflation. And, unfortunately, the world's economic experts know even less about creating stronger growth -- without creating a bubble -- than they do about fixing a global credit crunch and a deep recession. It's not that stopping the global financial crisis was easy. Or that the world banking system is fixed and the world economy is on the road to a turnaround. Despite considerable progress, it remains very much a work in progress. It's just that the next part is even harder. Most of the world's economies -- the United States', the United Kingdom's and Japan's, in particular -- have dug themselves very, very deep holes in an effort to end the economic and financial crises. Strong economic growth, for a decade or so, offers the only comfortable way out of the hole. Alternatives such as runaway inflation or Draconian cuts in living standards have major, what shall we say, disadvantages. But all the signs point to what amounts to only anemic economic growth at best. The world economy, according to projections by the International Monetary Fund, will contract 1.3% this year and grow just 1.9% in 2010. Unemployment in the major world economies won't peak until near the end of 2010, the organization projects. And the longer-term news for growth is just as depressing: The U.S. economy, for example, won't return to its full potential growth until 2015, according to the Congressional Budget Office. To the degree that economists agree on how to create faster but sustainable growth, they recommend:

• Eliminating or reducing inefficiencies and bottlenecks in the economy. In the U.S., those efforts would include things as different as improving the efficiency of the road-and-rail infrastructure and reducing the paperwork and record-keeping expenses in the health care system.

• Improving the quality and productivity of the work force. In the short run, the next three to five years, that means financing training programs to enable workers to gain new skills or improve those they already have. In the longer run, it means improving the education system so that more kids stay in school and actually learn the skills they need for the 21st-century economy.

• Making investment capital cheaper and more readily available to high-risk but potentially high-reward companies that are creating industries or revitalizing existing ones.

To its credit, the White House understands the need to create faster growth in any recovery.

History Review and Readings: Prior Posts

Economic Warning and Outlooks

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You, Economics and the Elections , The Coming Economic Crisis

Economic Crisis in a Nuts Shell: Jump Out of the Window ?

Understanding Economics: Introduction to Macroeconomics & Businss Cycles

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This is a Rescue, Not A Bailout: And It's Your Life

Marketing Elephant Pills: Struggling to Explain the Rescue

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