Some crisis links (11.12.2008)

The Washington Post reports that Barack Obama intends to close the Guantanamo Bay Detention (torture) center — the Orwellian Camp Justice! — after he takes office. Practical concerns remain to be solved, however, since the Obama administration will not renounce President Bush's global or local terror wars. Nor will it release prisoners en masse. In other words, the Obama administration will also accumulate, interrogate, prosecute and warehouse terror suspects; consequently, it will need to implement a program designed to accomplish these ends without also retaining in any way the crudest and illegal aspects of the Bush program.

While critiquing it from the right, William Buiter savages Barack Obama's Transition Economic Advisory Board (the link comes via Naked Capitalism). The problems in a nutshell, according to Buiter:

the members of Obama's Transition Economic Advisory Board are too old, too uninspiring and too much part of the problem to deliver the change America needs and to keep alive the hope that Obama may have inspired through his election. A wasted opportunity.

Regrettably, Buiter ruined whatever confidence his analysis inspired by praising shock-master Paul Volcker — "a truly great man with more character, intelligence and vision than the rest of the Board put together"!

Treasury Secretary Paulson, perhaps responding to the strong signal the electorate recently sent to the country's elite, indicated that his "…$700 billion government rescue program would not be used to purchase troubled assets as originally planned." Part of it will be used to support additional financial concerns and even the troubled mortgage market. Counterintuitive as it may seem, and it is odd because the country endures a debt-driven recession, Paulson wants the revised bailout program to reinvigorate consumer borrowing. How might lenders, thus equipped with this new liquidity, identify those individuals worth a loan in an uncertain labor market? How might the borrowers repay their debts during a recession or depression? Why would they borrow to purchase luxury goods or even necessary goods when they may be unable to repay their loans?

Today, New York Governor David Patterson proposed to cut his state's budgets by at least $5.2B over the next 16 months, according to the New York Times (see also this and this). The cuts are likely to fall mostly on education and Medicaid, two areas which are most in need of funding and two areas in which those harmed the most by these cuts will lack the means needed to retaliate. The Governor also expects labor to make concessions.

Do cuts like these matter? Is state and local spending that important? Yes, it is. Their "…share is gigantic," the New York Times warned last June.

At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far, not even in California, despite a significant decline in tax revenue.

Shrinking state and local government spending programs will thus depress the national economy, suppressing growth and promoting unemployment. The multiplier becomes an issue as a stagnating economy generates the conditions for future stagnation. Patterson's announcement may be identified as one of the early efforts in what will soon become a budget cutting frenzy and another indicator of the crisis as it deepens and expands.

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