How to Do a Stimulus Package Right

Today the Wall Street Journal has an op-ed explaining how the U.S. job market is worse than it looks. It talks about such details as the work week, now just 33 hours on average and shrinking month by month. Around October, the headline may read “The Part-Time Economy” after we wake up to find that we have more part-time workers than full-time workers.

It’s all basically on point, but then it calls for a “second-act stimulus” — a stimulus bill that doesn’t repeat the mistakes of the stimulus bill Washington gave us at the beginning of the year. Realistically, though, an attempt to repeat the stimulus bill would lead to a repeat of the same mistakes. A well-crafted stimulus bill would do some good for the economy, but to accomplish that, Washington would have to give up most of its preconceptions. Here are some rules I would suggest for a second stimulus bill:

1. Stop thinking stimulus. In a average recession, economic stimulus can get the economy going again. In the current depression-like recession, stimulus has no such effect. It maybe shouldn’t even be called stimulus this year, because the whole objective is just to get some productive work out of people who would otherwise go unemployed.
2. Think small. Well, okay, not “small” in the sense of “eating a small lunch,” but not “risking national bankruptcy” either. An economic stimulus package with a price tag so high that it produces reactions like shock and awe does not exactly generate confidence in the economy. The first stimulus bill was said to cost $787 billion, which is kind of like learning that the doctors in the hospital have injected your grandpa with 5 kilograms of stimulants. When you see that, you don’t say, “That’ll bring him back for sure!” It’s more like, “Good lord! Will he survive that?” To minimize the shock and awe effect, no single stimulus bill should go much over $100 billion.
3. Make it labor-intensive. To qualify for a stimulus package, at least 75 percent of a project’s spending should end up in payroll to pay the wages of workers who otherwise might have been unemployed. You don’t get the economic benefit of the spending if you don’t move people from unemployment to employment.
4. Speed up spending, but don’t buy anything extra. The purpose of a stimulus package is not to expand the role of government, but to spend on things that people can agree are governmental responsibilities. The biggest category for this is going to be transportation. We all know where the bridges are, and approximately when they are going to fall down. If we don’t replace them before they fall down, we will still have to replace them after they fall down, and then, the costs are likely to be greater. Replacing at-risk bridges now instead of next year is not buying anything extra. It is just meeting a governmental responsibility sooner.
5. Be strict about returns on investments. Every legislator says all their spending proposals are investments. For stimulus purposes, a good investment is one that improves the government’s bottom line, usually by reducing future expenses. The prime example of this is improving the energy efficiency of buildings. Seal cracks and add insulation to a building, and future energy bill will be lower, and some such projects offer impressive returns on investment. But to qualify, it has to be a government-owned building — a courthouse, school, barracks, etc.
6. Make the stimulus pay for itself. About one fourth of the stimulus spending comes right back to the government in the form of income taxes and lower unemployment compensation. Then, use the energy cost savings and reductions in future transportation infrastructure spending (because you are doing some of that spending in advance) to pay off the stimulus debt.

With this kind of approach we would see a stimulus bill that would have little resemblance to the so-called stimulus we saw at the beginning of the year. It would create more jobs, and do so with no net cost to government. It still would not make the recession end sooner, but that does not mean it would not have an effect. The impact would be huge for the people who spent their time working instead of worrying, and all the work they would accomplish would be real work with real consequences.

Look at it this way: what kind of country lets its bridges collapse while 25 million of its workers are sitting at home doing nothing? Quite obviously, the only reason the United States finds itself in this situation is fear. But really, when we can put people to work, doing work that we know has to be done soon, there is nothing to fear about that. Can Washington put together a second stimulus bill that doesn’t repeat the mistakes of the first? Politically speaking, probably not. But if it wants to try, these are the rules I believe it should follow.

Toward More Conscious Drug Use

Is there a safe pain reliever?

Aspirin puts your stomach at risk. Acetaminophen can destroy your liver. Anything that alters the pain response more directly is potentially addictive. There is no completely safe drug you can take to relieve pain. Any pain-relieving drug is a calculated risk.

It’s something people are talking about after a drug safety panel concluded that millions of people are putting themselves at risk by taking too much acetaminophen — and this is occurring mainly because people don’t realize how much acetaminophen is in the drugs they take. The biggest damage comes from Percocet and Vicodin, prescription drugs marketed with a mystique meant to obscure the fact that acetaminophen is their main ingredient. To add to the confusion, discussions of these drugs often do not specifically mention the acetaminophen, referring to the exotic-sounding “paracetamol” or the very cryptic “APAP” instead. If you are an organic chemist, you might recognize these as synonyms for acetaminophen, but the rest of us may not immediately make that connection. It is an important connection to make, because anyone taking Percocet or Vicodin on the same day as an acetaminophen-based over-the-counter cold remedy (and these are some of the most popular drugs on the market) is probably getting too much acetaminophen. About one person per day dies in the United States from acetaminophen, and it is this combination of prescription and over-the-counter drugs that seems to be at fault in most of those cases.

Part of the solution is to stop using all drugs that, like Percocet and Vicodin, combine acetaminophen with narcotics. A patient can use these drug combinations more consciously by taking the two drugs in separate tablets.

Physically separating the two drugs does nothing to affect the way they function, but by leading to more conscious drug use, it permits people to be aware of the risks they are taking and make good decisions about those risks. Drug manufacturers have mixed feelings about this: they want to avoid having patients die as the immediate result of bad drug decisions, but they lose revenue if patients and physicians avoid risky drugs in situations where there is little to be gained by using them.

Johnson & Johnson, the largest U.S. acetaminophen manufacturer, is trying to walk a fine line with its advertising campaign that seeks to reassure drug users that its acetaminophen-based drugs, the various forms of Tylenol in particular, are safe if used as directed. This, of course, is not entirely true; not everyone who is hospitalized for acetaminophen-related liver damage took more than the recommended doses. But that aside, the conflicted message from J&J does not really help their case. They seem to be trying to say, “Go ahead and take Tylenol, it’s safe,” and at the same time, “If you get sick from taking Tylenol, don’t blame us.”

It’s a mixed message that has a jarring dissonance with the popular assumptions of the commercial drug culture. For half a century, people in the United States have, for the most part, taken acetaminophen whenever they felt like it, within the limits of the frequency schedule suggested on the drug’s packaging. The idea was that the drug was basically safe, “safer than aspirin.” Aspirin, of course, has dangers of its own, and now we are learning that acetaminophen is not necessarily safer than aspirin. Which pill is better depends on your individual situation, and is something you should stop and think about, and perhaps even seek medical advice. Recent polls are suggesting that the popular view of acetaminophen has changed abruptly in the week since the J&J advertising campaign began. People no longer think of Tylenol as “basically safe.”

Likely, this episode is also changing perceptions of drugs in general. If the drug that for years was marketed as the safest drug on the market is killing people every day, then every drug you take must be a calculated risk — as, of course, it is. As people pay more attention to the risks associated with drugs, they will use them better — but this also means they will use them less.

Can the U.S. Military Ban Smoking?

The U.S. military has been a walking, talking cigarette advertisement going back to World War II, when the army started distributing free cigarettes to the troops. Ever since, smoking rates in the military have been much higher than in the general population. You could almost say the tobacco companies owned the military.

But now, after a new report that tallies some of the costs of smoking to the military, the Pentagon says it has no choice but to eliminate smoking from its ranks. According to the report, it may take 20 years to do. The report says 30 percent of U.S. military personnel are smokers, probably intentionally lowballing this number to make the prospect of phasing out smoking seem more achievable.

Besides the obvious medical costs that result from smoking, the limited physical capacity of smokers is of special concern to the military. Smokers have less muscular strength and worse night vision, and they take more sick days and heal slower from injuries than non-smokers.

I think the military can eliminate smoking, maybe not in 20 years but surely in 25 or 30. If they want an example to follow, they might look at what has happened in radio over the last 30 years.

Walking into a U.S. radio station in 1979 was like walking into an ashtray. There was smoke everywhere and, by the end of the day, literally thousands of cigarettes filling ashtrays on almost every desk. It never made much sense, as the most important people in radio, the on-air personalities, news reporters, and sales representatives, all depended on the quality of their voices to do their work. For that matter, the tobacco smoke got into the grooves of the phonograph records that radio stations played at that time, adding a sort of nicotine static to every song you heard on the radio.

But all that changed in the 1980s and 1990s. Radio managers and executives started to think of radio stations as workplaces and cigarettes as a dangerous distraction from work. Gradually they banned cigarettes from studios and offices, and then from the entire facility. A few radio personalities who were caught smoking inside the building were suspended or fired. By now, the reputation of radio has been cleaned up enough that most people who smoke wouldn’t even think of trying to get a job in radio.

The military should be able to follow a similar path. There are steps it can take immediately to make cigarettes harder to get and reduce the smoking zones in military facilities. Over time, it can change the place that cigarettes occupy in military culture. And the ultimate result will be a healthier military with the kind of cost savings that are being found across society as people everywhere phase out the cigarette habit.

GM Tries to Make It As a Startup

The new General Motors Company now owns all the old General Motors businesses. It has billions of dollars in startup money. It employs thousands of the top designers and engineers in the automobile industry. And it has to get up to speed quickly before its money runs out.

That’s why the new company’s first big promotional push — for the 2010 Camaro — has drawn such a massive groan from observers. It’s not that the throwback “muscle car” isn’t a good move for GM. It’s a design with a history, and GM dealers are taking thousands of advance orders from drivers jumping at the chance to replace their aging Camaros from years past. It will be good for dealers’ cash flow. But once you get past the initial rush, Camaro is a niche car that will never appeal to the broader public. With a price typically around $30,000 and fuel efficiency between 16 and 29 mpg, for a car only big enough to carry two average-sized adults, it is pretty far removed from the car that people buy because they have to. In a time when most car buyers are buying cars only if they have to, and this will get worse before it gets better, GM has to start staking out a position with “the car you need” if is to have any hope of generating the volume of sales it needs to break even and stay in business.

Fritz Henderson, the president at the new General Motors Company, assures us this is something they think about every day, but thinking is not enough. The company probably has less than two years to actually introduce those cars, and sell millions of them, to keep its factories open. Most auto startups have just one factory to keep busy. GM has set the stakes much higher than that. It’s a lot like the game of double or nothing that killed off its predecessor.

This time, though, it is not GM’s fault. Politics is to blame. Senators and representatives want to keep the factories open in their states. Heck, they want to keep all the dealers open. It’s the same way they fight to keep military bases, not because the bases matter to the military, but because they matter to the cities they represent. GM, having painted itself into a corner, had to go along with these political compromises to get the political support it needed to fund its new post-bankruptcy startup.

My fear, though, is that in the process of helping to set up the new GM, the new owners have set the bar too high for a startup company. Usually, a new company is doing spectacularly well if it brings in $1 billion in revenue in its first year, but GM may need 100 times that just to keep operating. No new company has ever recorded anywhere near $100 billion in revenue even in the best of times, and 2010, when the new GM has to deliver, is likely to be one of the worst economic years in living memory. And so, unless the new GM can pull off a miracle, it is not this recently completed bankruptcy, but the next one, that will determine GM’s future.

This Week in Bank Failures

Printing money doesn’t help if people won’t accept the money you print. That’s the new problem in my ancestral homeland of California. Banks have been accepting the state’s promissory notes, essentially a form of money backed by nothing but political will, as a convenience to customers, but only until today. Really, banks have no business accepting promissory notes as money, and the strategy could come back to bite them if they can’t cash out the notes before their next balance sheet September 30. On a bank’s books, at this point, California promissory notes probably have to be recorded as illiquid bonds, with implications for the bank’s financial condition that are quite different from those of cash.

California is issuing promissory notes, or IOUs, to employees, retirees, college students, suppliers, contractors, and others it should be paying money to because its financial squeeze has made it impossible for legislators to come up with a budget for the fiscal year. The deadline was June 30, and at this point, there is still no resolution in sight. California, by some measures the richest state in the United States, has done this before, but that was so long ago that no one is quite sure what rules ought to apply. The state is not even sure it is legally permitted to accept its own notes as tax payments. The Securities and Exchange Commission (SEC) is trying to help out by issuing a ruling last night that classifies the California promissory notes as municipal debt securities. This could lead to an orderly market in which Californians can sell the promissory notes to investors. Banks could participate in order to help their customers cash out the notes at market rates. Just don’t expect banks to be the buyers in that market.

Where I live in Pennsylvania, there is a buzz about another June 30 deadline. Harleysville National Bank, one of the oldest and largest banks in the state, is undercapitalized and missed the OCC deadline to shore up its capital. The bank says it is working on this, is making good progress, and does not expect any immediate regulatory action — but that is what a bank would say. In an unscientific survey of people I know who are the bank’s customers, there is more amazement at the bank’s financial decline (reflected by a stock price down 85 percent since its peak in 2003) than concern about their own deposits. It says a lot about how well people understand and trust the deposit insurance system. But one longtime Harleysville customer I talked to turned out to be a former customer, after getting “a better offer from another bank” last month.

Remember AIG? This secretive company was the key to the world’s financial system barely a year ago, but now might worry about being forgotten as Wall Street has moved on. AIG has made headlines again this month. A 1:20 reverse stock split on Jul 1, as the stock was falling below $1 per share, might as well have been 1:100, as the stock has fallen by half just since then. According to an analyst this week, recent prices mean Wall Street gives AIG a 70 percent chance of bankruptcy. Meanwhile, AIG is asking the U.S. Treasury to review its new round of bonuses. The last bonuses it paid sparked one of the defining political controversies of the year.

In the United Kingdom, authorities promised a more intrusive style of bank supervision. For the first time, the Financial Services Authority will have some say in the compensation of bank executives and may curtail some of the riskiest lending practices at banks.

Does it make sense to get private equity involved in buying out failed banks? The FDIC is proposing rules that won’t make it easy for private equity players to bid on failed banks, and for good reason. The culture of private equity involves pie in the sky, secret owners, huge debts, and a high failure rate, and none of that will fly in the banking business. Private investors wouldn’t mind buying up a portfolio of failed banks and having four out of five fail again within a couple of years, but if they took that approach, they would be abusing the deposit insurance system. The FDIC’s rules are meant to warn private equity investors that they have to play by the rules of the banking business, and of course, most private equity money won’t go along with that.

Other banking regulators have said that the FDIC’s proposed rules on private equity are too restrictive, and they may have a point. Nevertheless, it is hard to bridge the gap between the “try anything” attitude of Wall Street and the insistence on integrity and stability that makes the banking system tick. It simply isn’t possible for the FDIC to adopt the kind of rules that Wall Street’s billionaire-investor class will be happy with. Besides, it would be a systemic risk if the bank failure process created a loophole by which unqualified people could become owners and managers of banks. As much as the FDIC needs private investors in the bank failure process, all that goes for naught if the same bank fails again.

On Wall Street, the root causes of the financial meltdown are still going on. According to reports, Morgan Stanley is about to unveil a new scheme to issue investment-grade bonds based on junk CDOs. This kind of scam, in which derivatives are promoted as being safer than their underlying assets, should have been stopped last year when it caused the financial system to seize up, but no such statutory reforms have even been considered so far. Worse, the main reason Wall Street is so intent on creating these supposedly investment-grade derivatives is to sell them to banks. These phantom securities allow banks to pad their balance sheets, making the banks look like they are more solvent than they are until just a short time before they collapse. The fact that Wall Street is still adding fuel to the fire suggests that we may have years to go before the financial sector begins to rebuild.

On Monday the NCUA liquidated a very small credit union in California. Watts United Credit Union, in Los Angeles, was put into liquidation by California after it became insolvent. According to the NCUA, the credit union at the end had less than $1 million in deposits. The NCUA is sending checks to the credit union’s depositors.

Tonight bank failure hit Wyoming for the first time in 18 years. The bank that was closed is Bank of Wyoming. The bank was not as big as the name makes it sound. Based in Thermopolis, a relatively isolated town of 3,000 in the mountains of central Wyoming, it had one office and $67 million in deposits, which will be taken over by Central Bank & Trust, also based in the central part of the state. Central Bank & Trust is also buying most of the assets of the failed bank. The FDIC estimates its costs at $27 million.