Inside PBS Blog

Since last week NewsHour's business correspondent Paul Solman has had a lot to respond to. The biggest news may have been the passage of an economic stimulus bill in both the House of Representatives and the Senate.

Solman also found time to answer some of your questions in our latest edition of Five Good Questions. You can read his answers below and let us know what you think.

If you don't see your question answered here, or you have more questions, you can ask at Solman's Business Desk.

1. What is your response to Jon Stewart's idea of the govt. sending bail out money to consumers to use for paying off credit cards and mortgages? Mimi

The idea of a debit or gift card was, it seems, seriously considered by Obama administration, though perhaps not inspired by "The Daily Show." One per household. It was apparently considered too difficult to implement. The basic concept was to force folks to spend and it wasn't clear they wouldn't find ways to save the money instead by, for example, paying off credit cards and mortgages. And what would be wrong with that you might ask? Well, the problem we're in right now is that folks are saving instead of spending. In the short run, that deprives businesses of customers, forcing them to lay off workers, which further shrinks the total pie, leading in the end to - (drumroll, please) - LOWER SAVINGS. This is known as "the paradox of thrift." And if everyone saved every penny they had and no one spent a cent, well, you'd have no economy at all.

Presumably this could never happen. In the longer run, then, things should work out. People have to put those savings SOMEWHERE and so long as it isn't literally tucked under the mattress or buried in the backyard, the recipient of the savings would lend it out to some risk-lovin,' lip-smackin' entrepreneur, who would now have the funds to hire new folks and build the next generation of industry. Moreover, the greater supply of savings would drive down the PRICE of savings, aka the interest rate, and so the entrepreneur would be able to borrow at a bargain rate. The circle would start moving onward and upward, "virtuous" once again.

That's in the long run, though. And as the Great Depression economist now so much in the news, John Maynard Keynes, wrote nearly a century ago: "In the long run, we're all dead."

The basic problem right here and now in the SHORT run is that someone has to spend and you can't count on the usual suspects - the American Consumer, American Business, or Foreign Consumers and Business - to do it. In steps the government, then, to try to make up the spending shortfall.

That's why the stimulus is driven by spending measures. The fear would be that if money just went to consumers, they do just as you suggest with it - pay down debt - and not spend, thus doing nothing to reverse the vicious circle we're in.

2. There seems to be two dominant strategies to getting us out of this recession. One is heavy government spending that will improve GDP since business investment and exports seem to be waning. The other is to reduce taxes on businesses so that business costs will decrease on the tax liability side which should increase investment to create more jobs. It seems to me that the latter option is the wrong solution since business taxes are quite low going into this recession and that cutting them more would do little to spur investment considering consumer confidence is the big issue right now and business tax cuts will only help profit margins instead of create additional job growth. Granted the economic issue is much more complex than I have stated it here but what are your thoughts on these two approaches? Christopher

Well, the economic issue can be MADE more complex than you have stated it, but you cut to the core. The key question: Will spending get us back up and running (or at least jogging) quicker than tax cuts? A second question: which will confer the most enduring benefits?

Right now, the split on both questions is along the traditional political fault line. Republicans like tax cuts. Democrats like spending. They can each martial evidence to support their points of view. But the fundamental impulses are ideological. Republican ideology tilts toward markets, individual decision-making and "efficiency." Democrats tilt toward policy, collective decision-making and "fairness." Where one aligns oneself tends to be more an act of faith than of data.

3. How does our economy being more globally interconnected today alter the effectiveness of strategies we used in the 1930s? Babs

A very good question, which reveals what we DO know and what we DON'T.

DO know: we're globally interconnected as never before.

DON'T know: what that implies for recovery, or further worsening.

Now that I've started with one dichotomy, let me try another: the bright side of connectedness v. the dark side.

Bright side: We can coordinate global strategy. The Fed has been providing billions of dollars to foreign central banks, for example, so their currencies won't collapse. The World Trade Organization can try to parry protectionist thrusts that would further cripple the global economy. The IMF can bail out marginal economies on the cusp of utter collapse.

Dark side: Any economy is a venture in confidence - in the belief that the wealth you entrust to others is being put wisely to work. The larger that economy, the more complex. The larger that economy, the more opaque. An interconnected world is a larger and perhaps less diversified world. As I never tire of pointing out, credit comes from the Latin "credere": to believe. When the whole world's drinking the Kool-aid, things go swimmingly (though, of course, there are always plenty who sink). When the world suddenly thinks Jim Jones stirred the drink, we say "no thanks" and the downward eddy begins. What, then, is to stop it from becoming a worldwide whirlpool?

You might consult "bright side" above at this point and say: coordinated government intervention. But as my dear friend, the esteemed PBS executive producer Zvi Dor-Ner pointed out when I shared this answer with him, in a larger world, you need larger interventions. And they may not be feasible at the level decisions are made: nationally.

4. How do we rebuild the middle class? Tony

Oh, nice. A 9-syllable question that could legitimately take nine hours to answer. Actually, you could have made it a line of iambic pentameter if you'd added a "so" at the head, as in "So HOW do WE rebuild the MIDdle CLASS?" In that spirit:

I do not have a short A to your Q.
We must invest but no one knows for sure
How much to pay for what or where or when.
The only certain bet seems on our schools.
What shall we have to sell if not our skills,
Our knowledge, know-how, pluck, smarts, savvy, guile?
Where will we hone them if not in a class?
A class uncrowded, focused, well-equipped?

A class whose teachers are the brightest, best?
In education, then, we must invest.

5. I heard over the weekend, in the news programs, that banks were not lending because of some regulatory mechanism that makes them lose money every time they do it. Can you tell me what is that mechanism and why is in place? Frank

I don't know what you heard, Frank, but perhaps you're referring to regulations known as "mark-to-market." And even if you aren't, they're important enough to explain here.

The inky cloud hanging over the banking system is teeming with "troubled" or "toxic" assets. These, as I explained on the NewsHour the other day are nothing more nor less than bad loans, loans SO bad, nobody will take them off the banks' hands at almost any price. The loans of Czarist Russia, say, after Lenin took over. Maybe worth a few kopeks on the ruble. Maybe not.
A bank's assets ARE its loans. Loans are what they make money from. If the loans are no longer worth as much as the bank invested in making them, the shortfall will eat into the bank's OWN money, its capital. If the loans are worth less than that, so the capital can't even cover the loss, then the bank is busted, kaput, insolvent, bankrupt. 

So much depends on what the loans are worth.

"What they're worth?" harrumphs the hardliner. "They're worth what they'll bring on the open market!" Like anything else, they're worth exactly as much as people are willing to pay for them. So their value should be MARKED down TO the MARKET price. "Marked to market."

"But that's crazy!" say the banks. "Prices are unrealistically low at the moment. This is a once-in-a-lifetime fire sale. To mark to market would unfairly put us under."

Okay, that's the story with the old loans. But your question, Frank, is about new ones - and regulation somehow stymieing that. (The more I think about it, the more I doubt this is what you meant, but in for a kopek, in for a ruble. I'm going to finish this explanation, your likely meaning notwithstanding.)

"So now you want me to make new loans," says the bank, somewhat plaintively. "But suppose THEY go down in value - through no fault of my own!" (The bank means that the economy might tank further and even the best companies will be hard-pressed to pay back their debts.) "In that case," explains the bank, "I'll lose money on new loans, no matter how duly diligent I've been in making them, because of circumstances beyond my control, AND a regulatory mechanism that forces me to declare those losses way too soon!"

But like I say, maybe you meant something else. In which case, sorry.

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