Prof. Courant on the Stimulus Package

Paul N. Courant, Economist


It was a pleasant surprise to find my erstwhile thesis adviser, Professor Paul Courant, blogging on matters related to economics, libraries and electronic publishing among other things (see Au Courant).

HIs post on the Stimulus Package, a masterpiece of clarity, begins:

Suppose that there were a major fire, and that in order to put out the fire you would need, say, a trillion gallons of water. Can you imagine a city council that would say, “oh no, we can only afford 734 billion gallons of water, so let’s leave out about a quarter of the neighborhoods. It’s the right thing to do because we won’t go into debt, and future residents will be better off for having had a quarter of the city burn down.”?

Or, for a better analogy, suppose that your ship is sinking, through a hole that is 10 feet in diameter. How about saving on repair costs but inserting a plug that covers only 75 percent of the leak? Sound like a good plan? Not so much.

The reason that we need fiscal stiumus is that monetary policy is impotent to provide sufficient stimulus (not generally true, but true now, and essentially no one disagrees with this view).

A collection of posts about the US Economy is maintained here.

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Innovation Thrust Upon Us

Maestro David Robertson on kazoo - Photos by Konrad Fiedler for The New York Times

Sometimes innovation, like greatness, is thrust upon us. As last Friday's rains washed over LaGuardia, the St. Louis Symphony Orchestra kept time through a series of ground delays at Detroit Metro. Months of preparation had gone into the annual trip to Carnegie Hall and hours of flight delays were threatening that evening's off-beat program, which was to pair Mozart's "A Musical Joke" with H K Gruber's "Frankenstein!!", with Gruber himself singing the lead. In Chicago Gruber was having travel problems of his own, word of which had already spread to staffs in New York, St. Louis, and Detroit.

By the time the SLSO's plane hit the tarmac in New York at 6:08 p.m., rehearsal had already been canceled, Gruber had been written out of the program and members of the orchestra had been granted dispensation to appear on stage in street clothes. Then, in the kind of brash and brilliant move we have come to expect from him, Maestro Robertson handed the baton to his assistant, Ward Stare, and took on Gruber's solo role himself. It is a showman's role, not a singer's, and Robertson (who had voiced a part in The Music Man earlier this season) was more than up to the task. As reported by Anthony Tommasini in The New York Times:

You do not need a proper singing voice to perform the part, but you do have to be uninhibited. Mr. Robertson's performance was a tour de force in uninhibition.

When necessity called, Robertson, Stare and the entire orchestra and staff rose to the occasion. Though physically separated, the team communicated throughout the day, developing a strategy (Robertson, already in New York, began rehearsing that afternoon), and adjusting the plan continuously. Orchestral musicians, masters of going with the flow, had shrugged off a day of travel delays, tight quarters, and nervous updates by the time the baton struck the first note. And the audience shared an experience that no recording could capture.

How do you get to Carnegie Hall? Practice.

See the account of events by Eddie Silva on the excellent SLSO blog here. For a previous article on innovation and the orchestra (same time, last year), see The Surprise of the New.

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General Motors Surrenders

Steven Rattner (left) and Ron Bloom (right) - Time Magazine

There is an element of politics whenever a chief executive departs, just as there must be in the timing of Rick Wagoner's departure from General Motors. In this case the White House has made quite clear its rationale in strict legal language. This week findings of the Presidential Task Force on the Auto Industry were posted on the White House website, including "Determination of Viability Summary: General Motors Corporation," which states:

The Loan and Security Agreement of December 31, 2008 between the General Motors Corporation and the United States Department of the Treasury ("LSA") laid out conditions that needed to be met by March 31, including the approval of Labor Modifications, VEBA [pension plan] Modifications and the commencement of a Bond Exchange.

As of the date of this memo, the above steps have not been completed, nor are they expected to be completed by March 31. As a result, General Motors has not satisfied the terms of its loan agreement.

The report, which takes exception with a number of key assumptions in the plan put forth by General Motors, goes on to state:

...even under the the Company's optimistic assumptions, the Company continues to experience negative cash flow (before financing but after legacy obligations) through the projection period, failing a fundamental test of viability.

In short, the Task Force put GM's best plan through a "stress test" and it failed.

Those who fear the Administration is being heavy-handed are reminded that it was General Motors that asked for the loan, then asked for another, then failed to produce a viable business plan. Today it became clear that the Administration would enforce market discipline by putting General Motors through the same kind of "financial workout" that other lenders routinely enforce when companies fail to meet their obligations to bondholders.

The Task Force is fully loaded with economists. Headed by Treasury Secretary Tim Geithner and Larry Summers, Director of the National Economic Council, the Task Force includes another seven members of the Cabinet and the Director of the White House Office of Energy and Climate Change, Carol Browner. The staff are directed by Steve Rattner, a corporate workout specialist, and Ron Bloom, whose experience includes advising the United Steelworkers union. Other Official Designees include economists Diana Farrell [no relation to the author], Gene Sperling, Austan Goolsbee, and Jared Bernstein, Chief Economist to Vice President Biden. Goolsbee's agency, headed by former Fed Chairman Paul Volcker, is specifically charged with (among other things) "reducing corporate welfare," according to remarks made today by Office of Management and Budget Director Orszag.

This new toughness on corporate bailouts occurs just as President Obama heads off to London for the G20 (Group of Twenty) Summit. There the Administration faces one more important sales job--that of convincing leaders of the other major world economies to fully and harmoniously participate in resetting the global financial system. A draft communique prepared for issue on April 2, pledges participants to supporting an "open world economy based on market principles, effective regulation, and strong global institutions."

One could fit nearly every version of capitalism within the confines of those broad, competing goals. For General Motors and its stockholders, lenders, suppliers, employees and pensioners, however, the options have decidedly narrowed.

See also Responses from Readers, a summary of reader comments when we asked in November whether the auto industry should be bailed out.

A collection of posts about the US Economy is maintained here.

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Jon Stewart: All Kidding Aside

Jon Stewart (right) and Jim Cramer, The Daily Show, March 12, 2009

Fight of the Century. Comedy Central vs. CNBC. In one corner, Jon Stewart, court jester extraordinaire and master of "fake news;" in the other, Jim Cramer of the adolescent voice, purveyor of fake investment advice.

Stewart takes off his comedy gloves and delivers a series of left jabs as Cramer retreats to the ropes, murmuring apologies. Stewart pulls him to his feet and delivers a hay-maker, forcing Cramer to view a clip of himself explaining to an interviewer some of the tricks he had used to deceive investors back in his trading days. Bewildered, Cramer staggers from the set. Stewart never cracks a smile. The audience that had come for comedy witnessed bloodsport instead.

It is telling that it was a comedian who focused populist ire against the financial Masters of the Universe and their apologists at CNBC. By the time word of AIG bonuses had leaked out two days later, public rage was in full boil. Congress, which had voted for restrictions on executive pay before they voted against them, scrambled for the low ground. And President Obama, who had spent two months trying to divert public attention from the injustice of the Wall Street bailouts toward the necessity of solving the financial crisis, finally had to begin to address the ways and means of punishing the whinging, unrepentant culprits.

One may well ask what has happened to the Fourth Estate when the most trenchant journalism is left for television comedians to deliver. As mass media has become big business has it lost its taste for controversy?

In his book The Big Con, Jonathan Chait devotes a chapter to "Media: The Dog That Didn't Watch." He laments that mainstream journalists now seem compelled to present at least two sides of every argument, no matter how patently ridiculous the argument may be on one side or the other. Ironically, his point is made by Jim Lehrer, whose Newshour on PBS routinely offers up some of the best reporting on television. When asked how he treats official statements that are "blatantly untrue," Lehrer responded in the relativistic style that has become the hallmark of mainstream media:

There's always a germ of truth in just about anything...My part of journalism is to present what various people say about it the best we can find out [by] reporting and let others--meaning commentators, readers, viewers, bloggers or whatever...I'm not in the judgment part of journalism. I'm in the reporting part of journalism."

However harsh his delivery, Jon Stewart's message to CNBC and to journalists in general is that reporting goes beyond stenography; that the editorial page is not the exclusive realm of editorial judgment. Professional journalists and media that purport to be something more than publicists for special interests are at least expected to filter the nonsense before they file their reports. By transcending his comedic format to deliver a stinging rebuke, Stewart made the issue personal and identified himself with his outraged viewers. He reminded us that journalism has consequences. Failure to speak truth to power has its cost too.

See The Big Con: the True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics, by Jonathon Chait (Houghton Mifflin, New York, 2007).

For our previous posts on the financial crisis, see US Economy and the Bailout.

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Obama at the Augean Stables

Maureen Dowd, The New York Times


We missed Maureen Dowd's columns throughout her December hiatus. She returned this week with fresh themes for a new administration: the novelty of "hot nerds" in the Cabinet and the looming internal conflict between fiscal stimulus and deficit control. Most intriguingly, she compares Obama's challenge of managing the Clintons to the Fifth Labor of Hercules, cleaning the Augean Stables.

Dowd writes as sparingly as a poet, asking the reader to complete her inferences. Wikipedia tells us this about the Augean stables:

The fifth of the Twelve Labors set to Hercules was to clean the Augean stables in a single day. The reasoning behind this being set as a labor was twofold: firstly, all the previous labors exalted Hercules in the eyes of the people and this one would surely degrade him; secondly, as the livestock were a divine gift to Augeas they were immune from disease and thus the amount of dirt and filth amassed in the uncleaned stables made the task surely impossible. However, Hercules succeeded by rerouting the rivers Alpheus and Peneus to wash out the filth.

One is left to wonder how far she meant to carry the analogy.

Dowd, who wrote an entire column in mock Latin this past October, makes frequent references to mythology and classical literature. In her book, Bushworld: Enter at Your Own Risk, she cast George W. Bush in the role of Oedipus, in psychological battle with his father as he unwittingly brought down the House of Thebes. This is at least her second reference to Obama and the Twelve Labors, the other occurring in her July 12, 2008 column about Obama's European trip, Ich Bin Ein Jetsetter. In that column she refers to Ms. Clinton as "the Amazon Warrior Queen Hillary." When Dowd says "I have a girlfriend in New York who puts her boyfriends through Feats of Strength," we suspect she is putting Mr. Obama through the same paces, just as she did with earlier references to him as Obambi, a fawn cowering under the withering gaze of Mrs. Clinton during the debates.

Like the devoted followers of the famous Sunday crossword puzzles of The Times, one is encouraged to have reference materials handy when reading Ms. Dowd. The columns are worthy of the effort.

Myths, neither histories nor fates, are sung anew by each generation.

See Bushworld: Enter at Your Own Risk, by Maureen Dowd (Penguin Group, New York, 2004).

For a translation of Dowd's witty but intractable column in Latin, Are We Romans, Tu Betchus, see the blog Ablative Absolute. The comments that follow the post offer further refinements. The translation reveals just how biting Ms. Dowd's satire can be when cloaked by a dead tongue.

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McDonald's: Relevant Retailer for a Down Economy

McDonald's restaurant, circa 1960


The lead business story in this Sunday's New York Times on the continuing success of McDonald's Corporation sounds a number of themes that readers of this column will find familiar.

The chain has broadened its merchandising appeal beyond kids and young parents just as management's renewed focus on value, quality, service, and cleanliness has taken hold.

Minor adjustments in the menu in the form of fresher food, better coffee and more savory seasonings (including a return to the Big Mac sauce in use when CEO Jim Skinner and I worked on McDonald's crews in 1971) appeal to the tastes of an aging population. Reformatted restaurants feature more comfortable seating, faster drive-thru operations, and flat-screen TV monitors.

Under Skinner this is a company that has rediscovered the secret sauce.

See our newsletter on Restaurant Lifecycle Management here.

See also McDonald's Strategy: Meat, Potatoes and Coffee and Brand, Menu and Store Design and Chain Restaurant Development or visit our Google Group page featuring articles about McDonald's Corporation.

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