For some time, The Wonk Room has been making the case that income inequality is a real problem that is caused by stagnating wages and declining union numbers. This week, the International Labor Office (ILO) released its Global Wage Report for 2008/9, which shows that wages in the United States and around the world are declining, as are rates of unionization and collective bargaining. This is leading to more widespread income inequality, and all of its associated adverse effects.

The ILO found that between 1995 and 2007, real wage growth in the United States was essentially 0 percent, and in 2009 wages will “decline by 0.5 percent in industrial countries and grow by no more than 1.1 per cent globally.” The Center for American Progress Action Fund has found that weekly wages were actually 0.3 percent lower in June 2008 than they were in March 2001.

This stagnation — which occurred at the same time that CEO pay steadily increased — has led to severe income inequality. The ILO found that the U.S. is one of the countries in which “the gap between top and bottom wages has increased most rapidly.” Indeed, the Organization for Economic Cooperation and Development (OECD) reported recently that “in the United States, the richest 10 percent earn an average of US$93,000 — the highest level in the OECD. The poorest 10 percent earn an average of US$5,800 — about 20 percent lower than the OECD average.”

As the ILO pointed out, income inequity has serious economic consequences:

There are also many economic costs associated with higher inequality, such as higher crime rates, higher expenditures on private and public security, worse public health outcomes and lower average educational achievements. A growing body of studies also highlights the importance of reducing inequality to achieve poverty reduction.

Furthermore, as the Center for American Progress’ Sabina Dewan explained, “declining wages means a decrease in purchasing power and a slowing down of global consumption at a time when the wheels of the world’s economic engine are already grinding to a halt.”

To alter the downward trajectory of wages, the ILO makes two suggestions: better designed and managed minimum wage laws and stronger collective bargaining for workers. A step that could be taken here in the U.S. to make stronger bargaining possible is passing the Employee Free Choice Act, which would help to ease the path toward unionization — and thus higher wages and better benefits — for America’s workers.

Today, in yet another transformation of the ever-changing Troubled Assets Relief Program (TARP), Treasury Secretary Henry Paulson announced that he will commit $20 billion of TARP funds to a plan being implemented by the New York Fed that is aimed at easing the current credit crunch. The NY Fed’s program is “meant to ensure that banks and other institutions remain willing to lend to creditworthy consumers,” by extending relief to holders of “auto loans, student loans, credit card loans, or small business loans.”

Meanwhile, Federal Reserve Board Chairman Ben Bernanke is finally taking a step that Paulson won’t, and spending $600 billion to revive the U.S. housing market. $100 billion will be designated to buy the debt of Fannie Mae and Freddie Mac and another $500 billion to buy mortgage-backed securities that are guaranteed by Fannie, Freddie and Ginnie Mae. According to the Fed, the program will be conducted “through a series of competitive auctions,” thereby establishing a price for some of the unpriced toxic assets kicking around those institutions alongside their more credit-worthy holdings.

Paulson, remarkably, still seems to be unwilling to do anything with TARP funds that might aid homeowners. And while Bernanke’s step is a start, akin to other actions by Fannie and Freddie, it still does not effect mortgages held outside of the GSE’s.

As Andrew Jakabovics pointed out, the Center for American Progress has for some time advocated shifting toxic mortgages “into the hands of an entity able and willing to make the necessary modifications to provide benefits to homeowners and investors alike“:

The discount at which mortgage-backed securities are currently valued in the secondary market by institutional investors provides ample room for modifications to be made while still offering Treasury — and by extension the taxpayers — a reasonable return on these investments.

Matthew Yglesias noted that, “despite the infuriatingly bad implementation and continuing dire situation, the passage of the $700 billion rescue package did in fact help avert a greater disaster.” Indeed, the consequences of doing nothing would likely have made the current situation an enviable one. Still, Paulson’s “ready, fire, aim” approach to addressing the financial crisis has left the Fed and the Federal Deposit Insurance Corp. (FDIC) to do the best that they can with their more limited tools.

Last night, federal regulators “approved a radical plan to stabilize Citigroup in an arrangement in which the government could soak up billions of dollars in losses at the struggling bank.” The rescue package “shields the bank from losses on toxic assets and injects $20 billion of capital, bolstering [Citi's] stock after its 60 percent plunge last week.”

Citigroup is a huge financial institution, with $2 trillion in assets tied up in over 100 countries. It really is the epitome of “too big to fail.” However, the bailout of Citigroup is symbolic of Treasury Secretary Henry Paulson’s continued flailing about with the $700 billion Troubled Assets Relief Program (TARP).

As the Wonk Room noted last week, Paulson’s declaration that the banking system “has been stabilized” was followed by Citigroup’s dive into the tank. Now, after assuring everyone that he didn’t need to use any more TARP funds to secure troubled assets, Paulson has done just that to save Citigroup. As Tyler Cowen at Marginal Revolution asks, “Didn’t Paulson tell us just a few days ago that TARP wasn’t needed after all? Doesn’t this mean that Paulson should speak less frequently?”

The emerging consensus from economists is that Citigroup received a sweetheart deal, which is not in the taxpayer’s interest. Nobel Prize winning economist Paul Krugman wrote that “A bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more.”

Former Secretary of Labor Robert Reich concurs, writing that, “This is not a particularly good deal for American taxpayers, but it is a marvelous deal for Citi“:

In return for all the cash and guarantees they are giving away, taxpayers will get only $27 billion of preferred shares paying an 8 percent dividend. No other strings are attached. The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well. The American public, including the media, have not the slightest clue what just happened.

As James Kwak as The Baseline Scenario notes, Paulson’s message amounts to “We will protect some (unnamed) large banks from failing, but we won’t tell you how and we’ll decide at the last minute. As long as that’s the message, investors will continue to worry about all U.S. banks.”

Indeed, Paulson is not inspiring any level of confidence, moving haphazardly from one proposal to the next, and focusing solely on salvaging the financial sector while doing nothing for the people whose money is financing the salvage effort.

Skeptics argue that the United States’ mounting budget deficits are a reason to put off public investments and reign in ambitious reforms. They’re wrong.

It is more imperative than ever to make targeted public investments that will yield high returns and lay the foundation for 21st century growth.

One set of savvy investments is in education, which recent research suggests would grow the economy and earn the government significant positive returns.

With investors around the world scrambling for a safe haven for their money, U.S. treasury bills are in high demand, meaning low yields for investors, but cheap money for the U.S. government.

At the same time, too many of America’s students are stuck in failing schools without quality teachers, test scores in key subject areas are woefully behind the rest of the world, huge gaps persist between students of different races and incomes, and more and more high schoolers are finding college out of reach.

This isn’t just a tragedy for young people and their families, it represents a huge missed opportunity.

High quality universal pre-school, improved efficiency, accountability and funding for grades K-12, and broader access to college, would address these festering educational problems and earn dividends on the taxpayer’s dime.

The fiscal benefits of these reforms aren’t abstract or aspirational. Conservative projections on the real fiscal rate of return on public educational investments are high: 10% for high quality preschool programs, 15% for innovative K-12 reforms like First Things First, and 10.3% for investments to encourage college access and graduation.

By contrast, the CBO’s projected real 10-year treasury bond yield (the cost of borrowing by the United States government) over the next decade is just 3.2% (after inflation).

The source of these potential returns isn’t complicated: better educated people are more productive, get sick less often, are less likely to require public assistance, commit fewer crimes, make more money, and pay more in taxes. Creating more of them is a good idea.

Of course, as a group of researchers at Columbia Teachers College write, “a society that provides fairer access to opportunities, that is more productive and with higher employment, and that has better health and less crime is a better society in itself. It is simply an added incentive that the attainment of such a society is also profoundly good economics.”

Read CAP’s education plans here.

As the Wonk Room has documented, Treasury Secretary Henry Paulson has repeatedly called the the banking system “safe and sound,” only to see those statements followed by the collapse of the banking system. Now, Paulson has added one more instance to the list.

In an appearance on NPR last week, Paulson announced that, due to the effects of the $700 billion Troubled Assets Relief Program (TARP), the banking system “has been stabilized“:

I believe the banking system has been stabilized. No one is asking themselves anymore, is there some major institution that might fail and that we would not be able to do anything about it.

As the LA Times noted, “So, after Bear Stearns, IndyMac Bank, Fannie Mae, Freddie Mac, Lehman Bros., Washington Mutual and American International Group — no more major surprises. Write it down, folks.”

Paulson must be stunned, then, to see the news that the major bank Citigroup is not stable at all. As the New York Times reported, Citigroup’s “precipitous stock-market plunge accelerated on Thursday, sending shock waves through the financial world.” In the last four days, Citigroup has lost half of its value.

Throughout the implementation of the TARP program, Paulson has been content to throw money at the banking system, provide assurances that everything is going as planned, and refuse to use TARP funds for addressing anything outside of the financial sector. On NPR today, Sen. Chris Dodd (D-CT) called Paulson’s refusal to help homeowners facing foreclosure the “most frustrating” aspect of the bailout process:

Here was a condition we actually wrote in…to provide at least the option of providing a guarantee in the area of foreclosure mitigation. And I say this respectfully, but the Treasury’s refusal to move on this is maybe the most frustrating piece of all, Steve. And yet we’re still dragging our feet on whether or not the government ought to be more aggressive.

Just yesterday, Paulson said that Treasury has been “proactively addressing the problems we saw coming.” But he is not proactively addressing the housing crisis, instead choosing to offer false assurances that the bailout has effectively muted the country’s economic woes.

The Labor Department reported today that new claims for unemployment jumped to a 16-year high last week, with 542,000 new claims for jobless benefits filed. Unemployment is currently at a 14-year high of 6.5 percent.

The Senate will vote this week — “and very likely today,” according to Bob Geiger — on “legislation already passed by the House that would extend unemployment insurance for those whose benefits have run out.” In an about-face, the White House announced today that it would support the extension.

“Because of the tight job market, the President believes it would be appropriate to further extend unemployment benefits, and he would sign the legislation now pending in Congress,” White House spokeswoman Dana Perino said. Previously, the White House’s position was that the “the best way to help” the economy and unemployed people is for the unemployed to simply “get back to work.”

Extending unemployment benefits is a crucial step that Congress must take. The National Employment Law Project estimates that more than 800,000 people have already exhausted their benefits, and that “more than one million will do so by the end of the year.” Without benefits, “the Congressional Budget Office finds that about 50% of the long-term unemployed fall under the poverty line.”

As the Wonk Room has noted before, extending unemployment benefits is also a vital first step towards getting the economy back on track. The Center for American Progress Action Fund has found that extending benefits “would significantly boost the economy in those communities hardest hit by layoffs while also investing in a 21st-century economic security system“:

[A] major study of several recent recessions found that unemployment benefits contribute $2.15 in economic growth for every dollar of benefits circulating in the economy. With the health of the U.S. economy so dependent on consumer spending, unemployment benefits are especially important to maintain purchasing power and to boost spending in those communities hit hard by unemployment.

Longer-term reform to the unemployment system is also necessary, as eligibility laws are unfair and outdated. Currently, “only an average of 37 percent of unemployed workers actually collect benefits at all, with low-wage, part-time, and female workers particularly harmed by outdated state eligibility rules.”

Thus, Congress and the administration should work to enact the Unemployment Insurance Modernization Act. The Act “would provide $7 billion in incentive funding for states to cover more than 500,000 workers who now fall through the cracks of the unemployment program and to support those states already doing a better job with coverage.”

There are both immediate and long-term advantages to altering unemployment insurance benefits. There is a lot of hoopla being generated about auto industry bailouts and TARP reversals, but something aimed at helping Americans weather the current economic storm is also in order.

In the Wall Street Journal today, Thomas Frank wrote that — in light of the new progressive mandate — “it is likely that we really do want universal health care and some measure of wealth-spreading, and even would like to see it become easier to organize a union in the workplace.”

To this end, Frank makes the case for the Employee Free Choice Act, which would enable workers to form a union by signing cards of consent, instead of having to undergo a full unionization campaign and vote, which often ends in employer intimidation or a simple denial of the right to vote.

The Wonk Room has noted before the widespread public support for the Free Choice Act, and the conservative fearmongering about the results the bill would have. In his piece, Frank lays out one of the more virulent reactions, courtesy of Home Depot founder and former CEO Bernie Marcus:

“This is the demise of a civilization,” moaned Bernie Marcus, cofounder and former CEO of The Home Depot, during an Oct. 17 conference call about card check. “This is how a civilization disappears. I’m sitting here as an elder statesman, and I’m watching this happen, and I don’t believe it.” Mr. Marcus sketched out the doomsday scenario for his listeners, with unions going after what he called the “low hanging fruit” and proceeding to organize workers in industry after industry.

Marcus allegedly added that “If a retailer has not gotten involved with this, if he has not spent money on this election, if he has not sent money to Norm Coleman and these other guys,” who oppose the Free Choice Act, then the retailers “should be shot; should be thrown out of their goddamn jobs.”

But easing the path toward unionization is hardly the end of civilization, unless Marcus deems increased wages along with better health and pension benefits for America’s workers to be civilization’s death knell.

As Michael Whitney explained on the SEIU blog:

CEO-types like Home Depot’s Bernie Marcus and Wal-Mart’s Lee Scott have their hands on the steering well, and anyone who fails to heed their battle cry to block attempts by workers to take control of the wheel ‘should be shot.’ It’s too bad that for the last several decades, this cavalier attitude has led these greedy CEOs to drive the car off the economic cliff.

Indeed, as corporate profits have been going up in recent years, workers wages have stagnated. Shared prosperity through increased unionization, not the end of civilization, is what backers of the Employee Free Choice Act are looking to create.

Our guest blogger is Peter Altman, Climate Campaign Director at the Natural Resources Defense Council.

Over the last several months, the U.S. Chamber of Commerce has been holding “State Climate Dialogues” around the country, ostensibly to “stimulate a national discussion on key climate change issues.” These are much more monologue than dialogue though, and the punchline is pretty consistently a prediction of economic disaster if the Congress creates a serious climate policy.

If the Chamber’s Chicken Littles stay on message, anyone attending today’s event in Detroit, Michigan is likely to hear the same old message. But many experts disagree with this view of gloom and doom.

For instance, Dr. Martin Kushler, director of the Utilities Program at the American Council for an Energy Efficient Economy, says:

The claim that taking steps to address climate change would be bad for the economy is simply not true. We know from proven experience that we can save electricity through energy efficiency programs at one-third the cost of a new power plant. With a strong energy efficiency policy we can save money and reduce carbon emissions at the same time.

Dr. Andrew Hoffman, associate professor of management & organizations, associate professor of natural resources and associate director of the Erb Institute for Global Sustainable Enterprise, University of Michigan, said:

Think of reductions in greenhouse gas emissions as a market shift, one driven by regulations at the city, state, national and international levels. But one also driven by consumer, investor, insurance and energy markets. Any company executive who ignores these shifts does so at their peril.

This week’s event in Detroit is just the latest stop in the Chamber of Commerce’s Chicken Little Roadshow to gin up worries about efforts to solve our energy and climate problems. Speakers at these events rely on questionable assumptions and even more questionable results to make their case. Read more

Today, Treasury Secretary Henry Paulson appeared before the House Financial Services Committee — alongside Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair — to explain his implementation of the $700 billion Troubled Assets Relief Program (TARP).

During the hearing, Congress voiced its displeasure with Paulson. Rep. Gary Ackerman (D-NY) told Paulson, “you seem to be flying a $700 billion plane by the seat of your pants.” Both Rep. Barney Frank (D-MA) and Rep. Maxine Waters (D-CA) chastised Paulson for not providing aid to homeowners, even though he could under the TARP legislation. Watch a compilation:

Paulson defended himself by saying, “The purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties.” But the TARP legislation does have clear language allowing the Treasury to facilitate home loan modification; Paulson has just shown no inclination to do so.

Underscoring the extent of the housing crisis, currently “one in 11 mortgages is delinquent or in foreclosure”:

In the second quarter of 2008, the share of mortgages that were delinquent reached 6.4%, and the share of mortgages that were in foreclosure hit 2.7%. The share of new mortgages going into foreclosure continues to new record highs, with 1.1% in the second quarter.

In her testimony, Bair said that “more than 4.4 million non-GSE mortgages are estimated to become delinquent” by the end of 2009. Paulson, though, has proposed buying up just about everything but mortgages, including credit card debt. But as Andrew Jakabovics explained, “it is certainly questionable to promote increased lending for credit cards. Outstanding revolving consumer debt is approaching a trillion dollars. Encouraging further household indebtedness is hardly responsible.”

Bair has put forth a plan that — for $24.4. billion — could prevent 1.5 million foreclosures, which Bernanke called a “very promising approach.” If Paulson would come around as well, then some of the bailout funds might actually be directed at the root cause of the financial crisis.

During his unsuccessful campaign for the Republican presidential nomination, former Arkansas Governor Mike Huckabee was a vocal supporter of the fair tax, a plan which would abolish the Internal Revenue Service and replace the federal income tax and most other federal taxes with a 30 percent sales tax.

According to the Atlanta Journal-Constitution, Huckabee was in Georgia last weekend to support Sen. Saxby Chambliss (R-GA), another fair tax advocate, who is headed into a December 2nd run-off election with challenger Jim Martin. Huckabee “joined about 2,000 people Sunday afternoon at the Gwinnett Civic Center in what became not just a fair-tax rally, but a major campaign stop”:

“This race is our best chance to keep the fires burning for the fair tax,” said Huckabee. “And we are not going to squander this opportunity.”

However, as Matthew Yglesias has documented, even conservatives think that the fair tax is a crazy idea. In The New Republic, Jonathan Chait explained why the plan is unworkable:

Tax experts believe that a sales tax above around 10 percent is impossible to enforce because the incentives for cheating are so great. The fair tax would impose a 30 percent sales tax–so high that it would no doubt begin a cycle of black-market sales, resulting in escalating rates to capture the lost revenue, resulting in even more cheating, to the point of total collapse.

Even if the system was sustainable, as Megan McArdle pointed out “It will end up being quite regressive, with the highest effective burden falling on the lower tiers of the middle class.”

The American tax code is, admittedly, a mess, and one that actively encourages income disparity. However, enacting a cockamamie scheme that entirely scraps the current system would just make matters worse. Instead — as explained in Change for America — the U.S. needs to find its way back to a more progressive tax code that helps build “a sustainable, inclusive economy that benefits all.”

This week, Congress returns for a lame-duck session, and at the top of the agenda is a proposal to aid America’s ailing auto industry. During Meet the Press’ roundtable yesterday, much of the discussion centered on the auto bailout, and the effect it would have on the economy at-large.

PRI and PBS’ Tavis Smiley, though, lamented that bailout-mania has removed from the political picture “the working poor” and any discussion of poverty. “We’ve been talking about bailing out industry, talking about bailing out Wall Street. Every now and then, some conversation about Main Street. But no conversation about the side street, and that’s where too many Americans live these days,” he said. Watch it:

It’s easy to forget during the battle of the bailouts, but nearly 40 million Americans live in poverty. And there are several steps the new administration can take to alleviate poverty, even in light of the financial crisis. As the Center for American Progress Action Fund laid out in Change for America: A Progressive Blueprint for the 44th President:

The White House’s domestic policy agenda should make it a priority to address the challenges faced by nearly 40 million Americans living in poverty. Critical policies to achieve these ends include: raising and indexing the minimum wage; improving government support programs such as the Earned Income Tax Credit, Child Tax Credit, and food stamps; removing the barriers to union organizing to allow parents to earn more; and making health care available to all.

A Center for American Progress analysis has found that a $90 billion yearly investment could cut poverty in half, and that the money could be raised “by bringing better balance to the federal tax system and recouping part of what has been lost by the excessive tax cuts of recent years.”

It won’t be on the agenda this week, but while Congress is bailing out (or not bailing out) America’s industries, it needs to turn its attention to the working poor, who could sure use a bailout as well.

Transcript: Read more

Yesterday, the Wonk Room noted Treasury Secretary Henry Paulson’s reversal in regards to the aim of the $700 billion Troubled Assets Relief Program (TARP). Today, the Domestic Policy Subcommittee of the House Oversight Committee — chaired by Rep. Dennis Kucinich (D-OH) — held a hearing to find out whether TARP is being used to prevent home foreclosures, “as Congress intended.”

Kucinich questioned Interim Assistant Secretary for Financial Stability Neel Kashkari — who is charged with administering the $700 billion — as to why the Treasury has not focused more on helping homeowners facing foreclosure. When Kashkari replied that the Treasury Secretary is “passionate” about helping homeowners, Kucinich asked “He is? Where? What country?” Watch it:

Kucinich was absolutely right to be skeptical. As Andrew Jakabovics explained, Paulson “yesterday made it absolutely clear that he had no intention of using the authority granted to him by Congress” to stem foreclosures. “The message was clear to homeowners facing foreclosure and their neighbors watching the value of their homes plummet — drop dead,” wrote Jakabovics.

It’s not as if legitimate plans to help homeowners don’t exist. Today, Federal Deposit Insurance Corp. Chairman Sheila Bair released a plan that could “prevent 1.5 million foreclosures in the next year by offering financial incentives to companies that agree to sharply reduce monthly payments on mortgage loans. ”

The estimated cost of this program is $24.4 billion, a drop in the bucket relative to the entire $700 billion program. Treasury and the White House, though, have made it clear that they are not interested.

In testimony before the subcommittee, Center for American Progress Action Fund Senior Fellow Michael Barr explained what Treasury needs to do to aid homeowners:

Under Section 109 of the [Emergency Economic Stabilization Act], the Treasury secretary is authorized to ‘use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.’ Under Section 101 of the act, the secretary is authorized to ‘make and fund commitments to purchase’ troubled assets, including home mortgage loans. These authorities can be deployed now to help homeowners and stabilize our markets.

As Jakabovics wrote, “The solution is simple: Focus on the mortgages. Gain access to home mortgages and restructure them. Now.”

Sen. Saxby Chambliss (R-GA) today announced his opposition to “any additional relief” for the auto industry, a little more than a month after voting for the troubled $700 billion bailout for the financial industry. In an online chat with the readers of the conservative website RedState, Chambliss was asked where he stands on the auto industry bailout. He responded:

The automobile industry has systemic, deep-rooted problems that money will not solve and I will not support funding any additional relief to the auto industry.

Despite the “systemic, deep-rooted problems” in the financial industry “that money will not solve,” Chambliss voted Yea in both of the Senate votes on October 1st for the $700 billion Wall Street bailout package [Vote #212, Vote #213]. The Treasury has since disbursed hundreds of billions of taxpayer dollars to investment firms and banks, but “few are rushing to make the loans that companies and consumers need to cushion the economic slump.”

It is true that the auto industry needs to be retooled to be a leader in America’s green recovery. But inaction now could mean irrevocable damage to jobs, businesses, and communities that would make industry reform exponentially more difficult. The implosion of the auto industry would be catastrophic for thousands, if not millions, of American families. As Center for American Progress fellows Bracken Hendricks and Dan Weiss, with Ben Goldstein, explain:

The auto industry is a bedrock of the economy, with “one in 10 American jobs related to auto manufacturing.” Its survival is essential for the future of advanced clean vehicle and energy manufacturing. What’s more, this extra help is imperative to preserve jobs.

The implications of a collapse of General Motors, Ford, or Chrysler are beginning to become apparent. On Thursday, “Standard & Poor’s Ratings Service lowered the credit ratings of two big auto suppliers, and put 13 others on watch for possible reductions, because of their ties to car makers.”

In an October 24 debate with his run-off opponent, Jim Martin (D-GA), Chambliss claimed the hundreds of billions in loans made by Treasury Secretary Hank Paulson “went to free up liquidity so that people in Georgia can once again begin to have the- the freeing up of that credit so that they buy automobiles.”

By the time the “freeing up of that credit” actually takes place, there very well may be many fewer automobiles for Georgians to buy. As economist and blogger Duncan Black commented on news that Congress lacks the votes for action on the auto industry, “It’s pretty interesting that we’re propping up the fake economy and letting the real economy wither.”

Yesterday, Treasury Secretary Henry Paulson announced that the Treasury Department has altered the way in which it is going to implement the $700 billion Troubled Assets Relief Program (TARP). Paulson has now “officially abandoned his original plan to buy troubled assets from financial institutions,” and instead aims “to reinforce the stability of the financial system by providing sorely needed capital to banks, and even non-bank institutions that securitize credit card, auto and student loans.”

As Matthew Yglesias noted, “On the policy merits, I think Paulson’s shift into recapitalization was the right idea.” Indeed, this was the path recommended by many economists, including Nobel Laureate Paul Krugman.

But Paulson’s shift does lead to an important question, laid out at Economist’s View: “[W]hy are they still trying to figure out how to design the program? This program shouldn’t be in the design phase, it should already be in place.”

As Joshua Zumbrun wrote in the Financial Times:

Maybe it’s the right way to go, maybe not. But as the government’s efforts to shore up the nation’s economy and financial system continue to balloon, the man running those efforts is putting the most important asset he possesses right now–his credibility–at increasing risk. By changing tactics and communicating poorly, he may be inadvertently recreating the same failed ad-hoc approach to the crisis he’s been trying to escape.

Indeed, in September Paulson told Congress that the original bailout plan was “the single most effective thing we can do to help homeowners, the American people, and stimulate our economy.”

Furthermore, this plan, while potentially better than the original bailout plan, still does nothing to address the root cause of the financial crisis: the failure of the housing market. As Sen. Chris Dodd (D-CT) explained:

[I]t is becoming increasingly apparent that a robust and aggressive program to stem the tide of foreclosures sweeping across the nation is critical to any policy to put our economy back on track…it is my sincere hope that Secretary Paulson collaborates with [FDIC] Chairman Bair to get this program up and running as soon as possible. There is no legitimate reason why they would be unable to do so.

The Wonk Room noted yesterday that Fannie Mae and Freddie Mac took an important first step towards restructuring bad mortgages. Now, an across the board mortgage restructuring plan needs to be implemented, instead of Paulson throwing money at, seemingly, anything that moves.

John McCain and other conservatives spent the last year railing against the United States’ 35 percent corporate tax rate.

What they never mentioned is that this 35 percent corporate rate is so riddled with loopholes and shelters that the United States collects less in corporate taxes as a percentage of GDP than most other industrialized countries.

Now, new IRS data shows typical American companies paid only 25.3 percent of their U.S. book income in federal corporate taxes in 2005, despite a statutory corporate tax rate of 35 percent, by using loopholes and shelters.

U.S. companies “reported about $1.35 trillion in pretax U.S. book income to their investors in 2005, but about $1.03 trillion to the IRS — a difference of about 23%.”

A quick back of the envelope calculation shows that the difference between paying 35 percent on $1.03 trillion in income and $1.35 trillion in income is approximately $112 billion — enough to finance more than half of CAP’s ambitious “Green Recovery” plan to jumpstart a clean energy economy.

Some differences between book and reported income are legal and legitimate, but they can also be a sign of sheltering and abuse. Effective tax reform would first broaden the tax base by closing loopholes and eliminating shelters, before considering a lower statutory corporate rate.

Yesterday, during an event entitled Progressives Have a Mandate – Now What?, Center for American Progress Action Fund Senior Fellow Gene Sperling weighed in on the need for Congress to enact an economic stimulus package. Sperling explained that the government should take “a Powell Doctrine approach to economic stimulus for 2009,” using “overwhelming fiscal stimulus force” to get the economy back on track. Watch it:

Sperling added that “the minimum amount that is needed is $300 billion…with the understanding that we may need more.”

In advocating such a large stimulus, Sperling is in agreement with a host of economists. Last month, New York University Professor Nouriel Roubini said that $400 to $500 billion may be necessary, while Nobel Laureate Paul Krugman has suggested $600 billion.

These proposals all dwarf the $60-$100 billion package endorsed by Rep. Nancy Pelosi (D-CA). However, Pelosi (and the rest of Congress) needs to be aware that turning the economy around – even if it means increasing the deficit in the short term – is preferable to holding back and enacting a smaller package that does not provide an adequate economic boost.

As the Center for American Progress laid out in its recovery strategy “for 2009 and beyond“:

These investments in economic stimulus and recovery will contribute to a higher budget deficit in the short term. But we cannot be penny wise and pound foolish. Strong economic growth will do far more to put us on the path of fiscal health than shortchanging needed investments today.

“Remember, if the stimulus is too big, it does much less harm than if it’s too small,” wrote Krugman. “You really, really don’t want to lowball this.”

At the same time, though, it’s important to “restore financial discipline and the public’s confidence in government” by making “a serious commitment to scrub the budget of inefficient and ineffective programs and tax incentives.” This combination of short-term stimulus and long-term discipline will help to create a “sustained economic agenda that focuses on building the foundation for a brighter future.”