rssThe Case for Spending More
Wednesday, December 17, 2008 at 6:00 am
- 25 Comments
Sen. Barack Obama (D-Ill.) (WDCpix)
Though it pains me to say this, back in 1981 Ronald Reagan got it right. He got Congress to pass a massively excessive tax cut – and then spent five years taking it back. Spurred by stimulus, the economy recovered. And no one remembers those tax hikes now.
For three months, we have fought this crisis by pumping money into the banking system. The idea behind this strategy – if you could call it that – has been to “unfreeze the financial system.” Last September 24, President Bush called for “urgently needed money so banks and other financial institutions can avoid collapse and resume lending.” We did it, and it hasn’t worked.
Illustration by: Matt Mahurin
And Tuesday’s cut in interest rates to zero won’t work either. We are in a full-fledged debt deflation, a credit collapse. It is not just an unwillingness to lend. It is also an unwillingness to borrow, and a collapse of the collateral – of home values and secure incomes – which people need in order to borrow. This is a failure at the very heart of the system, and if left untended it could both continue spiraling downward and go on for many years.
This is not a shock, like oil prices hikes or high interest rates, to a healthy system. It is not just worse than previous recessions. It’s qualitatively different. There is no source of growth in sight. Consumption and investment are being hit hard. And with the flight to the dollar, exports, which have been the one bright spot this past year, are set to suffer a sharp blow. We now have to address the economic crisis, recognizing that we have just one shovel left in the shed, and that is public spending.
Some call it “stimulus,” but that’s a term to resist because it suggests an exercise that adds energy to a viable private economy, which will come back in a short period of time. We must not count on this. The first task is, instead, to fill the sinkholes that are everywhere opening up.
The easiest way to do this is to build on an historical experience and also the surviving institutions from the New Deal and the Great Society.
The first priority must be to plug the tax gaps that are rapidly taking down state and local governments and causing enormous pressure for cuts in vital public services, and layoffs, which will only complicate further the housing crisis. Revenue sharing is the way out of this problem. This is just a matter of writing checks, on a large scale — and a bill could be enacted and on the President’s desk on his first day.
Second, capital markets for municipal and for state governments are locked up and if they’re not locked up, then they’re far too expensive. A National Infrastructure Fund could take advantage of the very low rates at which the federal government can now borrow, permitting states and localities to move forward on an entire array of “shovel-ready” investments. That too is just a matter of setting up a rudimentary structure that could be enacted and delivered to the President in a very short time.
The industrial crisis requires immediate action if the auto companies are to survive. For such cases in the future (and there probably will be some) the relevant precedent is the Reconstruction Finance Corporation, headed during the New Deal by an intrepid businessman, Jesse Jones, who saved many important companies with a combination of loans and workout plans. A new RFC would enable the federal government to assist industries– perhaps not as large, not as essential, or as threatening as the collapse of the automobile industry would be — but on a somewhat systematic basis for the duration of the crisis.
As for helping the workers who are most severely affected by the industrial aspects of this crisis, Teresa Ghilarducci, professor of economics the New School, has proposed a simple and effective step that would further the cause of universal health care: reduce the age of Medicare eligibility to the age of 55. That would take much of the cash burden of healthcare costs off of enterprises, where they don’t belong anyway. And it would provide the opportunity for many workers who would like to retire but won’t do so because they can’t afford to lose their health insurance.
The housing crisis requires mortgage abatement, a resetting of the toxic adjustable rate mortgages already being initiated through Fannie Mae and Freddie Mac, and also a concerted effort out in the neighborhoods to restructure mortgages and to keep people in their homes. Here the historical model is the Home Owners Loan Corporation, which did this in the 1930′s — an enterprise that took about 20,000 people to manage 1 million mortgages. Essentially the same effect could be achieved today by buying back the mortgages through Fannie and Freddie and then turning them over to a restructuring facility – the present version is known as the H4H, or Hope for Homeowners program.
The point is that while you cannot effectively stabilize the price of housing, you can try to save the existing housing stock, stop the spread of blight, the abandonment of homes, and the homelessness that results from an unchecked wave of foreclosures. We will then have preserved those neighborhoods and those communities for a better day.
Further, we have to expect that the fall of the stock market and its impact on the wealth position of the elderly and the near-elderly is going to cause a substantial drop in consumption over the next few years. This is not something that can be repaired individually because people’s stock market losses cannot be made good on a case-by-case basis.
But we can support the income of the elderly population as a group. The way to do that is, for the first time in a generation, to raise the basic Social Security benefit, beyond the cost of living. That would prevent many seniors from falling into poverty and also help to preserve the purchasing power of the elderly as a whole. Today we need Social Security more than ever. We should recognize that going forward it will be a larger, not smaller, part of American retirements. The days when we thought that the stock market might someday substitute for it are at an end, and so should be talk of cutting back on this vital program.
Meanwhile, to protect the Social Security Trust Fund and put an end to talk about financial troubles of that system, Congress could simply place assets acquired under the TARP and related programs into the trust fund, as William Spriggs, professor of economics at Howard University, has proposed.
These measures, in 2009 alone, could inject $450 to $500 billion dollars of new demand into the economy. That would be enough to blunt the economic decline. We therefore need to consider tax relief to working families either directly or indirectly through remission of the payroll tax. It’s a simple, effective means to give a pay raise, and to cut the cost of hiring to employers. It would help many working families to pay their mortgages and to stay in their homes and to pay down their debts. Even if it didn’t immediately boost in total spending, it would put American families on a better foundation going forward.
What is the total size of the package we would require? News reports suggest that President-elect Obama and his emerging team are considering $600 billion, or 4 percent of GDP, for next year. This number is based on a guess, namely that the slump will not be much worse than in 1982, when the unemployment rate went up to about 11 percent. And while that might be right, we cannot be sure.
This crisis is qualitatively different from any we have seen in decades. Moreover, we have been overwhelmed, in recent weeks, by unexpected bad news. The risk of doing too little is far worse than the risk of doing too much. Action should be sufficient to deal with a larger problem, perhaps a much larger problem, than we currently expect.
If we do too little—if we spend $400 billion when $600 billion is required, or $600 billion when $900 billion would have been better—then people will say “Gosh, that didn’t work.” And by then the new administration will have run down its political capital and we may find that it can’t come back for a second bite at the apple. The program we enact in early 2009 needs to show results the first time — and that means bigger rather than smaller.
If we get lucky – as Reagan did – and later find that economy is recovering rapidly that suddenly we’ve succeeded, we can always declare victory and pull back from spending more. A trigger mechanism might even be appropriate, to reduce tax relief if joblessness falls below five percent or revenue sharing if state and local budgets return to surplus. In my view, the chances of activating such a trigger are low.
This emergency requires our full attention, our imagination, and action on a grand scale. One hundred and forty-six years ago, the President wrote to Congress:
“The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty and we must rise with the occasion. As our case is new, so we must think anew and act anew. We must disenthrall ourselves, and then we shall save our country. Fellow citizens, we cannot escape history. We of this Congress and this administration will be remembered, in spite of ourselves.”
That was Lincoln, of course, on December 1, 1862.
James K. Galbraith is the author of “The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.” This article is adapted from remarks to the House Democratic Caucus on December 9, 2008.
25 Comments
Comment posted December 17, 2008 @ 7:16 am
I agree w/ JKG about the fiscal aggregates and abstractions, but not nostalgia for what are now rotten political foundations and managerial “silos”. Concretely, as we still say …
The “Shovel-Ready” projects of local governments today are mostly artifacts of recent trends in land-speculation and arms-barter: “The Wrong Stuff”. They will increase urban sprawl, energy consumption, and import of civil engineering goods and services. That would be “Toll Roads”, “Bridges to Nowhere”, and “Goverment-Owned, Crony-Operated” (GOCO) Prisons, Sports Palaces, and Convention Centers. These are not conceived by Lucius Clay, Jesse Jones, Herman Brown, or “Major” Parten but by “merchant bankers” and “offset hustlers” like the Carlyle Group and Booz, Allen, and Hamilton.
Public Utilities today are “financial institutions”. They are run by bond-lawyers, not by engineers. Their plans are absurd from energy conservation, technology development, and public health or safety perspectives. Those plans mostly reflect (a) cheap energy, (b) cheap credit, and (c) imported civil, chemical, and electrical engineering goods and services … also land-speculation, debt-pyramids, and discriminatory pricing — what used to be called “bunko”, “charging whatever the traffic will bear”, or, most recently, “Enron”.
So, too, industrial infrastructure today involves robust planning and standards that the “academic-military-industrical complex” has not updated in a half-century, or more. In fact, it is an agro-military complex that has produced the wrong army, navy, and air force for today's military challenges and that props up an “industrial mobilization base” that still reflects the WWII “Arsenal of Democracy” or, in the Southern states, the union-busting and land-speculation of the early Cold War period..
That is a huge challenge for a majority political party that must operate effectively at every echelon of government. Do not be surprised if Newt Gingrich steps up with a credible-sounding alternative to the DNC/DSCC/DCCC kludge by 2010. If Obama, Reid, and Pelosi fail to do much more than “Stick a Windmill On It”, — the lobbyists' energy policy — the self-proclaimed strategic Genius from Georgia will hand the cringing, check-list liberals in Congress their walking papers again.
Comment posted December 20, 2008 @ 3:49 am
I'm no economist but isn't social security running a surplus until around 2017? Isn't the surplus borrowed for other needful things? Isn't putting TARP funds into the “trust fund” just shifting the debt from one side to the other – with interest added. Kinda like pouring water into a bucket with no bottom. And we all get to pay it back later.
Comment posted December 20, 2008 @ 7:35 pm
No doubt there will be plenty of Congressional resistance to whatever economic plan Obama puts forth, from both the GOP and the Blue Dog Democrats. But it's not too early to start reminding those dimwits that they voted to send $3 trillion down the Iraq rathole, thus a trillion $$ invested in infrastructure at home is not an unreasonable proposition.
Comment posted December 20, 2008 @ 11:04 pm
IS AMERICAN CAPITALISM ABOUT TO CHANGE?
Don't let politicians, particularly the next President, or Congress, implement legislation that will deconstruct the system at the core of American society.
http://pacificgatepost.blogspot.com/2008/10/cap…
Comment posted December 21, 2008 @ 11:52 pm
Oh, I get it. Let's pour gas on the fire. That is not a bailout program you are suggesting but a good old fashoned pork fry. Let's call this what it is, a call for more Washington pork barrel spending.
Ahhh, I can smell the bacon cooking in the transition team's kitchen all ready. Hear the dinner bell?
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Comment posted December 29, 2008 @ 6:59 pm
To gain control of the financial mess, the government will, in the long run, be forced to create a national bank that actual lends and does not sit on the money, which they are doing now. In fact, the government seems to be close to being a national bank. Said bank would set reasonable rates, issue a credit card that is not usurious…and would work in concert with local communities. (In the long run, all banking should be local.) It's back to basics, please, in banking. (The private banks can continue to operate…but now they have a new fella on the block to watch.)
It will take some time to get our house in order.
At the same, we have to address seriously our net trade imbalance and current account balance, which is part of the root cause of our difficulties. No nation can run the kind of net trade deficit and current account deficit that we have with out imploding.
Comment posted December 29, 2008 @ 7:31 pm
Re nostalgia for shovel-ready state and local infrastructure projects: Let's assume that some of these projects will be less than optimal from the point of view of long range planning. But let's also assume that rebuilding confidence in the American economy takes longer than a year, and making good the shortfall in aggregate demand in part with infrastructure spending gives us time and opportunity to come up with better projects. It is in the Democrats' interest to deny the Gingriches of the 21st Century an opening, by making this thing work.
Comment posted December 29, 2008 @ 7:48 pm
There is no question about the aggregates to my mind. And, third- or fourth-best is fine for starters. But, Gingrich can come back hard in just two years from now, if all Obama can do is stuff the federal government with corporate lawyers who will do nothing but hand out money to corporate lobbyists styling themselves as experts on this or that.
The federal government is little more than public management silos bargaining with private management silos over how to avoid risks or, failing that, to diffuse responsibility, all the while blabbering about their three dozen top priorities. So, let's spend-up on this or that. But, look at America's Defense Meldown. The people who know how to cut a budget are the ones who know how to spend money on something besides financial engineering.
Comment posted December 29, 2008 @ 9:43 pm
I'll check out <e>America's Defense Meltdown</e> and recommend in turn the NBER study mentioned by Krugman a few days ago, “Politics, Relief, and Reform: Roosevelt's Efforts to Control Corruption and Political Manipulation during the New Deal” by Wallis, Fishback and Kantor. Government had a low reputation at the start of the 30s and it wasn't a given that the New Deal would change that, but it was clearly in FDR's and the Democrats' political interest to make it work, and for the most part they succeeded with the federally controlled, emergency, parts of the program, including the WPA. Here in 2008/9 we have the remains of a government run for most of the last three decades by predators (or gingriches) who had no interest in making government work. I hope we can now do something like Clinton is said to have done with FEMA in his two terms, turning it into a professional organization.
Comment posted December 29, 2008 @ 10:10 pm
Will check out the NBER work. It is important to combat right-wing attempts to revise history and trash the New Deal. Here are two things that worry me today:
First, progressive states, which back then included Texas, had laid quite a solid foundation for spending money in ways that bear scrutiny today. They were not terribly scalable inasmuch as they could only build one courthouse per county and were constrained on hospitals by the supply of Protestant doctors and Catholic nursing sisters. The farm-to-market road had not been invented yet.
Still, the land-grant colleges and their agricultural agents and research stations were a fabulous template for, well, the now-taboo “industrial policy”.
Only with “Military Keynesianism” did military-patriotic patriotism do quantitively what mere progressivism had not done enough of. (Note the great hydroelectric damn projects, the TVA, Bonneville, and so on, became mostly “cover stories” for, in fact, the Manhatton (bomb) Project.
Sadly, in the interest of military efficiency and actual preparedness, we need to actually cut the defense budget, unwind the Edwardian/Stalinist Pentagon, and open the now wholly corrupt “black budget”.
So, can we realize necessary fiscal aggregates and employment objectives with “green energy” or … what?
Do we really want to build more roads and McMansions, SUV's, and suburban shopping malls?
That is all most senior Democratic office-squatters and the Congressional Democrats know how to do!.
Comment posted December 30, 2008 @ 4:32 pm
Um.
If you recall, Reagan-Bush left trillions of dollars of debt which we are paying off even today. That debt is causing the dollar to crash as we try to get out of the present pickle. And it will eventually create inflation as bad or worse than Reagan inherited.
If Reagan got it right, why is the legacy of his tax cuts causing a later generation such misery?
I will never listen to James Galbraith with eyes as wide open again. His Dad would never, ever, ever have said something this perverse.
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Comment posted January 12, 2009 @ 12:19 pm
“And Tuesday’s cut in interest rates to zero won’t work either. We are in a full-fledged debt deflation, a credit collapse. It is not just an unwillingness to lend. It is also an unwillingness to borrow, and a collapse of the collateral – of home values and secure incomes – which people need in order to borrow. This is a failure at the very heart of the system, and if left untended it could both continue spiraling downward and go on for many years.”
This third paragraph doesn't have to be true. Microloans in developing nations prove you can have a large entrepreneurial sector without collateral. The 2/3 of people who are good rickshaw drivers and farmers in Bangladesh is probably a smaller % in the developing world's service economies. I don't have any specific solution, but lots of potential consumers can be small business owners without collateral, if an analogous small business motivation equivalent to survival can be found in the developed world. I guess I'm saying you need to threaten to starve the middle class…not really what I meant.
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Comment posted May 25, 2009 @ 6:57 pm
A new RFC would enable the federal government to assist industries perhaps not as large, not as essential, or as threatening as the collapse of the automobile industry would be but on a somewhat systematic basis for the duration of the crisis.
Comment posted May 26, 2009 @ 1:57 am
A new RFC would enable the federal government to assist industries perhaps not as large, not as essential, or as threatening as the collapse of the automobile industry would be but on a somewhat systematic basis for the duration of the crisis.
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