Cross-posted from New Deal 2.0.
Our policymakers continue to believe that they must first 'get credit flowing again' to restore output and employment. Unfortunately the reverse is the case: restoring output and employment will restore the flow of credit. Creditworthiness precedes credit.
And yet, as we get closer and closer to D-Day on the debt ceiling limit, the negotiations continue to turn on how much income the government should drain from the economy, even as private sector activity continues to stagnate. All moves to date by the Treasury and Federal Reserve have only served to shift financial assets between the public and private sectors. And that includes quantitative easing. Nothing has directly added to aggregate demand (the overall demand for goods and services).
The economy has therefore continued to deteriorate, with only the 'automatic stabilizers' like unemployment insurance slowly adding financial assets and income to the private sector as the counter-cyclical deficit rises. The rate of federal deficit spending now exceeds around 8% of GDP and seems to have begun moving the economy sideways, but has been insufficient to offset the impacts of the worst recession in over 70 years. Indeed, the combination of a tepid fiscal response -- which appears to have been just enough to ward off a second Great Depression -- and the premature fiscal withdrawal are largely to blame for the weak and teetering recovery.
Worst of all, most of the fiscal packages have been spent. That suggests that in spite of all of the cheerleading by US officialdom and the beneficiaries of this Potemkin prosperity, we will not record significant gains in employment until real output of goods and services exceeds productivity growth. Withdrawal of yet more fiscal stimulus, as the mainstream "experts" (who completely missed the Great Recession of 2008!) continue their call for further cutbacks in government spending, risks a repeat of the error that FDR made when he listened to conservative economic advisers in 1937. He slashed the budget deficit during the Great Depression -- causing a renewed surge in unemployment and the extension of the depression.
The most immediate crisis, deserving attention before any other, is in the states and cities. Yet assistance to the states is being cut off at a time likely to forestall economic recovery. State and local budgets should not be cut. But how to prevent this? Here's an idea: By recreating a revenue sharing program for the states, with a pass-through to cities, on a scale sufficient to plug the budget gaps. How much is needed? As James Galbraith has noted, the federal government's fiscal aid to the states has hitherto only offset the job cuts imposed by falling revenues and balanced budget requirements. He therefore suggests a number of practical measures to enhance this revenue sharing:
Federalizing Medicaid may be the most effective and practical way to achieve this. The alternative is open-ended general revenue sharing: on the condition that states neither raise nor lower their tax rates, the federal government should supply the funds required to close their budget gaps and to maintain public services at baseline levels, for the duration of the crisis.
President Obama could well point out that revenue sharing has Republican lineage; it ought to be a bipartisan cause today. It was Richard Nixon who first introduced the concept. Nixon viewed the federal bureaucracy as a poor revenue manager and argued that much counter-cyclical spending should go to the states, as they are closer to people's needs and more directly hurt by falling revenues. But instead of simply cutting taxes, as later conservatives would, he proposed a new system called revenue sharing, which redirected funds to states and municipalities. The federal government would collect taxes and local governments would spend the money. Passed after contentious debate, the State and Local Assistance Act of 1972 initially delivered $4 billion per year in matching funds to states and municipalities. The program, which distributed some $83 billion dollars before it was killed by Ronald Reagan in 1986, proved enormously popular.
It is important to remember that a sovereign government with its own currency can always financially afford such a program. By virtue of its position as issuer of the currency, the US Federal government could promote employment, output, income, and private expenditure through the expedient of revenue sharing. By contrast, US states, as users of currency, are reliant on this counter-cyclical fiscal policy to mitigate the destructive effects of economic downturns -- particularly unemployment and the suffering it causes. In the words of Erik Dean, the states "cannot run budget deficits without risking credit downgrades and insolvency. Recessions typically diminish revenues for these users of the currency at the very time that their expenditures are most needed."
As an example, consider Hurricane Katrina. True, the rescue package was marred by incompetence, but how was New Orleans able to rebuild, given the underlying financial condition of the state of Louisiana? Simple, as David McWilliams noted in today's UK paper, "The Independent":
The United States cavalry rode in to save New Orleans and the State of Louisiana. The President declared a state of emergency, Treasury wrote the cheques and the Federal Reserve credited Louisiana's accounts. They then spent those dollars on cleaning up the city. So the central bank credited the account of the State of Louisiana because emergency economic conditions meant the State needed it. The State issued no bonds; there were no IOUs, except that the deficit of the US rose. There was no effect on inflation.
Yes, we have recovered from the worst of the crisis. But it is delusional to believe that economic recovery can really get underway until we have added something close to 10 million jobs. The current level of job growth will not see us get anywhere near that target for at least another 3-4 years. Indeed, in the absence of revenue sharing, we are likely to see more attacks on workers of the kind that has characterized recent budget battles in Wisconsin and Michigan. Wall Street crashed their pensions and created the fiscal crisis now afflicting the states. But this administration is still caught in the grips of that failed economic paradigm. If President Obama were to fight for revenue sharing, he would develop tens of thousands of local government allies. He would also have a very powerful issue with which to fight the next election, as well as a winning economic argument.
How?
We've been on a fully fiat currency regime for 80+ years.
1) "wealth" involves productivity & capabilities & Output, & the biggest return is always "return-on-coordination" [fiat currency just denominates real items]
2) a fiat currency supply is no different from a "number supply" in records, it's not convertible-upon-demand to anything except denominated transactions
3) fiat currency can NOT, by any logical definition, be "revenue" to monopoly issuerd; quit calling it revenue, and call it an adequate currency supply
http://www.curiousevidence.com/(S(z1vx2r4odqqqwxoxjvsfymbl))/samples.aspx?id=21
4) Treasury distributing adequate currency supply is no different from a public mandating public standards; quit calling it "revenue sharing"
5) We use a two-signal control loop;
distribute currency (pattern of public spending) / sap currency (pattern of public taxes)
a] result = diverse efforts, and
b] coordination into transaction patterns,
c] which are greater than the sum of their parts
Cost of denominating distributed transactions must drop, to speed distributed decision-making.
6) We scale by lowering distributed decision-making costs
7) We denominate decisions with fully fiat currency
8) So, distribute enough currency to denominate waiting transactions.
Bankers deserve lower pay than librarians. Scarce currency and high banker incomes is massively counterproductive.
Bankers aren't needed for quantum physics, complex chemical reactions, intra-cellular biology, multicellular organisms or human tribes - only records keeping in market economies. Banks are replaceable with Android phones and Treasury/IRS/personal spreadsheets. Banks have become the problem, not a solution.
Our gargantuan levels of spending (> 25% of GDP, most since WWII) and deficits ($1,600 bn, now two years after the end of hte recession) is simply crowding out private borrowers.
Crowding out; classic Keynesianism
Go read your favorite Murdoch propaganda sheet, and even The Wall Street Journal, for God's sake, will tell you that corporations are sitting on billions of dollars.
Why?
Because they don't have to spend money to expand to serve existing demand.
Why?
Becuase people aren't spending money, because they don't have jobs, don't have money, or are afraid of losing both.
The only way to increase investment is to increase the demand which will cause that investment. Any other belief is simply delusional. Go ask ANY businessman what it takes to make them invest in something: demand for that product or service.
And there's no lending b/c banks are buying our $1,500 bn deficit bonds.
The Community Organizer has killed off the recovery, now nearly two years from the end of hte recession (June 2009)
Any time there are more than two dots to connect, they get lost.
Now if we were really "progressives
immediate actions such as this are needed, ask anyone looking for a decent job and then take a gander at the Demand side of the equation....as opposed to the "supply side" ideology that has driven the nation since Reagan, until and unless the focus is back on growing the middle class as opposed to leeching U.S. dry, all the revenue in the world dumped into the problem will disproportionately flow up into that top 5% as it has been doing for the last 30 years or so
a much more comprehensive solution is required, but this is a fine place to start...
oh, wait...it appears the States that need it the most are the same ones that hate the mean olde "gubmint"...and already receive more from the Fed than they contribute in tax base, and if you have a look at some of the Governors and their state Houses...can you really believe they are going to allocate the funds properly?
i don't think it's going to be their cup of *tea*, as it were...
woe is U.S.
Preferably well paying jobs with benefits.
You reap what you sow.
*******outsourcing, etc.
The chickens have come home to roost.
Every time a group of politicians are elected....they hope that the time of reckoning is NOT during their terms.
Even Pres. G. Bush asked why the economic meltdown of 2008 had to come while he was in office.
We ordinary Americans NEED JOBS.....not more credit.....JOBS!
Jobs are what the politicians (all of them) should be working on, not most of the other nonsense like Planned Parenthood or school vouchers.
****Those things can be looked at AFTER job creation efforts work.
and i'm for cutting off the TEA type governors...call their bluff and let the noisy states secede as they like, see how that works out for them
ok, i'm a bit cranky this evening...
This is great for employing bankstas and them giving themselves HUGE bonuses.
Bring back stringent usory laws.
Real income is what you earn from a job. Real expense is what you spend. This is the cost to live in America. The largest rake is the interest and principal on the home you are living in. If the banks, feds and the greedy scrooges came together they would find, three years down the time line, if they cut interest to three percent and home values, real values by half America would have $600.00 times eight million to spend. This is real income. The growth would be in homes exchanged, buying cars and investing in jobs plus real growth because none of it would have been debt forward amounts.
The American Party. A head of our time but ready for 2012!
William50, you may be on the right track with the idea of forcing home mortgage interest rates down. The interest should be set at 1.0 to 1.5%, though, not 3%, and only for existing mortgages on primary residences. Otherwise we get artificially inflated house prices. The US gov't already holds the paper on a large percentage (I've heard 98%) of home mortgages and could easily adjust these mortgages. The banks should have to adjust to 1 - 1.5% mortgage interest, and absorb the artificial paper losses.
The federal government has powers that the small-minded repubs and dems are unwilling to consider using because they are in league with the banking elite.
What powers would those be?
Is there a hidden US Constitution I'm unaware of?
It is equally important to remember that increases in the money supply that are not based on increased output and demand inflate the currency, resulting in higher prices. There is at the first step, a certain inertia that will postpone the onset of inflation. And if the economy remains mired in deep recession, there will be badly depressed demand that offers little pricing flexibility. But continued for any appreciable length of time, and with anything resembling a recovery, it is absolutely inevitable that inflation resulting from such a policy should consume all gains.
I am badly depressed over how many people will read this article, while remaining completely innocent of this basic economic truth that goes unstated by the author.
Too bad you still think like someone from the 19th century who uses gold for their transactions.
There is no wage/price inflation and there will be none unless people get back to work or our resources to produce things evaporate.
"There is at the first step, a certain inertia that will postpone the onset of inflation. And if the economy remains mired in deep recession, there will be badly depressed demand that offers little pricing flexibilitÂy."
The person who never foresees coming events continues to languish on the edge of poverty.
"Too bad you still think like someone from the 19th century who uses gold for their transactioÂns."
I think EXACTLY like someone who's taken care of themselves and their family and will never again have to worry about a job, a wage, where their next meal is coming from, a roof over their head, or a hospital bill. I will keep my result, you are MORE than welcome to keep your result.
They don't exist!
Prices are rising, yes, and people aren't buying. Look at gas consumption, for example. We are awash in gasoline.
This is why government tax and spend, and government borrow and spend, and government print and spend isn't working, won't work, and can't work. What will work? For every American citizen to BUY AMERICAN!. If Americans can't be bothered to create jobs for their family, friends, and neighbors, who do we think will?
The real estate brokers, insurance brokers and agents, and lawyers and accountants that dominate our state legislature listen to the rich just as much as those in our Federal legislature - leading to the greed of tax cuts for the rich as infrastructure building and benefits for the non-rich are cut .
But your point is well taken - deficit reduction is a crock in a "need jobs" economy where the large companies insist on sending money and jobs overseas because our tax code rewards that action (IRS Code Section 482 that determines how much corporate tax is not deferred because of overseas operations has not been vigorously enforced since GW Bush took office).