Nothing described below should be interpreted to mean that greasing the skids of the financial system is unimportant. So long as credit is locked down, much of the economy does not function.
But, fixing the credit markets will be of no importance if demand declines. Businesses will not use a lot of that credit to hire workers and produce goods if there is no market for their wares. Companies will not invest in plant and equipment if there is no demand for the products they produce.
In the preceding decade, declining real wages in the middle class was offset by paper gains on the value of real estate, against which families borrowed. With the housing market declining, and with unemployment rising and real wages continuing to stagnate, demand is contracting.
The Great Depression has more than one lesson to teach on what to do, and what not to do, to reduce the length and depth of this "recession". The first is that we ought not to have enabled such extraordinary leverage. In those days we had the holding companies; today, we had the derivatives, and the credit-default-swaps. Once value in one part of that house-of-cards declined, failure spread through the system.
Roosevelt came to office as a budget balancer. Nonetheless, recognizing the need to build demand, he engaged in deficit spending with large public works programs; by 1936/7, the economy had momentum, unemployment had been reduced, and it appeared as if it was on the right trajectory. Then, FDR made a fateful mistake -- he decided to cut spending in 1937 for the sake of balancing the budget. The economy again declined, and it was only the massive government spending required by preparations for, and then participation in, World War II that created an economic boom.
This should tell us something. Namely, that what we need now is not tax credits or a rebate check, but massive public investment to create jobs. The key word is "massive". Less-than-massive will not work, and ideologues will regain the upper hand.
Note that John McCain is already promising to cut spending. It appears he aspires to be both Herbert Hoover and the 1937 version of FDR rolled into one. If anyone did not think a McCain presidency would be both a foreign policy and a domestic disaster, you now have proof positive. McCain's proposal to have a gas-tax holiday, properly opposed by Barack Obama when it was not popular (put that in your maverick pipes and smoke it!) would have robbed money from needed public works, resulting in less public investment at precisely the time we need more of it.
We are, today, the beneficiaries not only of the economy created by the New Deal, but also many of its public investments, from hydroelectric power, to rural electrication, to soil conservation, to historical preservation, and even to classic buildings that would otherwise not have been constructed. What we need today is a comparable set of public investments that will a) reverse the economic decline; and b) have enduring value so that when we do emerge, we are a stronger country and economy.
Here are some suggestions for massive public investment:
1. Rebuild bridges and roads and schools.
2. Highspeed public transport between cities;
3. Light rail, rail tunnels, within cities and municipalities. The DC metro is a nice model.
4. The infrastructure for solar farms in our deserts.
5. Windmills
6. Large bioreactor farms for algae cultivation (algae trap CO2 and produce oil that can be made into diesel and gasoline, plus many other products).
7. Retrofitting for all public buildings (Federal, State, Local governments), and money available to fund private buildings and residences to retrofit to conserve energy.
8. Rebuild levies. Rebuild natural barriers. Relocate families from very high-risk storm zones if they volunteer to be relocated.
9. Establish highspeed internet links between all schools and libraries, including the Library of Congress.
10. ......etc.
The key to all of these, and other choices, is to create JOBS that INVEST in our economic future. This is not providing the proverbial job to dig a hole and fill it up again. That is government spending without investment. It will help in the short and intermediate term, but not return enough value to enable the economy to thrive. I leave it to those of you who are more knowledgeable and creative to design 10 through 1000 of the projects that would have those characteristics.
With people working and earning good middle class wages, demand will slowly rise. If we redo our tax policies (the subject of another article) to be consistent both with our own needs and the realities of a global economy, businesses will invest in plant and equipment HERE again, and hire US workers.
How do we pay for all of the above? Well, we are going to have to reduce our appetite for foreign adventurism. Ending the Iraq War will save $10B per month, although some of that will have to be directed to Afghanistan and to rebuilding our military.
We will have to reinstate the tax rates on the top brackets that were in place during the Clinton administration. Clinton raised those taxes in a recession, and created 23M jobs during his term. So, do not allow the mantra of a few percentage points' increase in taxes for the top bracket scare people into inaction. And, the capital gains tax rate was 20% for most of Clinton's term, and 18% for the remainder. Perhaps even higher tax rates on incomes over $5 million should be considered.
But, much of this will be deficit spending, a bill to our children. If we can, through this intergenerational transfer, use that money wisely, keeping mom and dad at work so they can provide for their children, and to leave to their children the fruits of that public investment, it will be a "fair" use of their money, and they will have the wherewithal to pay down that bill.
This is no time for supply-side nonsense, or railing against big government, or even the McCain instinct to damp down demand by cutting spending.
This is the time to act, "frankly and boldly". The more rapidly we do, the less the psychological hangover from the debacle, and less time it will take to work out the problems in the economy. But, it must be massive, otherwise it will only have a small impact, and will be dubbed a failure.
Larry Kudlow, the siren songster of the anything-goes-so-long-as-it-benefits-Wall Street mentality, has trumpeted the "Kudlow Creed": "free market capitalism is the best path to prosperity".
What Kudlow missed is that what really matters is sustained prosperity, and that will not occur by beggaring the middle class, by destroying our natural environment, or by determining a successful economic policy on the basis of how many billionaires have been created.
Here's an alternative "creed" for this century: "strengthening the middle class is the only path to sustained prosperity".
A question for those who are savvy about such things: IS IT POSSIBLE that the Treasury has already purchased common stock in the open markets of distressed financial institutions (on Friday)? In order to shore up stock prices so those institutions can raise funds in a public offering? Certainly a similar strategy was employed in 1929 by some rich bankers, though I do not believe the government was involved with public funds at that time and I am not sure how transparent their activities were at the time.
I'm not casting judgment about whether the purchase of common stock (so they don't vote the shares) by the Treasury is good or bad. If partially nationalizing banks saves the country (and the world) from another Great Depression, perhaps the end justifies the means and they will be proclaimed heroes by future generations. But, is it possible?
You make a good point about taxes/spending, but the problem goes further back, and incrementally. Over administrations, there have been power grabs by the international elite via. lobby-whoring Congress, Wall Street and the Fed. We have a plutocracy, and with few exceptions there are only two parties on the Hill: the complicit and the clueless. They come in all colors....especially blue and red. Not you and me, them. They want us divided.
The New Deal worked for a while because we were still backed by gold. We still had an industrial base and exported and produced goods. The Brenton Woods breakdown (1971) opened up the door fully for debt/consumer based economy vs. production/savings based economy as we once had. Total fiat debt created out of thin air by private individuals. People don't even realize that the Fed is private and not accountable to Congress!
We were on the gold standard when we went into the Great Depression. Anyone who thinks the gold standard is inherently a good thing knows little about economics.
it could be an okra standard. it is a standard that we need, controlled by the market, you and me. (Congress).
don't lecture me about the great depression and what caused it and who was behind the new deal.....or about the gold standard, unless you can substantiate your claims.
I look to Hayek and Von Mises.
p.s. thanks for the spell-check...i went to college with a brenton....get it mixed all the time.
what is money to you?
"Allow me to issue and control a nation's money and I care not who writes its laws!" Amshell Rothschild.
So, if the right massive public investments are made, the economy will strengthen and with it the currency.
I don't know if you believe--and if you do, I disagree--that the the currency has some independent existence and value disconnected to the underlying economy. If you believe that, you are wrong.
If we do not return to sound money, all rhetoric on the table is just that. Money is debt, and has been since 1913. When you chart the dollar vs. oil you will get an inverse relationship since then. When you chart oil vs gold you see them equally nearly. I highly suggest The Creature from Jekyll Island for more. Also, www.silverbearcafe.org in the Federal Reserve tab. 1971 secured the Fed's power. This latest grab is at the international level. What moral authority does some international power club have deciding what my currency is worth?
Thanks for the article, good read.
No one is speaking truth to monetary policy. We hear alot about regulation vs. deregulation. Its a moot point when the Fed controls the money. If we really allowed free markets, we would have allowed Goldman Sachs to fail, as it should. Housing prices would fall, as they should. People would go bankcrupt and go to jail, through anti-trust laws and fraud. That is free market. Free market is also trumping the managed market bailout. why? because only the free market principle of trust can exist within a free market - you can't manage trust. Managed markets is corporatism - fascism.
We've had 50 + years of Keynesian economics. I encourage everyone to read Hayek and go to www.mises.org.
Does anyone think our sovereignty or security or liberty will be enhanced when our currency is destroyed and we're all on one currency?
You can't fix inflation with printing more money. Sound money is the only currency that preserves freedom.
ever heard of Sarbanes-Oxley?
Our constitution calls for Congress to issue money, not the Fed. It also calls for sound money, not fiat currency created on paper out of thin air.
Its a mess! We've had 95 years of Keynesian economics, fully put on throttle since 1971, whereby the power-elite have benefitted by that mechanism but forced the populace to try and practice free-market economics within a corrupt monetary system.
We are seeing the results now.
However, rooftop solar and wind are far better than centralized solar and wind.
Tax credits for individual purchasing and installing these systems seems like the most straight forward way to encourage it.
Raising taxes on the those making over 250K and again over 5M$ will make those rebates very attractive.
who pays for it?
where does the MONEY come from?
YOU, the EXPERT on economics and monetary policy...
http://www.photius.com/rankings/healthranks.html
The USA's doubly expensive, elitist system ranks 37 in the world.