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".