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Deficit or Depression?
Here is a fine example of why a despairing President Truman once said, "Bring me a one-armed economist." Our quote of the day comes from Martin N. Baily, an economist at the Brookings Institution, who was once on President Bill Clinton Council of Economic Advisers. The quote, incidentally, was the centerpiece of Peter Goodman's lead article in the Sunday New York Times News of the Week Section, "Printing Money - and its Price" -- expressing alarm that President-Elect Obama's stimulus program will over-spend and over-borrow.
Baily told the Times:
"We got into this mess to a considerable extent by overborrowing. Now, we're saying, 'Well, O.K., let's just borrow a bunch more, and that will help us get out of this mess.' It's like a drunk who says, 'Give me a bottle of Scotch and then I'll be O.K. and I won't have to drink anymore.' Eventually, we have to get off this binge of borrowing."
But, wait, here comes the predictable "on-the-other-hand" that drove President Truman to look for a one-handed economist. Goodman, in alarmist mode, continues disapprovingly:
"'This is a dangerous situation,' says Mr. Baily, essentially arguing that the drunk must be kept in Scotch a little while longer, lest he burn down the neighborhood in the midst of a crisis. 'The risks of things actually getting worse and us going into a really severe recession are high. We need to get more money out there now.'"
What is totally unhelpful here is the Times' use of misleading metaphors about drunks, and Baily's sloppy and promiscuous use of the pronoun, "we." In fact, "we" did not borrow recklessly. Many financiers speculated with borrowed money to get very rich, and the financial economy is now unraveling as their assets turn out to be worthless. The Bush administration plunged the Treasury deeper into debt so that millionaires could pay lower taxes and a needless war could be waged. The entire economy borrowed from foreign central banks to finance purchases of products that the U.S. economy no longer made at home because of a perverse trade policy. And yes, consumer borrowing increased to make up for wages that were stagnant or declining. But that is not an undifferentiated "we" in the sense of thee and me. Mainly, it is a "we" made up of the rich, the powerful, their political enablers and their perverse policies.
So now that "we" are collectively up a creek, what exactly should we do? First, the rest of us need to take back our democracy from the tiny elite we that got us into this predicament. And in deciding what course to pursue, let's appreciate that Baily's left hand is much wiser than his right one: the government needs to spend a lot of money, so that the collapsing private economy does not end up as Great Depression II. When recovery comes, we can get the budget closer to balance. But if we attempt fiscal austerity in a severe recession, depression is all but guaranteed.
However, en route to a sensible stimulus program, President Obama will need to hack his way through a forest of elite nay-sayers like the Times article. Republican Senator Lamar Alexander (TN) said of a proposed stimulus package in the range of a trillion dollars, "I don't even want to think about a number that big." The President-Elect will face almost wall-to-wall Republican opposition.
Others contend that government is just not capable of spending large sums efficiently in short order. Infrastructure spending is debunked as taking too long to conceive, plan, and execute. "It's actually very hard to spend $700 billion quickly," New York Times columnist David Brooks argued. "If you've got a tiddlywinks hall of fame, they're going to fund that thing."
In fact, state and local governments and school districts are likely to suffer a revenue shortfall approaching $200 billion by next year. All the federal government has to do is write a check to cover that amount, and not a single policeman, fire-fighter, teacher, or first-responder need be laid off; not a single human service office closed; and not a single public project deferred.
These are not new projects that take time to conceive and plan. This is about preventing layoffs and shutdowns of existing public services. And Washington should also help non-profit social service agencies that are reeling from cuts in charitable giving and foundation losses as well as declining local government aid.
Some housing projects take a while to conceive. But according to Anne Gelbspan, a Boston non-profit community developer, finance for "shovel-ready" affordable housing projects has dried up in the current crisis. That's because Congress foolishly structured our non-profit housing system to depend on tax credits for private financiers--who are now too traumatized to lend. If Washington substituted direct lending, these projects could move forward.
The federal government could also usefully spend money subsidizing mortgage rates on starter homes and on refinancing mortgages at low interest rates so that people at risk of foreclosure could keep their homes.
And even if universal health insurance is too heavy a lift for Obama's first hundred days, part of the stimulus could go directly to community health clinics, which are already stretched to their limits.
An emergency infusion of federal cash could make public universities affordable again, and increase the value of Pell Grants. It's far better to have young people attending classes (and not graduating saddled with huge debts) than to have them clogging unemployment rolls.
Another easy way of raising purchasing power is a temporary cut in the payroll tax. That's a quick 6.2 percent after-tax raise for all workers. To qualify, businesses would have to resist the temptation to cut wages or employee benefits.
Still other doubters worry about increased deficits rekindling inflation. A loss of confidence in the value of the dollar, warns the same Peter Goodman in the Times, "would force the Treasury to pay higher returns to find takers for its debt, increasing interest rates for home and auto buyers, for businesses and credit-card holders.
Well, in case Goodman doesn't read the Times' financial page, the government's current borrowing cost on 30-year bonds is currently around 2.5 percent. That means private investors here and abroad are willing to lend the federal government money for 30 years at a very low yield. Thirty years! The markets are aware that larger federal borrowing is in the offing. If markets anticipated inflation, they would be demanding far higher rates.
The government should sell lots of these bonds, and lock in a low rate. The national debt is going to have to rise for a time--the alternative is a depression--and the government might as well finance that debt cheaply. A cost of 2.5 percent for thirty years is effectively zero; it's lower than the likely rate of inflation.
Once recovery comes, more credit will begin flowing to private investments again. There will no longer be a stampede into the safety of Treasury bonds, and government borrowing costs will rise. By then, the government can begin paying down debt, as we did after World War II.
So there is no shortage of good uses for a trillion dollar stimulus package, and no shortage of funds to finance it--and no good alternative. There may, however, be a shortage of political will. And that's where the exceptional leadership of our new President will face its first big test.
President Obama will need to ignore the nay-sayers, and win over public opinion to the proposition that temporary use of very large deficits is preferable to a great depression. It is bizarre than any educated person thinks otherwise.
Robert Kuttner is co-editor of The American Prospect. His new best-selling book is "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."
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Infrastructure jobs are a good start but we must start to MANUFACTURE once again...
Everything from Steel to Televisions etc.
Economists always seem to get it wrong don't they?
For months they told us we were not in a recession and finally we got word
that we had been in a recession for a year...
Now they all tell us that we are not in a depression...
I think we are in the Second Great Depression already:(
I think a depression would be good for this country and the world in general. Let's face it we haven't had one for a long time and it would be a good lesson for the younger crowd. Why is everyone so afraid of a depression. Great things came out of the last depression and I would expect more good things will come out of this one. Most people need to learn to be more frugal. Too many of my neighbors have too much money and I personally think they need to wind it down a bit. I also think Teachers and Nurses and Auto Workers make too much money and they need to have their pay scaled back quite a lot.
Read this, for your own good:
How to Repair a Broken Financial World
http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html
And if that's not enuff; read this one too:
The End of the Financial World as We Know It
http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html
The government does not need to launch massive new spending to turn the deflation around.
All it needs to do is print dollars and use them to buy back US government debt. Those holding debt will get dollars, which then must be invested or spent somewhere.
We have $10 trillion to buy back. And we can do it without re-inflating. We just need to stabilize the currency and investments can be made again with greater confidence that we are bouncing back.
Right now, the billions we've given banks is simply being used to buy US debt, which is where the bailout money came from to begin with.
Its not working folks!
You cannot rescue the economy by throwing money at banks!
Only direct public infrastructure and energy investment can restore the economy.
We MUST regulate the banks. They have become drunken gamblers with OUR MONEY.
Look up CDS.
http://www.huffingtonpost.com/users/profile/research
Deficit or Depression?
Deficit is the latest REPUBLICAN-SPEAK for DEPRESSION.
It took Republican THINK TANKS forty years to create that "switch".
Enforce the Sherman Anti-Trust Laws or pass new legislation to break up these massive corpaorate monopolies. No bank or corporation should ever be too big to fail. Reinstitute the legislation passed under the Roosevelt admin. separating commercial banks and investment banks, period. Begin prosecuting all bunko artists responsible for this mess, not just the obvious ones like Madoff, regardless of the amount of time and effort it takes. They must be held accountable for the destruction they've caused. Create strong, careful regulation of all industries and institutions belonging to the Commons including airlines, which use public airspace and media corporations which use the public airwaves. Require all CEO's to demonstrate effectiveness in creating a healthy company before they're given a penny of compensation. Limit the amount of compensatuion CEO's can earn. This is a beginning.
They're NOT too big to fail.
What's going on is BUSH'S TRILLIONS GIVE-AWAY to
1) further ENRICH his family & hi "nanny state for the rich" pals
2) make it very difficult for Obama and Democrats to get up from under.
This serves republicans well!
1) their RICH PALS will FINANCE THE NEXT REPUBLICAN ELECTION big bucks.
2) Republicans can DEMONIZE Democrats in the next election for "not doing enough"
to repair the REPUBLICAN ECONOMY CRASH. Absurd, but this will definitely happen.
You sound like an Palastinian - are you?
While the inevitability of a massive stimulus package is a given, a more troublesome issue will be what steps does Washington take to be certain we never again find ourselves in this dangerous financial situation ? If scores of banks, financial institutions, commercial corporations are too big to be allowed to fail in 2008, how many more of even greater size will exist in 2025 ? Will the taxpayers just open a new pipeline to all failing corporations above a certain size ? And will we still accept the nonsense that senior executives justify their outrageous compensation packages when recent experience reveals the average $50,000.00 white collar worker could have done just as well or as badly as these high flyer boys in running these firms. If anybody in Washington still thinks we should minimize a dependency on Social Security and put our retirement at risk by investing in Wall Street, what oversight , restrictions and tigher regulations will be put in place on the people who manage those investments? The stimulus is the easy part for the next Administration, the hard part comes after.
Is it the confidence in the dollar or is it preservation?
Ask them that are buying short term treasury. I personally find the treasury a safe place to preserve my money. I care less of the value of the dollar. I know the dollar is getting devalued. Yet, leaving it in a bank is very high risk now. When the President elect calls for a bank holiday(week or longer), treasury will send me mine yet and I can take it to the local store to cash. What will you be doing? Many believe FDIC will not be able to cover the losses and so it will defunct(many lose cash).
Alternative depression? That is assuming you can conquer the crash. My economics tell me there is no way. Forget the debate, I will plan for the worst and let the rest take the risk road to losing all.
If they fail this money will cause inflation, on top of devaluing the dollar, and deflation. Simply put.
Inflation-essentials needed to live will cost more
devaluing-oversea products will cost more
deflation-stocks, housing will be worth less
on top of a prolonged, higher unemployment
Infrastructure-companies will use mainly crews already established working longer hours and months. Stimulus has to start somehting-what are they starting or creating-larger government and larger government debt is over.
Bob's post lays out well the false choices that are being presented, mostly in the biznews media, for solving the problems we face.
Borrow Trillions or Depression.
These are false choices?
Even with long-term borrowing cost by the government at two and a half percent, we the taxpayers are unnecessarily paying the bankers and investors for the privilege of using their money, that is created out of thin air.
It is unnecessary because we could readily fund the transition to a more sustainable economy through a Treasury system issue of credit-money, paying directly for the services that are being pursued.
Bob, I know that you are familiar with long-term banking committee Chairman Wright Patman of Texas, and with his statement on government borrowing:
"" The Federal Reserve Banks create money out of thin air to buy Government Bonds from the U.S. Treasury...and has created out of nothing a ... debt which the American people are obliged to pay with interest.""
We need to throw off the financial yoke that the federal reserve banking system has built up around the American people, and we need some progressive economic leadership to enable this new American freedom.
It is possible.
Jefferson, Madison, Jackson, Lincoln and others are true American patriots and statesmen who warned against the private banking interests controlling our economy.
We need to create a new progressive economic agenda, based on the Treasury system of money creation, and abolish the FED.
respectfully.
I'm with you on this. We need to Dump the Fed and create our own government treasury system. We don't need them.
Help me out–
It seems so confusing to me that U.S. gov. owes trillions of dollars to the Fed, but yet those banks are insolvent and need to be bailed out, so U.S. gives them 700 billion that we really don't have. What happened to our debt? If they failed, wouldn't our debt disappear? Or wouldn't our debt go down by 700 billion?
On the FED, debt and the Treasury.
Under the present system, the private bankers of the FED alone create ALL the money, and ALL of it as debt.
We live under a 100 percent debt-money system.
The Treasury issues IOU-Certificates, but it does not create the money.
When you go the bank and borrow money for a used car, you give them an IOU, but YOU do not create the money.
It is the banks that create the money.
We don't want the FED to fail, we want to absorb its operations into the Treasury, and re-monetize ALL federal reserve note dollars into United States Notes, making them OUR money and not the FED's.
As to the $700 Billion. Or, the Obama Trillion.
The only substantive matter is WHETHER the money is BORROWED into existence, or whether it is ISSUED into existence by the Treasury, debt-free.
Under the Chicago Plan proposed to FDR at the FED's earlier failure, all money would be created by the Treasury, and all banks would operate on the 100 percent reserve "real-money" basis.
The way to reduce our debts is to take the money-creation, and thus 100 percent debt-creation, powers away from the bankers, and restore the sovereign American people's right to create our own money.
Debt problem will soon be solved.
The grandkids can pay their own way, rather than paying for this generation's failure to operate an honest money system.
Monetary transformation NOW !
Absolutely. The Fed needs to be destroyed. It is nothing but a nest of vampires who have sucked the lifeblood out of this country since 1913 (over which time the U.S. dollar has lost 97% of its purchasing power). We need to be on a gold or silver standard, whether that means raising the price of gold to $10,000 an ounce or raising the price of silver to $100 an ounce. THIS IS NOT ACCIDENTAL, folks. Today's mess is the result of a concerted effort by a cabal of banks to take over the United States of America. These people are attacking you--what are you going to do about it?
Geeze. Do you want to have a recession now or have your kids deal with a depression later?
http://ewebsmith.com/Finance/7trillion.html
We are already in a recession! For a year! The danger is us falling into a downward spiral like the water rushing out of a tub, where the current job losses, housing value losses and 401K losses cause people and businesses to cut back on spending, leading to more job losses, falling state incomes and state cut backs on unemployment, food stamps and cutting jobs leading to more job losses and more business and state income declines and the circle spiraling until the unemployment rate is at 20 to 25% and rising. When your job is lost because no one is buying your company's goods, will you be happy that everyone decided not to support some government spending to avoid the downward spiral? When you can't pay YOUR mortgage, will that finally convince you?
But if we choose to have the government spend money that it can borrow really cheaply (0 to 0.25%) it would be crazy NOT to borrow and build people's confidence that their jobs will be there for the indefinite future. Then normal commercial activity will resume and take over for the government spending which should THEN be returned to a pay back the debt role; but ONLY as the economy resumes (which will be obvious as the interest rates that the government must offer to borrow money rise). As long as that money is spent for things that will benefit the country for many years into the future -- e.g., bridges, public transportation rail, schools, electric transmission grid, solar and wind power projects, and education from K-12 to college, it IS an INVESTMENT in all our futures. Getting Americans trained in green jobs will provide PRODUCTIVE jobs for the foreseeable future.
If we do this spending, we can grow ourselves out of this recession rather than wallow in it for a decade with the consequent waste of economic power and human lives. We do not have to come out of it with a monstrous debt, although it will be bigger than it would have been if we had not gotten to our current position (thank you Republicans). But if we do not do this, we will be even deeper in debt and with nothing built to help us recover. Since when does private business decide to build transportation systems or bridges? Or education systems?
You really have the choice of your kids having a big debt to pay off without a decent job to earn the money or an equal debt to pay off with a higher paying job created by the existence of a better infrastructure that your kid has been prepared for by an improved school system.
no, actually, we can't grow our way out this time. the numbers are that bad and the fundamental structure is eroded.
credit comes from savings, not more credit.
steps to be taken.
1. slash entire federal departments
2. cut federal spending to FY 2000 + eliminate federal income tax (only 38% of tax revenue) = surplus
3. repeal sarbanes oxley
4. end the fed
5. return to sound money
6. pull our troops home
we'll take care of the rest.
Everyone complained that converting to solar and wind and efficiency would cost a trillion dollars or more.
Well?
The 700B$ we gave to Pualson for the GOP crony hog fest, doesn't bother these criminals.
But ordering a trillion dollars worth of green energy government facility upgrades,
That's a problem?
JOBS are the answer, via Green infrastructure.
Taxing the 250k/year incomes of the rich even at 93% (please don't, how about 50%)
Didn't hurt the economy from WWI till the mid 60s.
http://www.huffingtonpost.com/users/profile/research
With jobs, the company and banks recover(if they are doing anything useful)
Then tax incentives can get solar and wind onto every appropriate home and business roof.
That will save the USA some 700B$ PER YEAR.
Robert - Your analysis of the causes of the problem is OK but I love how you've decided to scare us with the black and white choice: (1) fork large amounts of money to the financial establishment or (2) have an economic depression. No other alternatives? Sounds like the standard Wall Street threat to me.
As an alternative, I'd suggest starting with required payback from any institution that gets "bailout" money, including total payment back to the taxpayers of all profits and shareholder company value. I'd also institute serious criminal penalties for anyone engages in fraud on or fixing of any financial market. Any collusion to start a depression that hurts the poor while the wealthy skate goes down. Along with appointing the most viciously competent prosecutors available to enforce the rules.
1d- excellent alternative!
They don't use effective economic indicators to identify recessions...such as wages and consumer spending. They factor out oil and food prices from the inflation index, which doesn't make sense to me. By the time they finally admitted to a recession, it was like, Dah!
The current crisis is repeatedly compared to the 1930's, so sounds like we're in a depression. But they don't want to tell us, because our confidence may be damaged....as if it isn't already!!
It doesn't take an economist guru to figure this stuff out...it's just common sense.
movecenter.. my wallet tells me the entire story.
There really is no definitive answer to our financial dilemma. However, there are some guidelines that can be helpful:
1.) Infusions of cash must produce jobs in the private sector for people of modest means. Programs like the old WPA only require people to work for their unemployment "benefits."
2.) There has been so much wealth destroyed that the government must somehow produce "new" money to keep the economy going. Because so much wealth has been destroyed, this will not be inflationary.
3.) The government must do its utmost to ensure that the private sector gives attention to the common good, not just immediate self-interest.
4.) No single group may be favored. The good of each interest group must be weighed against the common good.
5.) There must not be a valuation made of who is "worthy" or "unworthy' to obtain assistance. The application of such Victorian standards following the Great Chicago Fire of 1871 sewed the seeds for the violent strikes of 1877.
Other such guidelines would be worth developing.
As I see it, a depression is unavoidable. We need to find ways to deal with it that are not ideology-bound and do not repeat the numerous mistakes of the Roosevelt administration in the 1930's. We need fresh, pragmatic thinking.
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