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."
"'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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Everything from Steel to Television
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:(
How to Repair a Broken Financial World
http://www
And if that's not enuff; read this one too:
The End of the Financial World as We Know It
http://www
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-inflati
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!
Only direct public infrastruc
We MUST regulate the banks. They have become drunken gamblers with OUR MONEY.
Look up CDS.
http://www
Deficit is the latest REPUBLICAN
It took Republican THINK TANKS forty years to create that "switch".
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 republican
1) their RICH PALS will FINANCE THE NEXT REPUBLICAN ELECTION big bucks.
2) Republican
to repair the REPUBLICAN ECONOMY CRASH. Absurd, but this will definitely happen.
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(we
Alternativ
If they fail this money will cause inflation, on top of devaluing the dollar, and deflation. Simply put.
Inflation-
devaluing-
deflation-
on top of a prolonged, higher unemployme
Infrastruc
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 unnecessar
It is unnecessar
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..
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 progressiv
It is possible.
Jefferson, Madison, Jackson, Lincoln and others are true American patriots and statesmen who warned against the private banking interests controllin
We need to create a new progressiv
respectful
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?
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-Certif
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-monetiz
As to the $700 Billion. Or, the Obama Trillion.
The only substantiv
Under the Chicago Plan proposed to FDR at the FED's earlier failure, all money would be created by the Treasury, and all banks would operate on the 100 percent reserve "real-mone
The way to reduce our debts is to take the money-crea
Debt problem will soon be solved.
The grandkids can pay their own way, rather than paying for this generation
Monetary transforma
http://ewe
Well?
The 700B$ 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 infrastruc
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
With jobs, the company and banks recover(if they are doing anything useful)
Then tax incentives can get solar and wind onto every appropriat
That will save the USA some 700B$ PER YEAR.
As an alternativ
The current crisis is repeatedly compared to the 1930's, so sounds like we're in a depression
It doesn't take an economist guru to figure this stuff out...it's just common sense.
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 unemployme
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 inflationa
3.) The government must do its utmost to ensure that the private sector gives attention to the common good, not just immediate self-inter
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
Other such guidelines would be worth developing
As I see it, a depression is unavoidabl