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."

Comments

[etbrand9]

On December 12, 2008 I received a notice from Bank of America (Bank of Amafia) saying my credit card interest would be going up to 27 per cent (from 9 percent) with my monthly payment going from $400 per month to $1200 a month. When I called them to ask why they said it was because my debt to income ratio was too high! What's the logic behind this? Increase my monthly credit card payment by a huge amount so that it becomes virtually impossible to make the monthly payment?

If I'm making my payments on time, have never been late, and am paying a bit more than the minimum, have a credit score in the mid 700s, why do I deserve to pay this amount? Like many Americans, I have been trying to keep my head above water given all the problems with the banks and mortgage companies; but now it seems the companies want to drown us before there are any true reforms for the middle class. It seems that the banks get golden parachutes while the consumer gets lead boots. Who will bail us out?

[chayefsky]

These interest rates are usurious and the Justice Department needs to look into it. Oh wait, the Justice Department now works for Bush. We're screwed. Obama, help us out! Tell these banks to back off!

[BenHenny]

Why not just take it a step further and pay all the unemployed people $30k/yr to not work? Problem solved! That is, until the money runs out - then we'll be back where we started, but another trillion dollars deeper in debt.

We're in a hole. We don't need a shovel.

No matter how you slice it, we're in for extended pain. There's no way to spend our way out of it.

[joebhed]

Ben,
We're in a hole dug by the shovel of debt-money.
You are correct that more debt cannot be used to dig our way out of this hole.

I don't believe it necessary to accept either the depression or the additional debt.
Debt-free money is the answer to fund the new economy.
Google Treasury System versus Federal Reserve System.
Today's economic and financial crisis requires a bold new look at the systems by which we live, and none is in more need of reform than the monetary system.

All HUFFPO readers should take the minute to read this from the American monetary Institute:
http://www.monetary.org/need_for_monetary_reform.html

We live in unprecedented political and economic times.
But we can solve today's problems without mortgaging the grandkids' well-being.

[Perryof1963]

Ben Henry-- you are correct.. we want to work!!!

[royevatom]

Spend more money ! Really! Here is one example of this idea. My college President decided that to many trees on campus were not growing straight enough and had the trees that were not growing straight enough removed. Then they decided that the campus should have new sidewalks and these were installed after being laid out on paper without regard for the paths that people actually walk between buildings, very few people use them unless they have wheels to deal with. And then a massive sprinkler system was installed to maintain the grass even though the campus receives double digit rainfall each year. Now the students get sprayed by sprinklers even when it is raining and the grass still gets walked on. All of this was done at the same time that the college raised tuition and parking fines. When I asked about the expenditures I was told that it is money that they don't get if they don't spend it and if the amount they spend is less than projected then the next year they will get less. Give this college more money and they will not subsidize education. They have proven that they will spend to be able to continue spending. Until we fix our particular world view and the arrogance that comes with it we will continue to pander to a defunct mentality.

[humeliberal]

This is what happens when there are no consequences to investment errors. Why is this money available to your college? Get easy money out of education. Parents who have made wise investment choices will find ways to help their children go to college. Their children, in turn, should work and earn enough money to help out on college expenses. This country has a lot of fat to trim before it gets back on track. Abandon all attempts at bailing out failed ideas. We will all be better off in the end. Is this not the best kind of education?

[vbierschwale]

Actually I don't think any of these are correct..

Take a look at the very short article at

http://keepamericaatwork.com/?p=525

Look at the two charts.
Verify the data yourself with the links

To me its very obvious what the problem is and what the solutin is.

Do you see it ?

Virgil
http://www.KeepAmericaAtWork.com

[lj9283]

“Baily told the Times: "We got into this mess to a considerable extent by over borrowing””

Now I may be wrong, but I thought we got into this mess because the Financial Industry over borrowed. That the financial leverage ratios of debt to equity in the Financial Industry caused this mess.

It was the American Taxpayer who borrowed to saved the Financial Industry based on the promise that if the American Taxpayer borrowed money to shore up the Financial Industry that that borrowed money would make Financial Industry monies available to the American Taxpayer.

Well guess what? The Financial Industry pulled a grift on the American Taxpayer. They used the money that the American Taxpayer borrowed for themselves. There is no accounting for the monies that the American Taxpayer borrowed for the Financial Industry so we have no idea of how many out of country entities the U.S. Financial Industry financed with our money, while our small businesses languish for credit.

About that money that was supposed to “trickle down”, the U.S. Financial Industry got a good giggle out of that one!!!!

Now the American Taxpayer is talking about borrowing money for the American Taxpayer. Borrowing money for paychecks to American Taxpayers. Paychecks that will provide income taxes to pay off the debt that is caused by the borrowing.

This money does not “trickle down”, and the economists don’t see the grift for the top 2% so they nay say the borrowing, and call us all drunks.

[realcon]

Americans, listen to me. We have to protect our country. It is the greatest country in world history. Let the government sell its bonds. Build up the military. We are surrounded by wolves. We have to protect ourselves. Spend money to have a strong military. Protect private property, but in the form of large national conglomerates. Liberals just think about the individual's rights. We need to protect our values as a nation. Free trade is for the interests of the individual.

[hl7]

An op-ed in the Wall Street Journal the other day called for more spending on things like the F-22 as the best way to stimulate the economy. At $140 million -plus each, this is incomprehensible to me. Clearly the military-industrial complex is still alive and swinging. It makes me sick to think of what could have been done for education and caring for our disabled and impoverished neighbors with the trillion dollars or so we have already wasted on the Iraq war. Not to mention the impact of the deaths and injuries of thousands of our soldiers and hundreds of thousands of Iraqis. It's time for this madness to end.

[movecenter]

The WSJ has lost its credibility (for me) now that Murdoch owns it. It doesn't surprise me that such an ignorant op-ed piece would be published.

[Rita at Goldivas]

Robert, thank you for this article, we need to keep hearing your sane voice.

[kenstremsky]

Congress caused the mortgage mess because it did not learn from the Savings and Loans Crisis. Congress should have required down payments on homes and fixed rate mortgages and regulated properly. Allowing mortgage backed securities to be sold based on mortgages with no money down was nuts.

Financial institutions and the Federal Reserve contributed to the mortgage mess.

If the federal government is serious about growing the economy and creating jobs, it will stop taxing interest from savings accounts, dividends, capital gains, and estates. People and businesses will have more money to spend. Businesses especially small businesses that employ lots of people will be better able to obtain loans and investments for hiring workers, research and development, and plant and equipment. Middle class people and union members who have mutual funds would benefit from capital gains and dividends not being taxed. People would have an easier time saving for college tuitions and retirements.

Congress should eliminate the Federal Reserve or veto many of its decisions.

I graduated from the University of New Hampshire in 1992 with a BA Degree in Political Science and a minor in Economics. I ran for United States Senate from New Hampshire in 2002.

My website is http://www.myspace.com/kennethstremsky


Sincerely,

Ken Stremsky

[HMDMSR]

What will investors spend the money on? If good investment opportunities have been available, why haven't investors taken them? Investors spent heavily to give us the "New Economy" back in the 90's. Where is the new economy?

[Republicrats]

agreed and great ideas!

[Perryof1963]

Ken you speak the truth! The Federal Reserve conglomerate of worthless mo.ney printers must IMMEDIATELLY be SHUT DOWN. They are only in business to line their own pockets and do NOT make a cent available for me to spend... Thanks folks,but not gonna "BUY IN" with wortless sense.

[DLBSR]

You are correct with respect to Congress. Wall Street, the banking industry, and Congress are all co-conspirators in this great game of greed, corruption, and the consolidation of power. Congress provided the thief (The Banking Industry) the tools and assistance needed to become a better thief. Deregulation, the Community Re-Investment Act (CRA), and institutional greed all contributed to the Subprime Mortgage Crisis. Indeed, the thief became very prolific. But....you haven't seen anything yet. Look toward the horizon and you will see two tsunamis speeding toward shore. These tsunamis are siblings of the tsnumai with the Sub-Prime moniker. These tsunamis are known as Alt-A and option ARM. All three are the offspring of the CRA. Alt-A and option ARM will make Sub-Prime look like a small tidal surge. Collectively, both are valued at $1.6 Trillion dollars! The default rate for motgages approved under these programs is predicated to be in the neighborhood of 70%, or approximately $1.25 trillion dollars! Don't believe me? Google the Community Re-investment Act and do your own research.

[Republicrats]

basically the worlds turned upside down. we had a repub prez spending like there was no tomorrow all while lowering taxes, while the congress went all in cahoots with him, huh? We had a dem prez "reform" welfare and balance the budget,working with the congress to get it done, huh? now we have a gigantic fed monster with many overlapping functions- dea/atf/fb­i/homeland security/ border patrol ? narco terrorism drives more and higher levels of violence on our borders, and we do what, get a new drug czar instead of de-criminalizing the stuff, huh? we borrowed too much, let exotic financial derivatives and lax loan standards crash the system and kill off jobs, and we want to do what, borrow more money and "inject" it into the system- huh?

Each of us can take a stand this year, pay off your debt, live frugally, f*** trying to keep up with the jones', and get back to our core values of independence, liberty, and the pursuit of happyness!

[jhNY]

But why shouldn't we ordinary people get free money like the plutocrats do? I promise to spend my free money on paying down my debt until I'm entirely debt-free, and if I have any left over, I'll put it in the bank where the plutocrats will give me possibly as much as 2% interest a year! I've been living frugally for pretty much my entire life, thanks, and I'd like time off from the hamster wheel of debt, just so I'd know how it feels. But feel free yourself to live as frugally as you can. I hear it can be soul-stiffening.

[ProFromOre]

While I agree with your analysis in your first paragraph completely, in your second paragraph you miss the point of Mr Kuttner's article completely: if 'we', the working people, working poor & non-working poor, live more frugally than we are already forced to the economy will spiral into TGD..v.2.0.

A massive government influx into infrastructure and social services will do what you aspire to accomplish, but will avoid an economic calamity. The infrastructure will get people back to work, which will help everyone and the social services will allow the working and non-working poor to ease their burdens - the aid they are given will flow right back into the economy, helping everyone.

The poorer someone is, the more likely they are to spend 100% of everything they receive.

[BigHeadTodd]

When financial institutions are again being run by financial experts interested ONLY in the true-market performance of their companies, as opposed to being run for shareholders who DEMAND ever-expanding profit, this situation will correct itself. But at what cost in the interim?

[exmate]

Running companies for the shareholders would be a more reasonable approach if stocks paid dividends which would reflect the market performance of the company. Instead, we buy stocks with the expectation that the share price will increase. Share price increases according to perceptions. As we have found out , sometimes those perceptions are influenced by " Irrational Exuberance"

[Republicrats]

agreed, they need to focus, not join the pack mentality and focus on the long term growth!

[WeTellTheTruth]

"Pity the child who was never allowed to suffer"
Yes, WE - all of us - are the unfortunate child who was never allowed to suffer. As a result WE have a totally unrealistic view of life. WE think that life should never be difficult. WE think that WE should always be getting richer and that WE should be getting more things, more toys, more cars, more TV's more clothes ..........­..........­.
Now, WE are going to suffer for the first time and WE are not prepared for it. There is no one to pity us except.........WE.

[Republicrats]

Amen to that!

Debt is normal, be weird!

[ProFromOre]

I couldn't disagree more, I came of age at the end of that mentality. I worked hard to pull myself from poverty, being the first in BOTH sides of my family to go to college, (only four of my ~30 cousins graduated high school). In spite of that, my only time of real economic success was during the computeriz­ation-driv­en boom of the '90's. I have lived through declining social services, maniacally increasing military-industrial growth, and a steadily shrinking standard of living.

The government was hijacked by right-wing idealogical nut-jobs, hell-bent on hate speech instead of political dialogue.

Our government agencies reported a massaged unemployment rate of 6-7% that is actually around 12-13%, an artificial inflation rate that is closer to 8-9% than 2008's 4-5%. Here's an essay that explains the inflation & job picture quite well:

http://www.safehaven.com/article-1942.htm

We are spoon-fed a shaped news picture and economic picture of our country in an attempt to maintain the life-style of disingenuous political leaders & idealogues; if we are ever to right the floundering ship, we need to face realities, not massaged news and statistics.

[WeTellTheTruth]

Pro
I will respond to your post one paragraph at a time.
1. The "mentality" you refer to has never ended. The borrow and spend mentality is still alive today. You should be very proud of yourself for your education and for your courage to rise above.
2. I agree but your statement is about politics and my post was specific to financial issues - borrow and spend.
3. I agree with you which is another reason why we should not borrow and spend money we dont have.
4. I agree with you again, especially your last comment about facing reality. This is exactly what we are NOT doing. We are spending money we dont have and paying the bill with borrowed money we cant pay back. Even now, when our world is crashing down around us we [ wall street, government, citizens] continue to borrow and spend money we dont have.

[artistcain]

We have every right to be angry about the bail outs; it always seems we are bailing out the wrong people (financials, car companies, insurance companies, etc.etc.) all of whom keep getting us into recessions or depressions decades after decades. Giving the taxpayer $300.00 in a rebate was peanuts and did nothing to help the consumers. It was peanuts compared to the billion dollar steaks and filet mignon we are giving to the banks and other institutions. It would be better to give every American who filed a tax return or holds a legitimate social security card $5,000(call it our bonus) each year over a 4 year period, that way housing will recover and spending will improve dramatically which would do a lot more for people’s confidence in the system all of which would end up in the wide system instead of what we have now the rich get richer the poor get poorer and the middle class disappears.

[HMDMSR]

This might help Americans pay off their debts, but what happens afterwards? Usually in scenarios like the ones being discussed on this blog, Americans end up saving and not consuming. How will institutions which hold these savings manage them? Will they make loans? Loans to do what? Will wages be falling during this period? In the end won't you still have profits going toward speculation and not investment in socially worthwhile goods and services? It seems like many Americans want the economy to produce an outcome. Market economies don't produce outcomes responsible people want. They produce outcomes that make profits.

[exmate]

The people who understand the economy best are not those involved in production or research and devellopment or even sales but those in finance and banking. They know about making money but not things. There needs to be a balance. In the human body no one system should be allowed to get too hyper or too hypo. Finance and banking have taken on lives of their own. Giving money to banks is like giving more Synthoid ® to a patient who is already hyperthyroid.

[bigmaddy]

what a great article anyone who still thinks the elite will somehow take care of them should read this

[Overd0g]

Why should they?