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

[Pdubya]

What money? Where is it? Sitting waiting on the printing press? In China ready to be loaned? A computer entry waiting to be entered? We have no money.

Fine, print and borrow away! A "stimulus" package will do little if it is not balanced by cutting spending elsewhere that outweighs the amount used for the stimulus. Otherwise, we we continue to debase our currency. Any job we have will buy less than yesterday.

It is high time we return to sound money and to only have Congress appropriate and issue the currency. When we realize the difference between currency and money, we may learn how to recover.

End the Fed.

[RebelTraders]

All of the corporate bailouts (and the still pending $1 Trillion stimulus plan) all comes down to one very simple thing.

Take money from those who have little to begin with (tax payers) and give it out to the banks and other corporate bailouts in the 'hope' they will then lend out that money to the same people from which it came at higher interest rates.

This is stealing from the poor to give to the rich.. then the rich charge the poor even more to get that money back.

All these bailout do is kick a can down the road, the bigger problem is that the can is rolling down a hill of snow and it is getting bigger.

[Pdubya]

yep. and the only way to fix it is to close their counterfitting press.

[TRex86]

PW,
In a deflationary collapse the federal government can print money with impunity and use it to replace the trillions of dollars that have evaporated with the devaluation of assets like stocks and bonds, the loss of jobs, etc. However, if you want to do some cutting make it the least productive part of the federal budget, defense spending. Since we spend more than the rest of the planet combined we have lots of room. Moreover, building stuff that gets blown up is the least beneficial way to prime the pump. Islamic terrorism has no potential to do significant damage to us, but our criminal invasion of Iraq has cost us trillions we'll never get back. If we put money into jobs, infrastructure, and productive investment we'll get them back many times over. If we continue to pursue Pax Americana it will be end of empire very soon.

[ProFromOre]

correct, sir, very correct - a year or so ago, the former AG Ramsey Clark called for a 50% reduction in the Defense budget. I almost cried hearing that said in public, in DC, no less.

[Pdubya]

I would suggest you research David Walker. The saddest part of your suggestion (laudible, yes, accurate, no) is that we are so far in debt that we can not grow our way out of this one - even by 'stimulus'. The numbers just are not there. We have mandatory spending and discretionary spending that both have to be cut. On top of that, we could actually do some good and cut our entire federal budget to the year 2000 levels, eliminate the federal income tax (it only represents 38% of our tax revenue) and we'd have a surplus. THAT would stimulate the economy.

...but no, again....you illustrate my point on fiat currency, inflationary spending: one teams thinks they can spend it more wisely than the other. And that just may be true. But, that is not the issue. The issue is the sytemic problem: inflationary spending in any form. We are so far gone we need to re-visit the basics.

[Pdubya]

I'm all for cutting the defense budget, drastically if needed. What you may not know is that doing that is a paltry effort to get us back into shape. We could cut the entire federal budget and still be in the red! But again, if we returned to sound money (ended the fed), cut our entire federal budget (not just defense) to FY 2000 levels and eliminated the federal income tax, then we'd have a surplus to work with, jobs would be created in the market (credit comes from savings, not more credit), and we'd be on our way to recovery. It would be a painful recession, but sure as hell beats a prolonged depression: exactly where we are heading.

[joebhed]

""the federal government can print money with impunity..."
Please say how.

Is it government-printed money?
Is it Treasury Certificates that enable borrowing from the federal reserve?
Is it debt?
Or, is it debt-free money?
Please.

[yappnmutt]

here's another metaphor. the alcohol metaphor is what got into this mess. we are walking the plank. keynes can only make it a little longer hoping peter pan will show up to save us. a depression is in the cards regardless of what the new gov't does. distilling all the complications into a simple concept is difficult but it boils down to this. withdrawing that much available credit from the world forces a contraction that cannot be made up without the world paying dearly for it.

[Troubledwawa]

Does Obama's bailout plan not included infrastructure improvements to get off of foreign oil dependency?

New electric grid, wind mills, solar, research into new alternative fuels, partnering with Detroit to build cars that get 100 mpg, and clean coal technology are investments, guiding the country toward that vision on getting us off of foreign oil - versus the the same old, same old, print money and "here ya go Wall Street..." nonsense.

I agree whole heartily with Mr. Kuttner that taking a risk now is far better now than doing nothing (or the same old, same old).

What I don't get is the World Economic Summit around April talking about a severe world wide recession, and our elite waiting to Wall Street falls on their face, to start taking action, which just happened to be by the way, the same old, same old.

[exmate]

Our "conservative" friends will say But..but you gotta give tax cuts to the rich because they are the ones who create the jobs. "If they can't own 5 or 6 houses ,they will not be motivated to create all that wealth for us." "If we redistribute the wealth, that would be communism and socialism and everyone knows that is bad"

[Overd0g]

Well that's true. I'm looking into my constitution and not seeing the authority granted to the federal government to take money by force from one citizen and then handing it to another. Must be in the fine print.

[DeadPhish]

Nah - Not in the fine print, in the NY Times.

When you take money from the taxpayer, and give it to a wealthy business man in the form of a bailout - you are, in essence, transferring money "by force" from one group of Americans to another. The only difference is that if the Rich are on the receiving end it's all good and there is no problem. If the taxpayer is the beneficiary, then NO WAY JOSE! No SOUP For You!

[joebhed]

I think you're speaking of taxation of some sort.
In reality, the largest transfer of wealth from one citizen to another in this country takes place via the nation's debt-money system, where ALL money is created as a debt payable from one person(taxpayer) to another(banker).
ALL of it.
Where is THAT in the Constitution?

Now, I don't know what you mean "by force" - do you mean by force of law?
In that case, it is by force of the federal reserve act of 1913 that created a private banking system that can tax every American for the privilege of using the private bankers' money system.
Every American pays three(3) times for every bag of groceries they buy.
Once for the goods, and twice to the bankers for using their money system.
Is it any wonder that SOMETHING is wrong?
The solution is monetary reform, and an honest, debt-free money system.
Then we can force the government to do major reform to its taxing powers.
Abolish federal reserve notes and replace them with United States Notes, of issue BY the American taxpayer, FOR the American taxpayer.
Let the banks lend real American money.

[Erdgeist]

Thanks Robert -- great insights! I hasten to add that there were actually two waves of the Great Depression. The first was from 1929 to 1933 and then 1937 to 1938. The latter occurred when FDR listened to the right-handed financial conservatives and cutback on government spending.

There are tried an true methods for bringing down the deficit such as saying, "No!" to the military and bringing back the 90% tax bracket. You could also put a revenue tariff on all imported goods the revenues of which would go directly to paying off the National Debt. The revenue tariff used to be a major part of how we capitalized the U.S. government until wars became too costly and the likes of Milton Friedman and other economic kooks came on the scene who lived in abstract thoughts and not the real world.

Economic history also teaches us that free-trade is the quickest and most efficient way to ruin a nation as compared with neo-mercantilism. This is why Karl Marx approved of free-trade. He was sure it would act to hasten the revolution. This same history also teaches us that a country that produces its own goods and services is much stronger than one that doesn't. We are not that country anymore -- at least not right now.

[Paulo1]

Erdgeist

Not at all sure I agree with your reading of Marx. People have a tendency to attribute ideas of revolution to the man and ignore his appeal to reform. Having a bunch of War-Communist totalitarians hijack his name and ideas for their own ends has given even the mention of the name Marx or any concept of socialism a bad rap.

The truth is that the countries who are now the most insulated from this economic mess are the ones that blended Capitalism with Socialism and a good dose of Government Regulation. You are not reading front page news about the bank failure and mortgage disasters in Germany or Norway or Denmark or Sweden are you ? Nor are their citizens panicked over loss of health care, destroyed 401k's and joblessness.

[SimonLeigh]

Well said, but aren't we all forgetting THE ENVIRONMENT? Do we still plan to restore prosperity and then maybe start considering ways to reduce our colossal overconsumption and overpopulation?

[Overd0g]

"Overconsumption" created the prosperity.

[Overd0g]

A Karl Marx endorsement isn't exactly a bonus.

[HurryUp1212009]

As hard as it might be to comprehend, this taking the US to the brink of bankruptcy was INTENTIONAL. If you don't believe me, Google "Starve The Beast". Deliberate bankruptcy through the lethal combination of lowering taxes at the same time as increasing military spending has long been a dream of the extreme right, especially Grover Norquist, so the ONLY way back to solvency is through complete evisceration of all New Deal programs.

Can you IMAGINE what would be in store for us if McCain/Palin had been elected and Phil Gramm became Secretary of the Treasury?

And, can you IMAGINE what Social Security would look like today if "George & The Republicans" had succeeded in "privatizing" Social Security, instead of being thwarted by the Democrats, back in 2004??

[provgrays]

No matter how bad things are, the pork parade will continue with no accountability. It's about bringing home the bacon to the home district and that is a large part of the problem.

A tiny elite does run, or more accurately, ruin, this country and that tiny elite sees the government as it's own exclusive property to do with as they wish. National outrage and some dim understanding of who government is supposed to serve is the only way out.

Otherwise, brother, can you spare a dime?

[Paulo1]

The writer makes good sense, however, I am supporting new spending yet

I see no reason to spend money until after we hold some people accountable. As much as I would like to see Bush and a bunch of CEO's hauled off in chains for fiscal treason I believe the accountability needs to come in the form of some stiff new regulations.

There was a time when investing meant putting your money into a good idea and reaping the profits of creativity. That was true capitalism and there is nothing at all wrong with getting rich from it. Today we have disaster based on gambling where so-called investors had no intention at all of holding the stocks or mortgages for a profit but only to sell them off in short term bets on future value. This isn't capitalism and just greed.

If you look at the best times in America's economic history they have come from three things. One is an investment in technology infrastructure, the railroad boom, the car boom and the computer boom. The second is stable tax policy, you know up front what you are paying and what the government is spending. The third is regulation, whether it was the Trust Busting era, or the reforms of Roosevel's New Deal or the Great Society programs of Johnson, Somehow the Republican insanity of Deregulation, Under Investing and "Tax-cut and Spend", have become the accepted norm. We need to reign them in HARD with regulation

[Overd0g]

It wasn't the betting that was the problem. All investing is betting. It's the leverage.

[Sundialsvc4]

Robert, here I agree with your opponents ... in part.

The root cause of our problem here is something that Truman's successor spoke about. Dwight Eisenhower coined the term "military industrial complex" and warned of its danger.

And how, prithee, is such a danger financed? Exactly.

"The guv'mint" is not, and cannot be, "a wellspring of endless liquidity." It cannot "spend us out" nor "bail us out" of anything at all. It can, however, regulate... if it will take its own laws and its own Constitution seriously. The problems are well known to the common man ... and to our erstwhile trading partners who rightfully say, "you must take me for an idiot."

[Overd0g]

As long as there is paper, the gov. can create liquidity. Buy gold.

[zjr909]

All of this sounds good. The problem is, we really don't know what our ruling elites have in mind for us. We can't just assume that all their assets hit the fan all at the same time. We have to allow for the possibility that this entire financial crisis is merely a set-up to achieve two ends which are enormously appealing to the elites: 1) getting a ton of taxpayer money; and 2) breaking the back of the working class. Which is exactly why there will be tremendous opposition to any kind of bailout package which benefits anyone but the elites. After all, the elites opposed FDR's New Deal every step of the way; so it's worse than foolish not to expect them to oppose any proposal that even smacks of progressive (i.e., human oriented) politics. Infrastructure? Oh, please, the rich get from point A to point B in private jets and helicopters; they have no need for roads, bridges or overpasses. Health insurance? Oh, please, the rich know the very best doctors and surgeons personally; they don't need no stinking clinics. Teachers, police, firemen? Oh, please, the rich have the very own cadre of protectors and their very own finishing schools. So, why would they care if every last county in America goes belly up? It's called: "I got mine - and that's all that counts!"

[GALLERY84]

WE ARE DEF IN A DEPRESSION , WE NEVER HAD "ALL SECTORS" IN A SPIRAL LIKE THIS ,

THE FED IS DOING EVERYTHING AND ANYTHING IT CAN , IF THEY DID NOT STEP IN THEN CLEARLY WE WOULD BE IN A DEPRESSION MUCH WORSE THEN 1929 IF MORGAN , CITI, BEAR STERNS ,MERYYL LYNCH WENT OUT (THEY WERE SET TO SOFT LAND) WE WOULD BE LOOKING AT A MUCH WORSE 1929

FACT IS THOUGH ALL THIS MONEY BEING THROWN FROM HELICOPTERS IS THE "NEW" WAY THE "UNTESTED" WAY TO FIGHT OFF A DEPRESION , WE HOPE ITS WORKING I THINK IT WILL WORK , BUT WE DONT KNOW YET IF THIS METHOD , WICH IS ACTUALY THE EXACT OPPOSITE OF WHAT THEY DID IN 1929 ( I APPLAUD THE FED FOR TRYING) WILL WORK YET

TIME WILL TELL

CAN WE PRINT OUR WAY OUT OF THIS ??

LETS SEE

LETS HOPE
LETS PRAY

GALLERY84.COM OVER OUT

[cayuse]

Money Supply need to be adjusted over time to make sure TIGHT money does not freezed the economy. There are good comments of how looser money may have helped prevent the crash of 1929

Unfortunately, the Milten Freeman, Reaganomics and Greenspan mentality went HAYWIRE blowing up the economy into the greatest bubble of leverage ever seen.

Now how do you real it all back in? Blowing it up more with more cash and Monitary Policy, holy cow, Batman. Is that not like pouring GAS on a FIRE

The journey of 1000 miles begins with the first step. It will get fixed with Obama's planned honest Analysis, Planning, Organization and Execution. It will not be easy or free. But the more the rich and nasty loose the less their influence with impede the process

[Pdubya]

by economic law, austrian economics can't even exist within a fiat currency, centrally and privately controlled. we've lived under managed markets: corporatism (aka soft fascism) since 1913 and full tilt since 1971 with the breakdown of bretton woods.

we've been duped to blame the free markets when we haven't had them.

[joebhed]

yo cayuse !

We know Friedman believed in free markets, but his knowledge of monetary policy was exemplary.
ALL of this sh*t is based on the mal-design of a flawed money system and human nature.
Friedman, among few others, saw that this money system would fail, and called for its complete reform, which is where we should ALL be heading.

His quantity theory identified the key variable in monetary economics, and he advocated both an end to private fractional-reserve banking, and the introduction of treasury-issue money creation powers.
It is a pity that progressives do not understand the money system for what it is, and what it could be.
Friedman was right f-ing ON.
The Greenspans/Reagans/Gramms of the world have successfully endeavored to deny Friedman's monetary thought from its truly liberating potential for the masses, while allowing the insanity of the debt-money system to engulf us in our present conflagration.
Monetary reform is what is needed.
Not more "borrowing".

[DaneAZ]

The ideas in this article sound great. And reasonable.
But is anyone listening?
Are there any grownups in our government? Or are they just all greedy immature children?

[Overd0g]

They are politicians. Does that comfort you?

[cayuse]

You have it right!

So why is there so little conversation about Bush, Bernanke and Polson's cash hand out for MASSIVE debt discussed at what it is. Overspending as a politcal move to keep Obama from spending the cash in a keynesian way to create jobs.

These same people along with the media admitting we are now in a recession and by the way we have been in it for a year. We knew we were and so did they.

The fact is JOBS have been lost and the cash handouts have only allowed big corporations and banksters to layoff even more. Without Jobs and cash for the people there is no economic spending, DAH!

Bush has not been helpful in the transition, HE has done his best to screw up the next administration.

Kind of the helping hand GHWB did with WACO and RUBY RIDGE to Clinton Admin in the first weeks

[blogadmin - Huffpost Blogger]

a google search link: http://www.google.com/search?q=deficit%20or%20depression

[hortonhearsawho2]

If I don't have any money, which one is it?

[cayuse]

I cannot say, someone said we said it already, 4000 times. The media has yet to say it once