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

[Edzero]

Mr Kuttner is giving us sound information.

The reality is that the corporate controlled mass media has been
propagandizing the US with increasing concenration for the last
eight years. We cannot allow the main stream media to frame every
discussion. The misinformation, coupled with the emphasis on
trivia and distracting nonsense has advanced the dumbing down
of the US population.

The web should become source one for the citizens to become informed.
The Kuttner's, Krugman's, Bill Moyers, Suzie Orman, Rachel Maddow,
Keith Olbeman and similar honest truth to power types should provide
the foundation information for civil, rational exploration of choices
along with thoughtful reflection upon side effects.

A nationwide reading program of Michael R. LeGault's Think:Why Crucial
Decisions Can't Be Made in the Blink of an Eye. NY: Threshold Editions,
2006 would be a step in the right direction to reverse the dumbing down
process.

Check out the website change.gov under Ethics for courses of action
every citizen can endorse and support with their representatives in the
Congress and the Senate.

The days of Zombie, Kool-aid drinking citizenship are over. We individuals
must come off the sidelines and get actively into the game of governing..

[Aaror]

I have a suggestion that I think would help our budget, our trade policy, and (hopefully) not cause a trade war...
The "world-wide minimum wage," tariff. It is based on a simple concept, if a factory in another nation makes goods, and pays their workers 25 cents US per hour, their goods enter untaxed. However, if the pay for any employees was under 25 cents an hour, the goods are taxed at a rate of double the wage savings. Companies which primarily send to other countries than the US will lose an advantage, and factories aimed at the US will pay 25 cents an hour, which will increase worldwide standards of living and reduce unfair competition from workers paid pennies a day.
All those tariffs go to pay down the deficit, and with the reduction in unfair competition more goods will be made in the states, which will also increase federal revenue.

[WFIGUY]

Which will then spike up the price of goods here in the US decreasing expenditure buy the consumer. Then the consumer confidence index drops, people being hoarding money, and pretty soon the economy grinds to a halt.

[brassminnie]

It's not just the will of the Democratic administration and majority in congress, but the will of the people to do what's necessary, which will be tested. Will we rise above the as-long-as-I-don't-have-to-give-up-anything attitude? Will we back what seems to be a consensus we want a single-payer health insurance or national healthcare system with a vote, if necessary? Will we vote for reducing our 'carbon footprint' with refusal to purchase big-powerful-and-gets-20-mpg-highway vehicles? Will we look for American-made products and not the low price, without caring those products are made in China or elsewhere? That isn't easy. Because we don't make much any longer. We have to invest in changing that, or no 'fix' can be anything but a Bandaid on an economy bleeding to death.

[Carolab]

I think we should start with a restructuring of our monetary system, including the creation of a central bank with the government/Congress issuing our own government-backed currency, coupled with a strengthening of member-owned, Federally-insured community banks.

[alexis d]

This is a great idea.

I've been seeing more great ideas in internet comments lately than coming from the corridors of power. We oughta collect and bottle these things up.

[joebhed]

I agree completely.
But we are stuck by the freedom of thought that flows uncollectedly.
The freedom of the internet.
Invisible typists.
I'd like to know who we all are.
Especially on the subject of monetary policy.

[Pdubya]

returning to a structure closer to our constitution? NO way! THAT couldn't work now could it?!!!

[Overd0g]

Allowing those idiots to control monetary policy will destroy the country entirely. There will be nothing left but a smoking hole.

[joebhed]

As opposed to allowing 'these' private banking interests to control the nation's money?
Look where that got us.
How can government money issue be any worse - provided they have the guidance of sound monetary policies?
Got news for the dog - this is MY government, and I am not letting you take it away from me for the faith in the invisible hand of the free markets.
The nation's MONEY is a creation of its free, sovereign people.
And WE want it back.

[joebhed]

Thank you Carolab.
Restructuring the money system.
Monetary reform.
The only way home.

[ObjectiveRealist]

Great article!

The general stock market collapses in 1929 and 2008 both followed anomalously large financial activity of a particular pattern: more speculative than production-driven. This ought to permanently put to rest the idea Henry Paulson is still spouting, that credit and financing are what *drives* the economy. Production drives the economy, including the financial markets. Money is just a medium of exchange. Without production, there is nothing to exchange and money is worthless. The government has abdicated its regulatory responsibilities for the past eight years. Investment in infrastructure, especially less-polluting infrastructure with lower or zero long-term cleanup costs, are exactly what we need now.

[brassminnie]

"Production drives the economy, including the financial markets. Money is just a medium of exchange. Without production, there is nothing to exchange and money is worthless."

Precisely.

[SurrealPumpkin]

It's amazing how easy it is to miss that little fact. Maybe we should get bumper stickers that say "Production = Economy".

[scottowego]

Here, Here!!! But I'll add my oppinion to your comment. The government has abdicated it's responsibilities to the general good for a lot longer than eight years. I think it started a way back in the Johnson administration. Even Clinton screwed up with NAFTA. But even before that we lost our domestic steel industry. Well.... Washington got it's wish and turned us into a service economy. A total waste.

[Overd0g]

Manufacturing is for 3rd world countries now. Robots, or 10 cent a day peasants will do it. Services are the only thing left that require human beings.

[SeriousBlack]

"Money is just a medium of exchange. Without production, there is nothing to exchange and money is worthless."

Spot. On.

Amazing how so many people can forget about something so basic. Unless labor is performed or something is produced/made (or both), there is no value hence nothing to represent via money. One of the problems with modern civilization is that the mechanism of "money" has been around so long it has become abstracted as becoming some kind of entity in and of itself. It is NOT. It is only a REPRESENTATION, or "proxy", of a service performed or some type of physical goods that someone can be given FOR that service or goods that THEY perform, so that they can go and give the money to someone else to have a comparable amount of service performed for THEM or be given a comparable amount of goods.

THAT is how "money" originated. When a society starts trying to essentially sell money itself, via speculation or ANY kind of higher abstraction built on top of money that is not based on actual services or goods, it is eventually going to get into trouble. And then layer "credit" on top of that, ESPECIALLY a mentality in which both individuals and institutions make a practice of borrowing themselves into the ground, and voila. Crash.

[joebhed]

With regards the true nature of money - yeas, a means of exchange.

HUFFPO readers will be ready for our monetary future if they can read Major Clifford Hugh Douglas, leading monetary reformist and head of the Social Credit Party of Canada, in his March 1923 testimony before the Canadian Parliamentary Committee on Banking and Commerce.

The great lie of money as a commodity is exposed in Douglas' treatment on "railway-tickets as money".
Think about it.
If we don't understand money, we are doomed to repeat this fiasco.
So, hang on.
Or demand monetary reform.
NOW.

[Antifascist-08]

Excellent post.

Tell Obama we are all with him. And prosecute some of these fools.

[ponderingmuch]

I think that if the money business can get simpler...$$ for actual products, and no mopre $$ for whatever the $$s have been spent on that blew up the economy so to make regular people have to get even broker to support the zillionaires, that would be good.

I am trying to learn fancier speak, but on the other hand, maybe the fancy speak should just speak to US.

[Antifascist-08]

Keep talking. You speak the truth.

[Aaror]

step 1, bring back the bankruptcy laws, let people declare bankruptcy to get rid of credit card debt and the credit cards would go away!

[Overd0g]

So your idea is to let people welch on their debts. Nice. Amazing how a little theft can solve anything.

[AnnfromCA]

Good thoughts.......and I agree.

Bailing out the idiots who obviously can't manage a checkbook, nevermind a company, is not particularly smart, however.

[Wilburrr]

... but what if this is is not a recession or a depression but an economic contraction? Does the US have the manufacturing capablity to produce its way out of this economic downturn? Or has that manufacturing capability been exported?

[Antifascist-08]

This is an economic disaster. No amount of disingenuous Republican posturing is going to make it anything different.

Try to move into the new century.

[Aaror]

You have a point, if only free trade (mostly republican) politicians hadn't pushed our companies to export jobs, and with it the manufacturing capacity, we would be in better shape right now. Personally I wouldn't mind a new great depression on the backs of us saying no to free trade, but I think it makes more sense to invest in new production capacity, the best bet is so called green technology which reduces energy waste so that we will not send trillions of dollars to Saudi Arabia any more.

[Wilburrr]

...an interesting point. Could this economic downturn be the catalyst that provides stimulus to the economic/business practices that will save our planet?..... hmmmmm. Gotta think about that one.

[ReneGdP]

Since my income does not depend on my popularity on some blog, I'll tell the truth that Kuttner can't seem to bear. "We" is exactly right. Yes, all those he wants to point a finger at deserve it, but equally culpable is the guy in the mirror. They sold us a bill of goods, but we bought 'em. Takes two to make a trade. Too many Americans have been borrowing up the ying-yang, because the 46" T.V. is just not good enough and the two year old BMW or S.U.V is just an embarrassment.

A huge stimulus is indeed necessary, but lets call it an investment instead. When Barack says he's going to watch every dollar and make sure pork, corruption and waste will not be tolerated, I hope he not only means it, but means it with a vengeance. When he says it will be spent on investments that will improve our competitiveness, I hope it's true to the last cent. If so, go for it, do a trillion. If not, get ready for a resurgence of the Republicans.

[Antifascist-08]

Right on. Thank you.

[scooperss]

Well said.

[Norm]

This is the truth I never hear. We, as American consumers who spent money we didn't have, are complicit in this financial crisis and should acknowledge it before pointing fingers. We have willingly embraced trickle down greed; that our wages have been worth less and that is why we overspent lets us off the hook entirely too easily. I read years ago that consumer overspending was keeping this economy alive. How is it possible so few realized it could not continue indefinitely?

[hollywood2008]

America needs a depression. If we continue borrowing and maxing out credit cards, the market will never recover and we'll all be acting like everything is fine when it isn't. The US government needs to stop letting rich people get away with not paying taxes. That's one way to get revenue. Maybe we should fix our CRAP of a health care system, which is worse than that of some third world countries. America is just a crappy place to live (unless you're rich). As long as these evil lobbyists run Washington, nothing will get better.

[Aaror]

Amusingly enough, even if you are rich you will live longer if you move to a nation with a socialized health care system. Great Britian has longer lifespans (and better quality of life) across all income levels!

[WFIGUY]

And yet you still live here. Perhaps a move to Canada is in order. Taxing the rich is currently the system we have in place. More taxes are paid by the wealthy than all other groups combined. Ask your local H&R block tax preparer. He or She will confirm this. I don't know how much overseas travel you have taken, but I can assure you that US healthcare is infinitely better than third world countries. The poorest least funded clinic in the worst nieghborhoods in the US are better than thirdworld countries. It's the fact that it isn't "free" that seems to bother most people.

[SeriousBlack]

"More taxes are paid by the wealthy than all other groups combined."

Bull. It looks to me like you're confusing "the wealthy" with people who make over $100,000 a year or so. Guess what? Nobody who is TRULY wealthy (i.e., has a net wealth over 100 million dollars) gets their taxes done by H&R Block, for pete's sake. What a laughable assertion.

"I can assure you that US healthcare is infinitely better than third world countries."

Yes, you're right. The original poster may have been a little over-the-top with respect to his comment. BUT (and this is a massive but), that doesn't mean that the health care system in the US is not completely, ridiculously broken and dysfunctional. Which by pretty much any reputable study or institution will back up. Your conservative touting of your opinion that it DOESN'T have problems is completely uninformed.

"It's the fact that it isn't "free" that seems to bother most people."

Same misguided conservative talking point. No, it's not that it isn't "free" that bothers me. It's THAT. IT. DOESN'T. WORK. 47 million completely uninsured. Easily another 50 million who have insurance but CRAPPY insurance, which they will find out to their dismay (including you, most likely) won't cover tens/hundreds of thousands of costs if they develop any number of serious illnesses. It is, at its core, a system in which the rich are taken care of and the poor/middle class are SOL. Period.

[SeriousBlack]

Oh - And I forgot the way you opened your post. The rightwinger's favorite catch-concept - "Love it or leave it."

Come on, all together now, start the chanting: "USA! USA! USA!"

Heavy sigh. Why is it that the desire to IMPROVE one's country automatically becomes "hating America" to you guys?

[wordgrl]

Oh, WFIGUY, so we are supposed to compare ourselves with third-world countries now? Well, even some third-world countries (CUBA) have better life expectancies that we do. But really, why not compare apples with apples? Compare us to the French, the Finnish, etc. Well, maybe soon you will say our salaries are so much higher than those of third-world countries. For now, maybe.

[RaeDae]

The ideas here are sound - although one thing that would save money is to get out of Iraq!

National health care could be covered by a deduction from everyone's income and still be cheaper than what we have now, due to savings in time wasted checking eligibility and pre-existing conditions. Get rid of the co-pays to see the doctor, run tests, go to the hospital, etc. and your average person comes out ahead right away.

We also need a law that stops companies from paying anyone more than $250,000 in any year the company is in bankruptcy, or getting a bailout from the government, so running a company into the ground would be less attractive to the people at the top, because it would immediately affect THEM. This would help them to make decisions that will benefit all, not just themselves.

Also, let's bring back tariffs. Our country used to have tariffs that paid for the government services before we ever had any income taxes. This would pay for more services, and lessen the incentive to import everything, which would help keep existing jobs from going overseas, and possibly bring some back.

FINALLY, we can't keep up the pace of waste we have in this country. Jobs could be created in recycling (getting the recyclables out of the trash before it is buried or incinerated) and resources could be saved in reusing (remember bottles that had deposits? Bring them back!). We can restore the economy while conserving resources.

[runswithscissors]

You bring up some very good ideas. I would add that we need to create an incentive for people to work in jobs that actually improve our society. I'm not just talking about teachers, doctors, and firefighters (though they would certainly be included), but business owners who employ American manufacturers, businesses specializing in environmental protection (but not the ones that just repeat the slogans because it's the "in" thing to do), etc.

[Antifascist-08]

You are on point. Not everyone else here understands.

[Edzero]

RaeDae:

Great ideas. We can all find some ways to help eliminate
"waste" in all senses of the word, and get more use out of
what we have.

The Great Depression and WWII saying:"Use it up,
Wear it Out, Make it Do, or Do Without," makes as
much or more sense today.

The citizenry needs to evolve from the 24/7 materialistic,
consumer driven rat race mind set, which guarantees no
time to think wisely, to a mindful electorate who recognize
and are willing to commit to grassroots democracy.

We have 3,141 counties in the 50 states. The citizens
in every county need to organize around issues through
Obama House Meetings (see change.gov) and send
well conceived messages to our elected employees who
make choices in our behalf in the House and Senate as
well as the White House.

[scooperss]

Some really good ideas there.

[mheister]

Ralph Nader also has an interesting proposal for raising the money necessary to cover the bailout - a one-quarter of one-percent tax on certain types of stock, derivatives, and securities transactions.

It would be quite nice to see the incoming administration show the political will to make the financial sector actually pay for their bailout.

[January]

I am not convinced that the willingness to put cash into Treasuries at the current rates is anything more than a substitute for putting your money under your mattress. You want to see higher rates? Crank out a $trillion deficit budget package, and we will see higher rates. The current buying pattern is a short-term hold-and-wait that cannot be sustained. Investors can only buy what is available, and 30-year is available.

Kuttner does not mention the dilemma of housing where prices continue to plunge, except to presume the solution of "refinancing at lower interest rates." Balderdash. The pattern we can expect is vacant homes being stripped of useful materials by vandals. We can expect widespread social discord as people occupy vacant housing. All of that while Congress goes through the bloodthirsty fight we are in for.

We need a public jobs program before everything else. We will not get one without coming closer to a civil war than we have had since the rebellions of the 60s. Those who have robbed the public treasury for the past 40 years will not give it up without a fight. Not all the "make nice" talk in the world can make things right. The best we can do at the moment is to not make things worse.

[Antifascist-08]

January

Good pints. The war has just begun.

[Deaninphilly]

You do make some good points, but housing needs to continue to plunge. Sorry, to those who bought real estate to make money but that was never the market to buy into for a short term gain. People need real affordable housing, not the slight of hand let me show you how this can work for you housing that we have now where 50-75% of ones income goes to housing. Housing should be no higher than 25% of ones income. Housing and jobs need to be done at the same time, not one after the other.

[DrPaulProteus]

TAX THE RICH