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

[leftLibertarian]

If there must be a HUGE stimulus program, please stimulate my checking account and direct deposit $125,000,000.00.

Thank you.

[Davwbaird]

low interest rates on cards some are at 32 per cent, should be no higher than 12 percent.

[Deaninphilly]

Bring back and enforce the usury laws

[SurrealPumpkin]

$125,000.00 would be fine with me. Heck even $1,250.00 would help.

[vjoseph]

Robert as usual you are spot on. Good work

[Davwbaird]

many great suggestions, you must have oBama's ear.

[AlaninWA]

Protecting the prerogatives of the "Malefactors of Great Wealth" is not the answer. Timid solutions
will result in tepid outcomes. Throw money at these problems but throw it low. Bailout from the bottom
up and pay for it by steeply progressive taxation. Universal single payer health care, oh yeah!!!

[Blutodog]

I have little faith in a Gov't stim. to be honest. I like Obama and I know his heart is in the right place but politics will direct the money in such a way that it will be absorbed by another crowd of rich folks. I doubt much of it will ever reach the folks that need it.

[sesshoumaru]

Thank you for pointing this out. I don't understand why this subject is so hard for columnist to understand and write clearly on. After 30 years of reaganomics, now there's a loud cry over deficit spending, are you serious?? I read that article earlier and rolled my eyes.

"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."

It would be interesting to see more pieces written about the amount of productivity lost due to people working jobs JUST for the mediocre healthcare benefits. Universal healthcare is a stimulus in and of itself.

[SurrealPumpkin]

The Community Health clinic I go to just cut 11 positions, including a doctor. Now I go to a nurse practitioner to get my prescriptions. I'm lucky, at the moment I'm stable, but for those with acute problems it's a mess.

[elsellel]

The screaming death of 90+ years of fiat currency in America can be heard loud and clear.

[BillZBubb]

Wonderful rebuttal of the right wing talking points against a huge stimulus program. You'd think Americans would have had their fill of right wing economic baloney by now, but they never seem to tire of the easy "solutions"--solutions that always lead to a mess.

[Antifascist-08]

The people of this country are ready for a change. The Republican criminals will fight to the death and fill the airways with their flawed economics and fear.

We won the election and now the real fight begins.

[SurrealPumpkin]

Let's pledge to keep an eagle eye on what's going on and "tsunami" our representatives with complaints and praise as necessary to remind them of whom they work for. 2010 is coming soon, all our Representatives and a a third of the Senators will be up for re-election.

Hold their feet to our fire.

[Edzero]

Antifascist-08

Go to the website, change.gov,and get actively
involved in making the change from the grassroots
up. Get your friends and neighbors engaged.

Yes, we can! need not be just a campaign slogan.

We must move beyond keyboards and laptop
exchanges on what needs to be fixed and
how to fix it. The time has come to put our
energy and action where our mouths are.

We can't let corporate lobbyists manipulate
the government of,by and for the people any
longer. Enough!