Why We Need a Real Fiscal Stimulus Package, Pronto
Make no mistake. We're in a recession. Today's unemployment report showing nonfarm payrolls falliing by 49,000 jobs, is the fifth month in a row in which payrolls declined. Over the past six months, the economy has shed 411,000 private sector jobs. You will hear some cheerleaders tell you to disregard all this, pointing out that the economy continues to grow at a healthy pace. Baloney. Those growth numbers are illusory, based partly on the fact that, with fewer employees, productivity per employee has obviously grown. And partly on the temporary effect of the little stimulus package now in place.
What to do? Monetary policy is frozen. Bernanke and company don't dare to cut rates now, for fear of spurring inflation. They're wrong -- the inflation isn't coming from inside the United States. Employees have no power to demand higher wages, and companies have no power to raise prices. Inflation is coming from outside the US. Demand from China and India is pushing up commodity prices. And the dollar is dropping, which makes everything we buy from abroad more expensive. The Fed is correct to worry about only one thing when it comes to cutting rates -- that investors will be even less enthusiastic about returns they can get in the U.S., and will move more of their money into euros, yen, and a basket of other currencies. This will drive the dollar down further and thereby push up the prices of much that we buy from abroad, spurring inflation. But the chain of cause-and-effect here is not so powerful or direct as to suggest that no rate cut is warranted now. The Fed should cut rates again. If we the economy gets moving again, and investors will flock back.
Fiscal policy is a surer bet, but Congress -- especially the fiscally-conservative followers of Herbert Hoover called "blue-dog Democrats" -- is still hung up about budget deficits. Now is the time to exhume John Maynard Keynes and understand that government must be the spender of last resort when there's inadequate domestic demand. And the best and most urgent government spending now is for infrastructure -- especially public transit (see my postings below). Dems should move quickly.
More basically, the problem is weak consumer spending, which is directly related to the failure of jobs and wages to keep up. This problem, as I've indicated, has been long coming, although masked by the housing bubble that allowed consumers to borrow against their homes. If the middle class is to continue to provide adequate spending to keep the economy going, taxes must be reduced on the middle class and the fiscal gap filled (deficits have to be filled eventually) by marginal tax increases on the highest incomes. Because their incomes are so high, the rich don't spend nearly as high a percentage of their incomes as moderate-income and poor people (after all, the definition of being rich is having most of what you already want). The rich will not and cannot keep the American economy going on their own.
What to do? Monetary policy is frozen. Bernanke and company don't dare to cut rates now, for fear of spurring inflation. They're wrong -- the inflation isn't coming from inside the United States. Employees have no power to demand higher wages, and companies have no power to raise prices. Inflation is coming from outside the US. Demand from China and India is pushing up commodity prices. And the dollar is dropping, which makes everything we buy from abroad more expensive. The Fed is correct to worry about only one thing when it comes to cutting rates -- that investors will be even less enthusiastic about returns they can get in the U.S., and will move more of their money into euros, yen, and a basket of other currencies. This will drive the dollar down further and thereby push up the prices of much that we buy from abroad, spurring inflation. But the chain of cause-and-effect here is not so powerful or direct as to suggest that no rate cut is warranted now. The Fed should cut rates again. If we the economy gets moving again, and investors will flock back.
Fiscal policy is a surer bet, but Congress -- especially the fiscally-conservative followers of Herbert Hoover called "blue-dog Democrats" -- is still hung up about budget deficits. Now is the time to exhume John Maynard Keynes and understand that government must be the spender of last resort when there's inadequate domestic demand. And the best and most urgent government spending now is for infrastructure -- especially public transit (see my postings below). Dems should move quickly.
More basically, the problem is weak consumer spending, which is directly related to the failure of jobs and wages to keep up. This problem, as I've indicated, has been long coming, although masked by the housing bubble that allowed consumers to borrow against their homes. If the middle class is to continue to provide adequate spending to keep the economy going, taxes must be reduced on the middle class and the fiscal gap filled (deficits have to be filled eventually) by marginal tax increases on the highest incomes. Because their incomes are so high, the rich don't spend nearly as high a percentage of their incomes as moderate-income and poor people (after all, the definition of being rich is having most of what you already want). The rich will not and cannot keep the American economy going on their own.
posted by Robert Reich | 11:54 AM
49 Comments:
would you consider becoming the Democratic vice presidential candidate?
I disagree with you on several points.
First, rising prices for commodities due to increased demand is not inflation. It is market price setting - consumers/businesses will have to shift their purchases which will result in relative price changes among goods.
Inflation, on the other hand, is when ALL prices go up due to an increase in the money supply. While in the short run there may be some relative price differences, mid to long term all prices go up proportionally with inflation.
Hence, lowering interest rates _does_ cause inflation, and higher demand from China and India does not.
If fiscal spending is increased, government debt increases. The effect of this is either a) higher interest rates, or b) inflation. Assuming the Fed attempts to keep interest rates low to fight the recession (which is a reasonable assumption given the voice of Bernanke, Yellen, et. al), I expect inflation.
So what is the path to health? Tough love, unfortunately.
In reference to the last sentence, itulip.com agrees:
http://www.itulip.com/newdepression.htm
Bravo, Bob. "Rebuild America" is the slogan that can win for Obama and all Democrats this year. As a union retiree, I've been pushing it since the '90s. It will appeal to hardhats, unions and all blue collar voters (check out the website for the Laborers'International Union), to engineers and professionals (see web reports by Am. Soc. of Civil Engineers), to the unenmployed, to seniors who remember Roosevelt's WPA and to everyone in states hardhit by storms and Republican incompetence. Its traditional, not "liveral": Rebuilding America's infrastructure used to be the bipartisan policy followed by Eisenhower, Nixon and Ford, until the Radical Right (now including McCain) jetisoned it. Best of all, it's inspiring and patriotic. Please urge the party to make "Rebuild America" a central theme in Denver, ads and the campaign as a whole.
I think this country also is in desparate need for a strategic energy policy that will quickly relieve us of our oil dependency. That is why we just spent $2 trillion for the latest war.
The largest wealth transfer in the history of the world is happening between the industrial war machine of the west and the releigiuos war machine of the middle-east.
I am tired of sending my hard earned money to the rat-faced diaper-heads in the middle-east.
Robert says…..
“Demand from China and India is pushing up commodity prices”.
According to Chris Barrett, a professor at Cornell University who studies food-assistance programs: “Demand for food-bank assistance is climbing rapidly when the resources are falling in dramatic terms because the dollars just don’t go as far.”
Vicki Escarra, president and chief executive officer of America's Second Harvest: "This is one of the worst times that our food banks have experienced in recent years in terms of the level of need and our ability to meet the need."
Those on the fringes of the middle-class are increasingly turning to food banks in order to avoid hunger. This places even more pressure on the working poor and poor to have their basic food needs satisfied. Maybe the most urgent action needed is to extend
unemployment benefits and provide some emergency funding for the nation’s food banks.
First, rising prices for commodities due to increased demand is not inflation. It is market price setting - consumers/businesses will have to shift their purchases which will result in relative price changes among goods. ... Hence, lowering interest rates _does_ cause inflation, and higher demand from China and India does not.
Um... inflation is just a general increase in prices due to the falling purchasing power of the dollar. Yes, increased demand does inflate prices. So will lowering interest rates. You are trying to parse things a bit too preciously when you deny the current inflation because you don't mind the underlying cause.
Go back to beginning macroeconomics and look into the multiplier effects of injecting money into the economy.
Ummm.. The fiscal package is just going to be a transfer of future wealth to the present voters to China and the Middle East.
Of the various factors involved in this run-up (supply/demand, speculation, etc.), let's not forget the value of the dollar. In the past 2 years, it's about 50% against the Euro. Except for OPEC and China, nobody wants our dollar, except to buy oil. So, raise rates or balance the damn budget, but no more money from the trees.
It's as if America is a junkie jonesing for a hit. Congress has got to ween us of our addiction.
The definition of inflation is extremely important, so I would disagree that I am "trying to parse things a bit too preciously."
First, let me say that I am 100% in agreement that there is inflation. Check out the stats on MZM - the money supply is increasing. With low interest rates and growing debt, inflation continues. (The best fix, in my opinion, is for the Fed to let the market set interest rates).
However, the current upward movement in prices is caused by two factors: inflation (growth in the money supply) and increased demand/decreased supply. This differentiation is key in terms of policy.
If we are only looking at a change in demand/supply, increasing interest rates to combat inflation won't work. Prices will drop, but so will the money supply and hence incomes. Moreover, it can become prohibitively expensive for businesses to raise funds, thus hurting economic expansion. Investment versus savings levels diverge.
Yes, intro macro books talk about the multiplier effect. Intro macro books, however, are not the real world (not meant to be condescending).
Infrastructure should include investment in hard assets that also build new energy sources and new capacity. How?
- Nuclear to generate hydrogen during off-peak hours - hydrogen-powered fuel cell cars could operate as a major transportation fleet but they're in need of fueling station infrastructure
- Mandate solar on any new federal or state buildings plus any schools or improvements financed under new bond issues, no exceptions
- Mandate that federal car/van fleets be retired and upgraded to US-made (factories must be on our shores) hybrids and electrics (rumor is that NUMMI plant will convert to making Prius models)
- Upgrade the national power grid so it's no longer a patch-work of regional weak links
- Fiber channels everywhere especially to the last mile if possible
Infrastructure investment has the all the benefits as described by R2's blog post. What is totally lacking is a political vision so bold as to challenge the entire nation if not the world that we must move beyond coal and oil within the next 25 years or less. We will actually need every last drop of oil and gas to "fuel" this next generation of infrastructure effort to convert.
What other options do we have? Sit back and believe a "free-market" system will suddenly make this happen? Incentives and mandates are needed. Like Kennedy's race to the moon, we must not sit back and wait. We cannot wait.
-
Barack is a sitting Senator. He should introduce a prudent stimulus plan, probably including an extension of unemployment benefits, and press to have it passed before the Fall elections. It would show leadership and initiative, and could become a considerable legislative accomplishment. What will McCain do? Propose more tax cuts? Go ahead - make my day. The country has problems, and its better to take action BEFORE "Day One" if we can.
Dr. Reich:
Tis a puzzlement!
Was struck by one comment you made: ..with fewer employees, productivity per employee has obviously grown. This would seem to imply that productivity can be increased simply by decreasing employment. Further, it seems to suggest that increasing employment will reduce productivity. I realize that this is simplistic but seems to follow from your statement, which perhaps was simplistic in its own right.
Is interesting that we are about to enter the economic argument of the 70s, given stagflation is once again upon us. Is it "demand pull" inflation or "cost push" inflation?
My recollection is that economists rejected "cost push" fairly quickly, even as the concept was bandied about for awhile. I believe, and it makes some sense, that the rationale was that since supply and demand sets prices, costs would have little or no bearing. I have always tended to disagree with that argument but then what the hell do I know, I'm just an accountant.
I have always viewed supply and demand as establishing a range of acceptable prices as opposed to specific price. Within that range prices could move up or down not predicated on demand and supply only but based on costs. I think that is what we are seeing now.
Worldwide demand versus a relatively stable worldwide supply, especially of commodities, seems to be putting upward price pressure on a variety of goods worldwide. At the same time the low dollar is causing prices of imports to rise. If the demand for imported goods is somewhat flat and supply is little changed then the increase in prices is seemingly due to rising costs, calculated from the exchange rate loss of countries exporting to the US. Is this not "cost push"?
Look at the airline industry. Demand has assumedly been rising but the recent price increases and cut backs appear to be related more to increasing fuel costs than any dynamic of supply and demand. It would also appear that the grounding of airplanes and the cancelling of flights is reducing supply and if not accompanied by a demand reduction, likely to happen, it merely exacerbates the problem. In the chicken and egg question it appears that the dilemma began with increased costs. Is that not "cost push"?
My take is that economic theory is faced with two major flaws. The first is that of the impact of oil price increases. Most economic theory is based on the assumption of some linear relationship, some stability, in the relationship of competing variables. Oil, being a critical cost ingredient in most everthing produced anywhere in the world, and with the price of oil not being directly tied to current economic activity but more to the expectations of a handful of traders, it follows that oil prices are operating outside the confines of the built-in economic parameters. The skyrocketing prices are putting tremendous pressure on the costs of everything else. For quite awhile companies have borne these increases. At some point, and it appears we are there, prices of everything else have to adjust for the increased oil prices.
Oil, and its various byproducts, is ubiquitous to our economy and that of the world. There is no other commodity or ingredient more impactive on the production of goods and services, coupled with their distribution, than oil. My extremely limited knowledge of economic theory would suggest that the models were not built considering the illogical price increases of one vital product that affects the costs of all other products.
No doubt there is an increasing worldwide demand for oil but the growth of that demand is not nearly as astronomic as the price growth.
The second flaw, in my mind, is the institutional control of the economies. Economic theory and its control variables, fiscal and monetary, work well in micro, individual country, settings. Granted they also can apply fairly readily to a macro, worldwide, interactive, setting, given some sort of normality in entirety. The problem arises in that when corrective action becomes necessary our institutions can only affect, for the most part, our economic condition. We cannot take actions to control China's or India's economy, not even the European economy. We can do all kinds of manipulations to the money supply in the US but if those other countries do not take complimentary actions, our hole seems to keep getting deeper. If the Fed continues lowering interest rates, which they had been doing, and Europe and other countries don't take similar actions, even worse if they take contrary actions, then the dollar keeps plummeting. As the dollar plummets the price of oil keeps right on skyrocketing. For the last year or so it seems this phenomenon is one of inverse proportionality.
Increasing government spending, in the face of record deficits, coupled with the War deficit, also has a negative effect on the value of the dollar. It seems we are so bound up with limitations that we need a Harry Houdini more than an Obama or a Clinton. And God forbid we get a McCain.
The point of all this is that while economic theory works, theoretically, it appears futile in the current environment in realtime. The old adage about the hole and stopping digging is antiquated. We may not have any choice but to keep digging and maybe we will strike oil.
To me, economics is a behavioral science. Its postulates, axioms and models are pretty much based, not on the science of matter and physics, but rather on the historical assumptions of how peoples and enterprises will react to certain stimuli. It always assumes a "rational man" behavior model. When rationality does not seem the behavior of choice, where do we go?
If we are looking to the best interests of worldwide economic welfare, what is rational about brokerage houses announcing that the price of oil could go to $150/barrel or $200/barrel? It is establishing a self-fulfilling prophecy that will create some big winners and some big losers. All the rest of us will be losers even though we didn't enter the game.
justin:
Though I am not knowledgable enough to argue your definitions, I find minimal solace in that, if it walks like a duck and talks like a duck, it likely is a duck.
Since someone or something has to start a general rise in prices and since the unusual rate of rise in oil and food prices has been occurring only for a year or so, does it not follow that we are seeing inflation commence?
In normal circumstances the Fed reacts to what they see coming not what they see happened. The Fed seems to think inflation is looming.
Professor Reich is correct; the housing bust is not allowing consumers to borrow. There are several other items driving down consumer spending. Personal credit has been overused for too long. People have maxed out their credit and are being forced to cut back on spending. This is also driven by the sub-prime mess. Banks and other lending institutions are not lending as they used to. The sum of this is a decrease in consumption (which is about 70% of our GDP).
What we are seeing is a long-term adjustment to our economy. We are the number one country in the world as measured by GDP. As a country, we have borrowed too much for to long. The reality is that the rest of the world is catching up with us. The progress which China, India, and Brazil have made is amazing. We need to start working with these countries and stop acting like the “sole” superpower. Together, we can make the world a peaceful and prosperous place for everyone.
If Obama wins the White House he has said he will give middle income voters tax cuts but increase taxes for those who earn over 250,000 a year. Unfortunately, families with those high incomes are often just getting by and don't consider themselves wealthy. Frugality has been our of style for so long that luxuries are now considered necessities by many people. Most Americans consider themselves middle class no matter how much they make.
Steve: Agree with you on "Rebuild America." A great theme to move the Dems forward, positively. Inclusive of all sectors and groups.
Way To Go, Obama!!
Dr. Reich,
When offering ways to stimulate our economy and to correct the decayed social-infrastructure parts, one can't look just at each item separately but must examine their interactions on our DEFICITS, the DOLLAR as well as on our ECONOMIC GROWTH.
Let's quickly review the different priority areas of SPENDING, SOURCE OF FUNDS, and need for SAVINGS.
I. "Real Fiscal Stimulus": Reducing tax rates measurably for those with an adjusted gross income below $150,000 while increasing rates for those with incomes above $250,000 (for, example) is, as you say, critical due to the many years of stagnant income for the lower-middle classes who also happen to be the major drivers of our Consumption economy. (I sense Obama´s $1,000 tax break is far too little).
But, over the intermediate term, such a stimulus will unlikely generate net tax revenue gains but will at best "stabilize" Consumption levels. I will explain Why in a moment.
With a "Fiscal Stimulus" one can't entirely ignore the Deficit effect. For every Deficit effect of each policy spending action contributes cumulatively its part to the fall in the Dollar... which in turn causes oil prices to rise. The Dollar's dramatic fall has a lot to do psychologically with the rest of the world seeing us as a "begger borrower nation" -- that is way over its head in Debt in so many areas.
As mentioned above, Why will there still likely be net tax revenue losses with a "Fiscal Stimulus plan in the intermediate term? I see at least two reasons:
1.---- Americans will use added funds to retire their massive debt commitments existing in so many directions. This will soften any possible Consumption spree.
2.---- Americans will likely become more cautious about frivolous, high-ticket-item spending and will save more; savings near zero can also be stimulated by tax incentives to reach 3-4% of GDP; this improves bank liquidity enabling the banking community to continue financing investments in good and bad times ... thus creating an offsetting "stabilizing cushion" when Consumption slows down
resulting in less volatile, more frequent swings in the economy.
The above and a long recession means that for the first 3-4 years, net tax revenue losses from a "Fiscal Stimulus" might reach $50-75 billion a year (far lower than +-$200 billion net tax revenue losses annually under Bush's tax cuts going mostly to the top 10%).
How will this Deficit be offset until the economy is fully recovered? Deficit financing? Yes, probably, unless it can be offset by real Defense savings from getting out of Iraq.
II. Then comes the "Public Transport" and general infratructure spending so critical to job creation, modernizing and expanding non-polluting transit
systems; spending that will reduce use of automobiles and make commuter travel more productive and
convenient.
How much will this cost in annual spending? Just a guess, but probably in the vicinity of $75 to $100 billion annually. How will it be financed? Can this spending requirement be Deficit financed? The answer is NO.
Here are just a couple of options to cover this program cost:
1.---- increase current miserly low $.18/gallon Federal gasoline tax to still modest rate of $.38/gallon (compared to well over $2.00/gallon in Holland today).
2.---- adopt some version of Thomas Friedman's idea to have a Minimum price for gasoline of, say, $4.00/gallon for a given period. All gasoline tax revenues from gas sales below the Minimum price would go into a separate fund to help pay for an extended U.S. wide Public Transit system as well as other infrastructure Imrovements (e.g., bridges, roads, waste disposal systems, etc.).
3.---- implement a Road Tax on all vehicles (except heavy trucks) that is based on Weight in order to also encourage quicker change to smaller, more fuel efficient vehicles. This action will also reduce wear and tear on roads over long term.
Other steps to stimulate rapid conversion to more efficient, green fuels in vehicles (as well as your "Fiscal Stimulus") will enable the general public to accept an inceased Gasoline Tax and/or Road Tax-- the funds from which would be recycled for a great economically stimulating investment in Public Transportation.
III.--- continue providing tax incentives and subsidies to encourage shirt to hybrid vehicles and totally Alternate fuel vehicles (electric/hydrogen), and to existing startup and new startup firms investing in Alternate fuels... as the major oil companies will only be passive observers and investors here.
So I suggest to get agressive here with entrepreneural America as innovation is our nation's key strength and needs all the support we can give it for this crisis problem of imploding energy prices and fatal dependence on uncontrollable Arab suppliers.
I recommend offering new innovative firms investing in Alternate Fuels a 10 year tax free period... so don't hesitate to extend current tax free status for such firms.
These actions will like cost $30-50billion annually and can be partly paid by the Gasoline Tax and/or the Road Tax. Any funding shortages would come from other general tax revenues or be Deficit financed until economy solidly turns around.
IV.---- The next priority spending item is for Pre-college Educational improvements; Retraining /Skills Upgrading for displaced workers and military personnel; expanded and lower cost college loans, perhaps by increasing Pell Grant loans. What is the cost here? Probably in the area of $50 billion annually. Can it be Deficit financed?
Possibly, but preferably it should be covered by bringing overall Defense spending down to 3.5% of GDP over next 3 years -- including streamlining Military departments, removing troops form Japan, Germany, and perhaps South Korea, etc. and making military force a high-tech, quick-in-and-out with much lower conventional troops ... without compromising national security.
We have a unique 10-12 year window to do this (and thereby greatly strengthen our domestic financial house) because China and India have their hands completely full to control their runaway growth, pollution and huge wealth dispersion over the next decade at least.
Potential savings could easily be initially $50 billion rising to over $200 billion in 4-6 years from now. Such savings could well cover the Education-worker training program costs noted above.
Another option would be to float Invest in Education 20 Year Bonds to all Americans giving an annual 6% tax-free return, plus an immediate tax credit for each bond purchased equal to 15-20% of the bond´s face value... borrowing from Americans and giving them the interest return beats borrowing and paying interest to the Chinese.
V.---- The next priority spending is for Universal Health Care that is affordable and of decent quality. How much will this cost annually? Probably as a guess in excess of $75 billion. Can it be Deficit financed? The answer is NO.
It appears possible to pay for this added cost by achieving $25-40billion in savings in how Medicare is currently being administered.
Canada has a universal health care system where the administration costs per dollar of total costs is about 25-30% less than Medicare's administration costs.
Another much more critical way to pay for this added cost is to get the insanely high premium costs for hralth care in America down to somewhere near European levels. As most know, premium costs in Holland, for example, are 50-60% lower than those in the States for better health care coverage.
Fortunately, some officials in the Health department (I believe) are now carefully examining the Dutch and Swiss systems to learn something.
So, if premiums come down and Medicare administration costs as well, it appears the added cost of universal health care might well not result in significant annual Deficits or in the need for added taxes. But only further analysis will confirm the real facts here.
SUMMARY
Roger, economic experts like yourself obviously must do some computer modeling of the Integrated effect of the above discussed Spending Priorities/Funding Sources to renew our economy ... to come to grips as to what the optimum policy mix is of Spending, Taxes, and Savings including their interactive impact on the Dollar and annual Deficits.
For the very serious external supply/demand forces on commodity prices are an added huge threat to the money supply equation compared to the 1930 depression situation. So opening the money supply doors to regenerate our economy quickly and the integrated effects on the Dollar or Deficits components be damn are a recipe for financial disaster, as you well know.
If it's possible to come up with a mixture of actions (some policy variation of what's been noted above) that also result over time in structurally reducing Consumption to 65% of GDP but increasing Savings to 3-4% of GDP
-- to strengthen the Investment side of our Economic Model for good and bad times -- while gradually returning our national budgets Deficits to Surplusses (as Clinton managed to do), then we should be on an ideal path to revitalizing our broken economy.
When the outside world sees us getting the right balance of fiscal, credit control amd monetary policies together (as opposed to a rush of incremental, conflictimg measures), this alone will have a powerful effect on raising confidence in the Dollar... even though we may be in the annual Deficit range of +-4% of GDP over the next 4-6 years of implementing system reforms.
In conclusion, The mix of suggested Big Steps that require balanced social and financial optimization to extent feasible are:
* Improving net earning power of lower-middle classes
* Improving drastically our infratructure wisely and constructively in harmony with each State
* Becoming totally independent of fossil fuels by 2018 by operating on Alternate Fuels to maximum extent possible (e.g, electric/hydrogen for vehicles; solar for homes and buildings;
wind for small towns; biofuels and ethanol for multi-uses providing there is no harmful effect on food production).
* Improving educational system and programs for retraining/
upgrading skills of displaced workers
* Providing universal health care afffordable for all
Frank Thomas, The Netherlands
Art a layman:
I find no solace in it either.
However, note that higher oil prices won't raise incomes, thus in real terms everyone is worse off as they can afford less goods, the exception being those producing / selling oil. Raising interest rates won't change this.
Theoretically with inflation, in the medium to long run wages will increase at the rate of inflation and therefore everyone is in the same state as before. However, during the adjustment period, the economy experiences distortions (think housing bubble). It is on this bases that many argue that central banks, through monetary policy, actually cause business cycles.
One solution to the food shortage, a book called Food Not Lawns. Shovels only in use, please, no rototillers, no oil-driven engine anythings, because they wreck the natural biodiversity of the soil. We use sun-drenched lawns for food production. All raw food scraps are recycled to compost, which is dug right back into the soil. Hay or anything else suitable is mulch. Fish emulsion for nitrogen, for fertilizer. For people who have or install ponds, even The Economist magazine listed a pond as a source of fish to eat, then the bottom of the pond is scraped to harvest the nitrogen muck for applying to the garden.
The pain is here. Our economy is struggling and there are no instant fixes on the horizon especially if your business (pricing model) must include recovering or offsetting rising fuel/energy costs.
I hope Senator Obama is creating a blue-ribbon panel of advisors now, not later, not after the election but now. Right now. Start showing leadership on the issue even before the general election.
I think Dr. Reich and Dr. Stiglitz would be excellent choices for the panel. But I would also add a few others including Dr. Steven Chu (Livermore Labs) and even a guy like Ray Kurzweil. We need real scientists inside our next administration helping to drive policy and decision-making. Why? Because we need to place informed bets (government spending/tax credits/incentives) on the right projects. And I might even include a crank or two like TJ Rogers who owes a good portion of SunPower's growth success to government support and investment credits. Even in Germany, you can't build a major solar industry without government support.
The blame game is over. The stakes are too high to be spending time on who missed the obvious opportunity to address our energy crisis these past 16 years. Imagine what will happen when gas hits $8 a gallon this year. Then what? Panic? Protests in DC? Mass transit mobs? Seriously, if gas hits $10 a gallon we're beyond a recession.
Does it have to happen? Should we just sit back and wait for it to happen? How will our trucking industry survive? How will airlines survive? And to think that Iraq is all about the oil. What oil? It's not making a dent in our supply problems.
The experts on this blog can debate the merits of economic policy but at this time, survival is the game. The economy is on life support.
Dr. Reich,
RS Love's following excellent to-the-point words poignantly echo my thoughts:
" We need real scientists inside our next administration helping to drive policy and decision-making. Why? Because we need to place informed bets (government spending/tax credits/incentives) on the right projects."
A bipartisan team, representing the Sciences and the Humanities, is urgently required to help reach balanced human and rational solutions to the serious, unique CONFLUENCE of internal problems-external threats challenging our social-economic system's viability.
"Demand from China and India is pushing up commodity prices."
This is the core of our economic problems.
For many decades, corrupt democracies in India, South America, Africa, and corrupt dictatorships in China, USSR ... denied their populations the ability to be part of the demand equation of a modern capitalistic market based economic system.
For many decades the distribution of the worlds available resources took place in the more efficient market system, to mostly players in North America and Europe. In other words, as long as 2/3 of the worlds population was denied anything other than a subsistence standard of living, we could enjoy an absurdly wasteful standard of living.
That game is over and it's not coming back!!!
You can fiddle with the knobs and switches of the dismal science and you may delay or hasten the inevitable, but if you don't come to a fundamental realization very soon, you've done nothing to prevent the holocaust that confronts our children and grand children.
We are at peak oil, peak fisheries, peak arable land, peak potable water ... The only way to supply the new demand is to distribute the concentrated wealth of the west to the rest of the world. The economic entropy that is now taking place will only accelerate, leading to an impoverished west that will then be in equality with an impoverished world.
We can talk of interest rates, libor rates, M3 money supply (when it used to be reported), budget deficits, fiscal policy, and continue to ignore the fundamental problem.
An economic policy, an energy policy, or a policy addressing global warming, which does not include a world wide population reduction policy, is simply shuffling the deck chairs on the titanic.
Obama talks of change. Does he have the courage to start the most difficult conversation in human history, that must take place to save civilization, or will he like Clinton before him; play it safe, don't rock the boat, go to the middle, raise high the chalice of mediocrity, and descend into the ever more crowded foot notes of history?
Time is our enemy, but time tells all.
we_are_toast said...
“Obama talks of change. Does he have the courage to start the most difficult conversation in human history, that must take place to save civilization, or will he like Clinton before him; play it safe, don't rock the boat, go to the middle, raise high the chalice of mediocrity, and descend into the ever more crowded foot notes of history“?
We already know the answer. He’s a typical liberal politician. He wouldn’t be where he is if he was something else. Did you hear his speech before AIPAC a few days ago? That pretty much sums it up.
He may have instincts that are better than this, but if they surface, he’ll be crushed. The pressure for him to conform to the status quo will be extraordinary. We’ve already seen many examples of this as his campaign has progressed.
justin:
However, note that higher oil prices won't raise incomes, thus in real terms everyone is worse off as they can afford less goods, the exception being those producing / selling oil. Raising interest rates won't change this.
At the outset let me agree there are no quick, no Valhallic fixes. Raising interest rates would appear suicidal at this point in time but it would, given history, raise the value of the dollar, which should lower the price of oil, thus relieving some inflationary pressure.
No doubt Volker played Russian Roulette but he was ultimately successful. As with all things economic it is arguable whether we might have come back without all the pain inflicted.
Theoretically with inflation, in the medium to long run wages will increase at the rate of inflation and therefore everyone is in the same state as before. However, during the adjustment period, the economy experiences distortions (think housing bubble). It is on this bases that many argue that central banks, through monetary policy, actually cause business cycles.
You are expressing a view consistent with economic history but it is less clear in today's world whether your wage premise rings true. Granted most large corporations peg their annual merit salary increases to the inflation rate. With the breaking out of the Core inflation rate that has become the corporate base. That works as long as the prices of the necessities of energy and food only fluctuate over short periods driven by natural events. If energy and food prices become an embedded, long term reality, not driven by anamolies, then wage increases based on the Core inflation rate become less and less an equalizer.
We also know that historically labor unions played a big role in keeping inflation and wages in balance. This is no longer the case. With business material and energy costs rising meteorically due to worldwide demand they have much less capital available to increase wages significantly without raising prices significantly which creates a Catch-22.
Little by little we are seeing bits and pieces of economic theory breaking down. It has long been an economic postulate that increased productivity leads to increased wages. Again, I have never understood that and we have seen over the past 10-15 years that it is not an absolute truth.
The ability of workers to "demand" increased wages is further encumbered by outsourcing and shifting production overseas. Many workers will struggle with lower incomes, in real terms, than run the risk of pushing their employers toward a decision to seek alternatives.
I have never been a strong proponent of monetary policy. My perception is probably based more on my inability to grasp the whole picture than in any specific arguments I have with its effects. I would posit that the monetary policy impact on business cycles is less the actual Fed actions and more the psychological effects of their musings. In my view, the actions of businesses and markets and consumers is less predicated on what actually takes place and much more dependent on future expectations.
Historically, when the buzz had it that a downturn was coming, or inflation was on the rise, it often appeared as a self-fulfilling prophecy. When an idea, good or bad, creeps into the pysche, everyone begins to scramble to position themselves to withstand it or take advantage of it.
We are faced with a whole raft of economic and social problems and though Dr. Reich and many others offer many good ideas, it has become more apparent than ever before, except maybe to economists, that we have an integrated system and positive actions here can have negative effects over there. It is ever more clear that our politicians are nowhere near state of the art in their approach to problem solving. It didn't require a PhD in economics to grasp that motivating ethanol from corn was going to have a negative impact on food production and prices.
It seems, more and more, that the American public is facing a question of: What do you want to die from?
toast:
No doubt we've been over and over this and, again, I don't disagree with your population growth premise, but with all the current problems facing the US and the world I don't see it gaining much traction. If for no other reason than it would appear to most folks to be the last bastion of government intervention. It can work in an oppressive or tightly government controlled society but I'm not sure that monetary incentives, leaving people with choice, will create the effect to mitigate the problem. It is highly likely, as China moves to more and more of a capitalistic democracy, that improved lifestyles will produce pressure to allow more offspring, simply because they can now afford it and it certainly seems somewhat of a natural right. This could lead other nations, in the interest of nationalism, to even promote population expansion.
I don't think you can point to many examples in the history of man where the tendency to shoot ourselves in the foot has been abated.
frank:
Now don't take this as personal but you have posited your solutions over and over and have failed to modify them to reflect some degree of rationality. It's not that your ideas aren't valid, nor necessary, in the long run, but the program solutions you proffer would be decades, if not scores or centuries, in effecting and there will be many intervening urgent problems that will interfere with achieving all of them, at least on a timely basis.
I do take exception to your constant comparison of Holland's gas tax versus that of the US. First understand that one of the reasons the federal gas tax is so low is because each state also imposes their own gas tax. Now the combination of federal and state gas taxes does not approach $2 a gallon but the total impact in most states is more than double the federal rate. Secondly, your argument is akin to the Reps argument that the US has the world's second highest corporate tax rate. Technically true, but it fails to look at the entire taxation policy of other countries. My understanding is that most European countries rely more heavily on gas taxes as part of the entire tax revenues than we in the US do. If you are going to make comparisons it seems only fair that you compare apples to apples.
You frequently appeal for better job retraining efforts and more funding for these programs. Though not wrong the reality is that these programs are not very effective. In many instances the workers needing retraining are middle aged and once completing retraining they are forced into competition with younger workers with the same educations vying for a limited number of jobs. There is a tendency in the job market for youth too always trump older unless the older has specific skills necessary in the job performance.
The pre-college educational priority is important but many of our pre-college educational problems are more the fault of parents and their children than of failings in the system. There has been a manipulation of what is taught pre-college that needs redirection but a great deal of that has been driven by the market and trying to prepare students for the workplace, albeit more generically.
Defense spending. We've been down this road before, many times. There will be no reduction in military spending targeting a 3-5% of GDP number in the near future. The recovery costs from Iraq and Afghanistan will negate that. Your idea of a quick in and out smaller military manpower force was the crux of Rumsfeld's concept. We can see it didn't work. If fighting terror in hot spots is our only concern, the idea has merit. Not knowing what kinds of wars will have to be fought in the future, minimizing manpower could be disastrous. With an all volunteer armed forces, mustering and training a large manpower force if needed would present a Herculean task if necessary immediately.
Consolidating the services appears on its face a good idea. Each service does have specific talents and while there is overlap they are each designed to serve a particular function and require specific knowledge. It is similar to the business move of the 60s-70s to horizontal integration. You will notice that for the most part most of those conglomerations failed. The larger you make an organization the more inefficient it becomes. Maintaining specialized smaller factions is more efficient even considering competing budget requirements. It can be wasteful but I would suggest less so than consolidation.
Tax cuts for the middle and lower classes is not going to have much effect on stagnant or declining wages. It will help but US workers are far behind the curve at this point and it will be too little, too late to overcome the problem. There are a plethora of problems that have created this phenomenon the biggest of which has been the decline in US production and thus the jobs it takes to produce. I don't know that we can ever return to our previous experience.
Certainly one aspect of those problems, to me, is that US businesses have to move to some sort of social responsibility. They have to shift from an interest only in profit growth to one of sharing both the rewards and the punishments of our economic performance.
An example: My local electric utility company expects to receive from our PUCO a rate increase in December of 16.2%. I haven't read all the details but historically they are allowed a certain profit margin range and when operating costs eat into that profit range they are allowed rate increases. My question is, if I am having to suffer with rising costs and only have available annual merit increases predicated on Core inflation to help me out, why is a huge corporation with many more economic tools available to it for managing costs allowed to jump way past any earnings growth I have?
Add further to this, I called last year to ask about any solar programs they had. I was considering putting solar panels on the house and was interested in any rebates or price breaks, as well as any power recapture programs they might have. Nada! Nothing! No program of any kind!
Another: A few years ago we had a severe ice storm that caused power outrages across a wide swath for as much as 7 days in some places. A huge outcry from the public emerged to make the utility company put their delivery cables underground, which they had done in many new neighborhoods. Mais non! Mais non! Exclaimed the company. That would costs gazillions and we would have to raise rates to recoup. Of course they didn't release the costs incurred with having crews from all over the Southeast come to the region in the crisis, working beaucoup hours of overtime. They didn't produce all the lost revenues from power outages. Nor did they respond with a plan to put cables underground in known troublesome areas. We have a lot of trees in NC and many of them are sitting adjacent to power lines. They spend significant amounts trimming those trees back every year. Argument should be made of sterner stuff. I think I will switch utility companies. Not! I don't have any choice they have a monopoly.
A couple small examples of why taxpayers, consumers, workers, are the tail of the dog. Globalization has allowed the dog to do without a tail. Until that changes, decent wages may have gone the way of the Edsel. It is far too easy to look at the machinations of American business and surmise that, due to a lack of interest, tomorrow, for the average American, has been cancelled.
If in fact we have only a 10 or 12 year period to catch up before China and India take over economic control, methinks you need to refine your proposals to a list that can be achieved in that period or less and prioritize those you are left with. Our political process is not given to fast, totally systematic solutions. Obama, even with a Democratic Congress, cannot achieve, quickly, all of those solutions. Given he has only 4 years to make some headway, if he fails to sufficiently produce significant results, we may see another swing in government that will turn the tide backwards.
Art,
I'm not suggesting a plethora of programs but in fact am saying we need to get the priority list (I site 5 projects), balance and timing correct for revitalization programs based on a number of interlated factors.
It's Dr. Reick who's suggesting a "Fiscal Stimulus" to help the lower-midddle class as well as an extended Public Transit investment. I agree with him on proviso that there is an evaluation of all other key demands on money and interrelated effects of same to come to right policy mix. That's my whole message, nothing more.
You will note that some projects are 3-5 year intermediate term and more urgent and some are longer term (e.g., improving public transportation). So funds and any taxes necessary would have to be planned accordingly.
I start on the premise reforms should not exasperate the Deficit levels we've been running in recent years -- therefore, the emphasis on a very specific mix of ideas of how to pay for certain programs. Dr. Reich avoids this point. Further, I think this all should be computer modelled, for I like you, don't have much faith in politicians getting the
strategy nor projects right without professional guidance from some wise people in the Sciences and the Humanities.
As far as taxes here are concerned, it's another world from the States. Holland has a 19% value added tax, a plus $2.00 gasoline tax and a tax on all cars depending on size, not to exclude a real estate tax and a progressive income tax. But the system is in balance and you get a lot for your money. But this is all easier to achieve, not only for cultural reasons, but also because Holland (as is true for all European countries) is very manageable given its size (17 million people on a territory half the size of my homestate Maine)and cultural cohesiveness. And it's economic model is in good balance between Consumption and Investment due to structurally high Savings rate. Holland spend 2%of GDP on Defense.
Americans don't get much for their taxes (excepting rockets and bombs) and the Republicans have made that a culture ... their obsession they only know how to protect our nation has long been an artful propaganda coup. Irony is they don't care or know how to provide any financial protection for Mainstream America ... without compromising our dynamic capitalism culture. Concern for human beings, a fair playing field and safety nets are a sina-qua-non in Europe ... and people don't mind paying for it. Someone once said: "Under capitalism mam exploits man. Under socialism it's just the opposite." I would add that Europe has got just about the right balance in between.
I hope to be presenting some simple historical data on our country's economic performance since 1977 (Pres. Carter) to now that shows rather conclusively that the Republican Administrations have been the BIG SPENDERS and DEFICIT producers for 20 of past 32 years. But, of course by the technique of "Repeter Tourjour," the Democrats and the media have given meek resistence to the lies.
It's time for change. I'm simply more optimistic than you that for most Americans the cup is full of a do nothing government... a government and societal culture that has not been looking out for its own people as much as its does for the rest of the world.
Getting started seriously on an energy independence strategy will be the first big test of our will to do the right thing as a nation. The oil companies have much drilling to do but all the drilling in the world will not scratch the surface of the imploding demand. And it pollutes.
In sum, the 5 priority projects I've raised have been raised in the campaign. We can't do Everything and must do some with speed and others persistently over a longer time span. That's was the underlying purpose of my message to Dr. Reich. There must be tradeoffs and there must be some professional science applied in coming to the right mix of policy actions.
I've been on the innovative side of business all my life as an entrepreneur (and now lecturer). I'm still taken in by Churchill's remark:
"A pessimist sees difficulty in every opportunity.
An optimist sees opportunity in every difficulty."
There's nothing our nation can't do if we rediscover our committmemt to community as well as individual welfare and unique instinct for innovation.
Hamlet when asked, "How much does a person decay after he is dead?" ... replied ... "Ït depends how much he is decayed before he is dead."
Well, America is a little decayed but it's not dead by any means. So cheer up!
Art, Correction: interrelated
Good discussion on this board on many levels.
Since I'm also interested in actions that we can take now; does anyone know which states or cities have the most advanced solar/renewable energy programs and policies in place to deploy it while not forcing the home or business owner to fund upfront costs of installing and running it?
Every single day I walk by a school or an office building or store front here in Palo Alto, California, I start to wonder how many megawatts of sunlight energy we're not capturing yet.
In my view, it's going to take community level action to start the energy and economic turnaround this country desperately needs. The Federal government should target infrastructure investments where partnerships can be formed as well.
Do we even know which communities are doing this already? As energy costs rise, how can we possibly sit by and not do something? We don't need to wait for McCain or Obama to get moving on this.
RS Love (Palo Alto, CA)
Jimminychristmas... how can us consuming, underemployed voters rest assured that all this stuff is in the Obama war chest?
Reich, Hillary and Bill on the Cabinet? How'a bout Henry too!
'...pointing out that the economy continues to grow at a healthy pace. Baloney.'
GDP says nothing in itself. It's a means of describing the total market, while ignoring the individual relevance. GDP per capita however is shrinking at a steady pace; the population is still growing at a faster pace than the economy, ergo: power purchasing parity is collapsing. This without the rise in gasoline prices and other commodities.
GDP growth per capita gives a better look on the real performance of an economy.
Let's get the 18 wheelers off the road and put those truckers to work on the refurbished railroads. Goods should be shipped to central distribution points and then distributed via local trucking which could be non-diesel. Act fast though, or all the rails will be turned into hiking trails as they are in the northern half of Maine.
frank:
Let me first state that I am in full agreement that the many facets of cures to our ills have to be carefuly balanced between spending and sources of funds. I agree that Dr. Reich has tended to shotgun remedies without tying all the factors together. I doubt that it is a failing on his part for I'm sure he is well aware of the interrelationships and the necessity for balancing. It is more likely that to present a full, sort of P&L picture, would be better presented in a multi-page paper than on a blog or an op-ed piece.
I would also give him credit for having a better understanding of just how much deficit spending we can handle than you or I.
That said, now to your proposals. Granted you have delineated 5 primary priority categories. In some of those categories, however, you have bundled different problems under one heading. Simple example is the pre-college and retraining programs with the added issue of college funding. All these are education related but beyond that generic heading there is no similarity between them so that legislation to accomplish each will tend to be mutually exclusive. You then add military spending as the potential funding mechanism to support those activities. Military budget cuts is a whole nother Pandora's Box.
Another example is coupling Public Transport issues with infrastructure updating. Again they are not unrelated but legislatively would likely be treated as distinct issues, with minor overlaps.
The point being that from a legislation standpoint you have presented far more than just 5 priorities. Though not always easy to follow it appears that some of your funds and expenditure explanations tend to overlap, resulting in the appearance of spending the same funding a couple of times.
You have mentioned on several occasions the issue of personal savings. Granted it appears a problem in the US but there are conflicting issues. One is, that though difficult to figure out, I'm not sure that our current information gathering systems are sufficient to truly identify true savings.
In recent years many companies have set up 401K products for their employees. Many of those firms have very beneficial matching funds programs which often guarantee an annual rate of return far exceeding anything available in a typical savings account or even some other kind of personal investment account. Most of these 401K funds are invested in mutual funds which means that the investments are not readily available to the banking system for use in credit issuance. Other folks put money in IRAs, Keoughs, etc. and in turn invest those funds in mutuals or specific stocks. Some buy bonds which would enhance the credit markets but my bet would be that bonds are minimal in the grander scope.
Saving, in this way, provides a far better return, with minimal risk, than the typical bank savings account. It must also be remembered that with stagnant wages and rising prices, over a number of years, there is little excess earnings available for saving.
The other factor that muddies the true savings rate is that between these retirement mechanisms, increasing equity in homes, until recently, and credit card proliferation, many consumers have backed into a sort of leveraged method of consumption. They put their money into homes and retirement savings programs, both historically good rate of return vehicles, and then do their consumption with credit. We all know that this borders on very foolish. Many view this as good financial management.
It is highly likely that tax reductions will be invested in these retirement vehicles and not in the banking system.
You also have to realize that all your "solutions" are not faced only with real viability, but more importantly with political viability. In the business world the CEO and the Board of Directors, usually a rubber stamp group, define problems, outline solutions and commence a fix. There is a minimal amount of political posturing if the powers are behind the solution. In government that is not the case. Theoretically the Board is 535 congressional folks with possibly 200 or 300 different ideas of what the fix should be. Whether Democrat or Republican, how do you think those representing areas where the private health insurance industry is a huge local economic factor, are going to react to universal health care legislation?
Obama, should he be successful, will quickly find out that the history of Democratic Congresses is that they are no less hard on a Democratic President than a Republican one. No doubt resistance can be sometimes overcome but it requires great time and energy and slows legislative progress significantly. That is why I suggested that your total program could take decades to accomplish.
I do agree in your layout that fiscal revenues have to be the first thing attacked. A solid view of future revenues will be tantamount to determining what spending can be done. It will also have to be a priority because the Bush tax cuts are about to run out and if not addressed and corrected immediately there are serious negative impacts looming.
You occasionally suggest using the savings from Iraq War spending as a source of funds, if we can get out soon. The fallacy in your premise is that most all the Iraq war spending is off budget and is 100% financed. Ending the war does not free up revenues to redirect to other spending.
Not a bad idea but cutting income taxes and then raising gasoline and road taxes, will not be viewed by many in the American public as a good deal. It will feed the conservative mantra of tax and spend liberals. The American public is a fickle friend. What is good for me today is wonderful. What is good for me tomorrow is often viewed as a pipe dream, especially if it cost me money today.
We must be very careful with subsidies. Tax incentives are one thing but subsidies brings out the worst in our capitalistic system. Look at the "splash and dash" process. Subsidies were introduced to motivate biodiesel production. What happened? Ships carrying biodiesel produced overseas make a stop at a US port. There, just enough US produced biodiesel fuel is added to qualify the whole shipment for the subsidy and then the ship continues on to Europe to the vast biodiesel market. Not exactly what Congress had in mind.
In a perfect world many of your proposals would be a piece of cake and a welcome relief. In our political/capitalistic maelstrom innovation is directed more at profits by hook or crook than at new product development.
What does it do to your overall program if the military spending savings do not arise? You keep wanting to ignore me on that issue but it is damn near an absolute that in the short term those savings are not going to come about. Again, politics, wrapped around national security, will stall them in Congress if they even get brought up. The environment, as regards defense spending, that existed during the Clinton years is long gone.
US bonds for education is a good idea but who is going to buy them when they can't put food on the table or gas in their cars? Tax reductions, on a massive scale, also tend to limit the incentive of tax-free investments.
Conventional political wisdom has it that if universal health care is going to fly it has to be enacted quickly. This alone puts a lot of pressure on deficits.
Am not sure where you get your numbers but one of the praises of Medicare is its low administrative costs. No argument that the true costs are elusive but max it would appear to be around 5% of claims. Currently that is spread over a much smaller covered population than in Canada. Should Medicare end up the administrative vehicle for universal health care that percentage will drop dramatically.
Beyond fiscal revenue/spending legislation we are sorely in need of regulatory improvements as well. This just adds to the burden of the government to react timely to address all our problems.
To address our many problems in a timely manner almost assures deficits continuing into the foreseeable future.
You refer to our committment to community. This has never been a hallmark of the US. In our founding years, external threats created a need for reliance on community. As safety and security was woven across the country, individualism, always present as well, began to flourish. In times of the Great World Wars there was a rallying around the flag collectively. 9/11 produced a short but similar phenomenon. Even during the Great Depression many Americans did not suffer the food lines, the soup kitchens. Many earned a decent living and though perhaps contributing some help in money or services still managed to stay focused on their own welfare. Great peril, in the form of a visible threat, can enable a community spirit. Absent that, we are very much an everyman for himself nation.
Great men of history have always left us with wise cliches; Churchill was not the least of them. Optomists are always vital to our future existence. They are the innovators, the providers of ideas for mankind's advancement. There was a time when innovation was the result of individual hard work; of personal sacrifice in achieving dreams. In today's world innovation, turning dreams into reality, has become much more a financial/energy effort. Enter the realist, call them pessimists if you like.
Venture capitalists, who provide much of the funding for innovative individuals/companies, turn down many more deals than they fund. They do that because someone raises questions as to the viability of a proposed project. Not from the standpoint that it shouldn't be done but that it likely can't be done profitably.
Realists looking at the social/political spectrum feed at that same trough. The idea is never to suggest impossibility but to keep the focus on the feasibility of actions and force the optomists to review, over and over again, the viability of their proposals. Profitability is fairly easy to determine. Social/economic/political advancement is made up of a lot more variables to consider. There is only so much funding available and so much energy to expend. It is best if the focus stays on the most feasible.
Walking and chewing gum at the same time is not one of Congress's strong points.
Mr. Reich -
I'd like Barack Obama to consider you for his V.P.
Why?
It's the economy again silly. Even Iraq is tied to the economy. I think you are a great advocate for sensible economic decisions tied to public policy, have a gift of facts and framing of arguments, and can provide Obama with solid advice for today as well as tomorrow kitchen table concerns.
Would you take it if offered?
- Steven Feinberg,
author, The Advantage-Makers:
How exceptional leaders win by creating opportunities others don't
VP
Jim Webb, Senator from Virginia
Dr. Reich and Dr. Stiglitz would be my choices for helping to set economic policy. Stiglitz can do the job blind-folded as he has served previously. R2 would be another fine cabinet member.
Art,
Our DEBT MADNESS and need for SAVINGS that I've been writing about for months now as being a major part of the systemic flaws in our Economic Model has been finding much sympathetic company recently by some recognized scholars.
See a report just out by The Institute for American Values entitled, "For a New Thrift: Confronting the Debt Culture."
It also gives some specific recommendations as I try to do in my social-economic problem/action program assessments.
The report is summarized by Barbara Whitehead in The American Interest and can be obtained free online. David Brooks has also written a summary of the report.
I will respond to your latest as usual provocative but predominately "CAN'T DO" post soon.
DO THE MATH ON RISING FOOD PRICES. iT ISN'T ROCKET SCIENCE. TWO YEARS AGO CORN SOLD AT AROUND $2.55 A BUSHEL. THEN THE US PASSED LEGISLATION DEMANDING A SIGNIFICANT INCREASE IN MIXING ETHANOL IN GAS AND SIZEABLE fEDERAL CASH SUBSIDIES TO ETHANOL PRODUCERS, SO WITHIN WEEKS THE PRICE OF CORN BEGAN IT HISTORIC RISE, UNTIL TODAY WHEN IT SELLS AROUND $6.50 A BUSHEL. THIS IS THE SAME CORN USED TO FEED BEEF, PORK, POULTRY AS WELL AS BEING USED IN CORN SURUP ,BREAD, AND BASIC FOOD INGREDIANTS FOR SEVERAL BILLION OF THE WORLDS POOREST FOLKS. So the real problem with rising cost of food is not inflation, not increasing demand from China: It is the direct result of a really really bad policy of turn cheap food into expensive fuel, making farmers richer and making the rest of the world suffer. Even in this country you can already see what is happening to the price of milk, eggs, bread, meat, cereals, etc. Already lower income folks are now making hard decision whether to buy needed food or buy needed gas,
Silverfox.
The kind of utter policy stupidites you dramatize is exactly why I and others think our Government and local authorities need much more support in their decision-making-- regarding the whole range of complex social-infratructure, Alternate Fuel options facing us -- from some independent wise people from the Sciences and the Humanities. We are so naive, divided, and uninformed about the right mix of technical, non-conflicting solutions to our crisises.
frank:
Have read Ms. Whitehead's summary, excellent piece. You will notice that most of her summary focuses on the debt influences in our society. No doubt an appeal is made for greater savings and no one is arguing that it is not an important issue. My main point was that I'm not sure the current database of information truly captures the increase in 401Ks, IRAs, etc., and secondly that a revitalized savings inertia will not likely occur through the banking system as was previously the case.
Another factor I didn't get into but is germane, is interest bearing checking accounts. Historically checking accounts did not pay interest. If you wanted a return on your excess income you had to put it into a savings account. Today that is no longer true and the difference between the interest paid on checking versus savings makes the extra work in moving money seem wasted time.
Further, to somewhat reiterate, there has been a sharp reduction in fees for buying and selling stock. There are many no-load mutual funds available to the small investor. There are just too many other cheap savings vehicles available today to think that the old savings, via bank accounts, is going to get much traction. Ain't capitalism grand?
All in all any increase in "savings", no matter the vehicle, will be a good thing. It will benefit economic growth but not necessarily through the credit/banking system.
Of course the biggest stumbling block is there are no excess incomes for most average Americans today. Nor have there been for a number of years. Tax reform may ease that but the impact will be minimal and to your point much of the tax savings will be used to retire debt initially. After that our propensity to consume may shift into higher gear and we will return to the heydays of the Reagan-Bush years.
Oh I know, cynical, pessimistic, can't do thinking. But, again, Ms. Whitehead and you are arguing a phenomenal cultural change and one that must be coupled with political will. A confluence that is often an odd coupling. She alludes to one of my favorite subjects; the sophistication of advertising and its ability to drive attitudes in the direction of more profits for the private sector. Those profits, in today's world, are never manifested into increased wages.
I am oft reminded of a Consumer Marketing course I took in college. The question was asked about why do businesses want to learn more and more about the interests and motivations driving consumer choices. Is it to better develop products that meet those needs? Or is it to better understand consumer thinking so as to create advertising to take advantage and manipulate the consumer? I, being older than most of my peers in the class, primarily due to my not being real bright, raised my hand and said surely it was to impove meeting consumer demands/desires. Wrong!
Few of us, not even me, realize how the many nuances and images presented in advertising actually create our desires and influence our spending. Ms. Whitehead lists a couple. Usurious lenders who use words and ideas with an appeal to helping you with your problems, when they actually are adding to your problems.
Do you think that the desire for SUVs and Hummers and gas guzzlers is an inherited trait? We are convinced over and over again that those are the kind of vehicles we want. They make us sexier, more manly, more in charge of our own existence. Why in the hell have we continued to manufacture 8 cylinder engines when a V6 will do everything that we need done more efficiently. In the late 50s Germany was producing 4 cylinder engines that could produce all the power and speed that any of us really needs in the US. Unfortunately, US car manufacturers never mastered that technology. They sell for less.
Most of the financial problems we face have been building for over 30 years. Many of our social problems go back over a 100+ years. These issues are not going to be reversed in an 8 year presidential term let alone a 4 year.
One of the main reasons that tax cuts gain leverage is not because we are overtaxed, your comparisons clearly point that out, but because wages have stagnated. To the working class, buying into the concept that their employers pay a fair day's wage for a fair day's work, realize that their paycheck doesn't go as far so it must be due to taxes that are too high. Eliminating all income taxes for those making less than $100,000 a year is but the tip of the iceberg on a per person basis. In aggregate it would be extremely burdensome on the government.
Ms. Whitehead argues, in general, for regulatory reform for payday lenders, credit card companies, banking institutions. She argues for a redirection toward thrift and institutions bent on helping folks rather than earning more profits. All good ideas, alas, we have no Ben Franklins around today. Nor do we have an experience base of a better way.
Likely your parents or grandparents went through the depression as did mine. This infused in them the importance of thrift and always looking out for that rainy day. Those lessons had an impact on each of us. As we segued to better times, with only minor economic hiccups, much of those messages went the way of virginity and marriage and many other cultural limitations. We now have a generation, actually generations, who never got that message from their families. They grew up in an environment of plenty, of immediate gratification, nurtured by our capitalistic system. Those generations have a huge learning curve in attempting to alter cultural habits. Legislation alone will not accomplish that, nor will politics alone.
Even Dr. Reich, in this post, appeals and points out the necessity for renewed consumer spending to attempt to right our economic ship. Where is the message? What are the masses to think?
We liberals can get carried away thinking that government can solve all the problems. Conservatives have a point regarding personal accountability and responsibility. Their deeper meaning of that phrase is suspect but the thought has merit.
We are faced with a plethora of chicken and egg dilemmas. Some can be worked on in concert. Others require a determination of emphasis and priority. Not a priority of legislation but a priority of altering cultural influences, of putting some additional pressure on Americans to be wise and to educate themselves as to their failings and helping them know what better options there are. It is a huge undertaking and it will be generations in the fixing.
I don't argue that it "can't be done" merely that before providing a list of fixes that are surface at best and temporary at worst, we need to drill down to the root causes and figure out how to address those as we put in place patches to keep the ship afloat. Patches must be handled delicately for they often have unintended consequences.
As a finance guy, a fancy term for accountant, I am big on cause and effect. In this country, perhaps it is just human nature in all mankind, we often attempt to resolve intermediate effects thinking them to be causes.
True problem solving has to get to the base cause and build from there. As I have struggled with this, I too, see the many intermediate effects that look like causes. As I fight through these I keep coming back to a root cause that is anathema to most; Laissez-Faire Capitalism. Unbridled capitalism, run amok, seems to be at the heart of many of our problems. I can conjur up a lot of solutions for intermediate effects but I see where many of them leave the larger issues begging.
That is my dilemma. I am still in the problem definition phase.
frank:
Let me elaborate on my major premise (a loud moan goes throughout the room).
Corporate profits are very necessary. They fund growth and new product development and sometimes new jobs and they provide stock price appreciation. Today the profits necessary for corporate welfare are less predicated on need and more on analyst's expectations. Now most of these analysts have never set foot in a business facility except maybe as a visitor. They come to Wall Street fresh out of graduate school imbued with the wisdom of case studies providing them all the knowledge of running a business they will ever need. Surely they know best what a particular company needs to earn to make everyone happy. Should a company miss their targeted earnings all hell breaks loose. It often appears as some of that tail wagging the dog stuff.
Of course stock price appreciation is extremely important to the execs because of all the stock options or grants they receive at special prices. The fact that the shareholders are happy to just adds more feathers to the nest.
On occasion, if profits appear to fall short we have those creative accountants who can work miracles with reporting falling profits with a tad of spin.
Now to make profits we need to make those products which best provide profits. Not to worry that smaller, more fuel efficient cars would be better for our society and the world, we can sell the gas guzzlers and make enough money that we can get seats on the first ship to Mars when catastrophe hits.
We always need to spend on R&D to improve and enhance our products. Now product improvement is important. It is always the highest priority preceded only by cost saving research.
Year over year profit growth, in the neighborhood of 15 to 25%, is extremely important to enable the company to keep pace with the free market value of executive salaries. God forbid our executives fall behind in their payscales and some corporate recruiter steals them away. That would force the BoD to come up with a new stratospheric pay package to replace them. That could impact future profits. Unless of course we can layoff a few peons to make up the difference.
Leads to another of those genuine decisions practiced by the wizardry of CEOs in today's world. Profits not up to snuff? Revenues taking a little downturn? Not a problem! I know Wall Street is nervous and they are beginning to look askance at our prospects. Aha!! I have it!! A restructuring plan, laying off a bunch of workers, that's the ticket! Wall Street loves restructuring plans! Let's include that financial analyst who is saving us $100,000 a year but is driving executives and managers crazy with his vitriolic, nasty emails, condemning our wastefulness (a little personal note).
After a year of banner profits we really should pass some of that back to the little people. Those ground floor workers who we constantly applaud as having helped us to those banner profits. Wait a minute! If we give them a big reward they will think they should receive it every year. Then in the future when we can't deliver they'll want to unionize and create havoc. Besides, after the executive bonuses there isn't really that much left over for them.
We could increase the dividends this year to reward our shareholders for the fine job we have done. Why do we want to do that? They didn't contribute anything to our stellar growth. All they did was buy some pieces of paper. They're happy with their meager 1.5% return, don't rock the boat. They too, will think it should happen every year. And further, our stock price will go up and that's enough to keep them happy.
We are in a dying industry. It's a slow death so there are many profits yet to be made. We really should be expending more in R&D to find new products and services to keep us viable in the future. But what if we master a new technology and it replaces all those profits yet to be claimed? All that potential wasted. Best if we wait until time is running out, critically, and then with our phenomenal management we can turn on a dime and discover that new resource. Oh, I know, the country and the world will be better off if we shift gears but think how much universal benefit is derived from getting all those residual profits first before we change.
While we're at it, I talked to the BoD and explained that all that bullshit I fed the workers about their contributions was just promotion. It was feel good stuff for the masses. If we keep them feeling good enough about their contributions they'll be happy with the meager pay we give them and we might even look at raising the pay for the Board next year. Of course my contribution was significant so a raise this year for me seems only appropriate. Let's not forget to increase my parachute payout just in case I can't repeat the performance next year. Maybe to appease the masses we can add a little to their severence packages should the time come; maybe two weeks for every year of service would be nice. I know it's nowhere near commensurate to mine but they're not worth as much as me.
Our competition is producing more overseas with those low labor costs and with none of this ridiculous regulation. We need to get our share of those profits. We need to shut down here and build up over there. Training? Not a problem! For the essential skills we'll pay a bonus to our current employees to train the new employees. Maybe we'll even send them overseas, sort of like a vacation, so they train them over there. The aftermath effect on our workers? Oh ok, we'll give them a little bump in their severence. After that they can draw unemployment and the government will pay to retrain them in a new exciting profession. Then they will be trained enough to venture into the market place for those new jobs and compete with all the youngsters with the same education. Think of all that assembly line experience they can provide in their new health tech profession. They'll be fine. Our bigger problem is figuring out how we manage our new facility from here so I don't have to give up my mansion. See, it works out well for everybody and only we are left with problems.
We are deeply involved in a global market and competition is stiff. We need to acquire some of our competitors so we don't have to compete as hard. Don't worry about the costs. Hell we can make most of it up by laying off those losers in the company we are buying. If they were any good their company would have been buying us instead of vice versa.
Just a few thoughts emanating from the hallowed halls of Board Rooms around the US.
frank:
BTW, have you noticed the upswing in demeaning Michelle Obama? Did I not tell you (admit it wasn't profound)?
I have also noticed that Obama is proceeding with his change message. The change message has changed though. His campaign is seguing toward those "old politics" tactics. We're seeing a lot more aspersions cast than issues differences.
Stay tuned, we've not yet begun to fight.
Consumer demand is weak? They are still spending more than their income. When will you switch from trying to spur such unsustainable behavior to attacking foreign currency mercantilism, which is responsible for a large part of our current demand deficiency?
Art Layman, cc: Dr. Reich
Excuses for delay in responding to your long posts. Sensational Dutch soccer play in Champions League has us all in its grip!
Rather than exploring all that's not possible, I prefer to confront constraints to fundamental change in the old American "CAN DO" spirit. Otherwise, I see little hope of coming out of the multiple Catch-22 economic dilemmas destabilizing our economic system.
I. BASIC ASSUMPTIONS FOR TRANSITION TO A STABLE ECONOMY
In my "Part III-Transition to a Stable Economy," I put forward a "wholelistic" approach...an "all parts" integrated consideration of social-economic dilemmas facing our leaders and experts like Dr. Reich.
Accordingly, I'll elaborate further on my BASIC ASSUMPTIONS underlying a framework for a "balanced mix" of Spend/Tax/Incentives/Cost Cut policies to revitalize the economy, while also stabilizing and improving the Dollar/Deficit situations.
A. Whatever medium and long-term actions we take, I assume they should not worsen current Deficit levels in 4% of GDP range. Extreme commodity price rises in a recession cycle magnify necessity to control Deficits to keep Dollar from cascading further, thereby triggering ever higher oil prices. This requires creative, prudent, bipartisan ideas to offset program costs by appropriate mix of budget cuts(e.g., Defense), taxes and tax incentives.
Briefly, realistic forecasts of tax revenues under various Stimulus Options are needed before plunging into a disjointed melange of spend/tax/incentives/cost reduction actions...forecasts showing the interrelated effects of policy actions on Growth, Deficits and the Dollar.
B. A Consumption rate of 70% of GDP is not sustainable in an economy now IMPORTING INFLATION (exploding energy and commodity prices) rather than DEFLATION as in 90s and the early 2000s (cheap imports); in an economy where at least 75% of the population has had stagnant wages for over 20 years -- causing credit market debt to soar to over 320% of GDP in 2007 (+-30% higher than 1995-2000 and 100% higher than the 1970-85 period. The debt to GDP ratio remained fairly constant at +-140% of GDP between 1950-80. It really started to accelerate when Greenspan became Fed Chairman in 1987.
Fed monetary policies thus helped create the 90s' debt inflation. In 2001, the Fed launched a new phase of money printing to avoid deflation. It didn't work. Credit market debt sharply increased to an excessively high 320% of GDP in 2007 while growing 4 times faster than GDP growth -- hardly a sign of a sound, well-balanced economy.
Households saved less and less and borrowed more and more, relying on ever rising asset prices to the maintain standard of living. Result? ... household savings (defined as what households receive in after-tax income and what they spend on goods and services with borrowings counted against savings) have reached their lowest level in 50 years!
Inevitably, (in combination with poor Fed oversight and regulations), households got hit with deflating asset prices, wrecking havoc in the economic system with massive defaults and bankruptcies -- intensified by predatory lending/credit card practices. Result? ... a dramatic collapse in consumer confidence today.
These factors plus current credit crunch, cyclical downturn, and many more years of IMPORTING INFLATION don't bode well for continued high Consumption rates anywhere near 70% of GDP in the foreseeable future.
That is WHY our nation must revert to stimulating Investments in key programs to counter a likely decline in Consumption and thus to support lower GDP growth rates of 2.5-3.0% over next 4-6 years. To achieve this, Savings must be stimulated by tax incentives. More savings will come about naturally as consumers buy fewer trivial and high ticket items; master the credit card disease assisted by tougher controls; and get educated in prudent personal financing behavior. This will also increase banking system liquidity in addition to banks raising their Safety Reserves to levels more in line with European banks.
C. Past U.S. policy of printing money and spending illusionary wealth by asset inflation with zero savings -- while Europe and Asia have high savings rates --has led to growing U.S. Current Account Deficits as high as 6% of GDP and growing current surplusses and accumulation of foreign exchange reserves in Europe and particularly Asia. This in concert with our substantial national budget Deficits has contributed to Dollar's steady fall and, consequently, to a shocking rise in energy prices. In fact, the current account deficit remains a serious hidden threat to Dollar's future value. If and when this deficit becomes unsustainable, the negative impact on the Dollar and oil prices will be a global shock wave of significantly painful proportions.
In the meantime, America today can be thankful it doesn't have to pay a pump price of + $8.50 per gallon of gasoline, as Holland does now, for example. There would be total CHAOS in the U.S. vs. Europe's relative calm! WHY is that? This is a question for another time but does get at the roots of our totally different economic models.
The Fed, seeing that asset inflation as a support of Consumption has come to its disastrous, inevitable end, is once again forced temporarily into the money printing game with lowering interest rates -- albeit with more sensibly rigid lending/credit controls and oversight. This liquidity impulse to prevent panic banking runs has been a strict necessity -- despite risk of intensifying normal and IMPORTED INFLATION above personal income gains. As is well-known, average hourly earnings of production and non-supervisory workers have been declining consistently since 2002 at negative 1-1.5% annual rates -- similar to annual declines of 1-2.5% during 1984-95, followed by some improvements in the late 90s.
D. All above means a Complexity and Confluence of external and internal factors are undermining the stability of our economic model. The scale of the threat is unique and lays naked a serious vulnerabilty as noted in (B.) above, namely: for too long our economic system has been out-of-balance with its extreme dependence on Consumption and far too little economic support from Investment.
But the latter requires Savings. In my humble Joe Doe opinion, this implies we must strive over next 4-8 years to adjust to a new equilibrium where Consumption falls to 63-65% of GDP and Investment, supported by greater Savings, rises to 6-7% of GDP (eventually contributing to lower imports and less dependency on capital from the rest of the world). In time, this new equilibrium should bring greater economic stability, more "Liquid Cushions" in financial system to absorb shock waves and surprises in good and bad times, and more confidence in the Dollar.
E. As stated, success here depends heavily on government and corporate Investments to revitalize the economy. The opportunities are abundantly clear: e.g., achieving independence by Alternate (green) Fuels and fuel efficiency; repairing a decayed infrastructure; and perhaps most importantly, investing in Human Capital (education/retraining) -- all leading to new JOBS and 21st century KNOWHOW that will be saleable to Asian and Middle-East countries.
II. SPEND AND PAY OPTIONS TO AVOID FURTHER DETERIORATION IN DOLLAR AND DEFICITS
To help pay for these programs, I assume, naively and unrealistically perhaps, our politicians can come together for once to put COUNTRY before PARTY to spur conservative and liberal ingenuity on how to pay for these Investments ... the goals being to move towards more balanced, stable GDP growth rates combining Consumption and Investment with a more equitable wealth distribution over long term.
This requires putting all financing/stimulus ideas on the table -- absent pre-conceived ideological prejudice or inflexibility and being assisted in the evaluation process by some wise men from the Sciences and Humanities.
The following expands further on some Spending/Financing action steps I´ve suggested in previous posts that also reflect ideas of Dr. Reich and others:
1. Cancel Bush tax cuts going mainly to top 15% income earners of our society who are also the smallest drivers of Consumption. Implement a 10-15% reduction in tax rates for lower-middle class Americans earning less than, say, $150,000 with an offsetting increase in tax rates for those earning, say, above $250,000. This is to correct obscene stagnation in lower-middle class wage stagnation; to strengthen Consumption; to moderate wage increase demands which would add massively to existing IMPORTED INFLATION; to amply cover impact of added taxes necessary (e.g., fuel tax and/or road tax) to pay for programs and to give households room to increase Savings as current consumer debt overload is paid down.
2. The energy crisis and related carbon pollution need a Marshall Plan attack mentality. We cannot dilly-dally in political stalmate and bandaid fixes. Congress should consider offering a 10 year Tax-Free status (or substantial Tax Credit) for existing and new startup firms investing in Alternate (green) Fuels such as hydrogen, electric energy cells, wind, biofuels, solar, clean coal technology, etc.). Lost tax revenues will also be partly offset by expected strong increases in new jobs.
One thing is fairly certain: the big oil firms are going to remain passive participants in investing in Alternate (green) Fuels. Their focus is entirely on drilling for fossil fuels as they are investing a paltry 1% of their annual Capital Budgets on new, green fuels. And a lot of that is PR money to convince the public they are doing more.
When comparing demand-price trend rises, it´s appears obvious firms like Exxon are enjoying "Windfall Profits." If these profits are measurable and/or are not going into greatly increased Capital Budgets for exploration of new finds, then I would join others in assessing windfall profits with a special tax.
3. Enhance the Investment component of our economic model as a driver of jobs and GDP by increasing long-term investments in modernizing public transport and transit systems. Pay for this by increasing Federal Tax on gasoline and/or by implementing a Road Tax on vehicles (excluding trucks). Contrary to your comments, Art, I think such taxes can be sold to the public and made affordable when designed in harmony with lower-middle class tax cuts and tax credits for conversion to or purchase of hybrid or non-fossil fuel vehicles. This is all part of the interrelated dynamics of policy actions that must be balanced for ideal overall effect, as you are aware of.
4. Invest in our country´s HUMAN CAPITAL by improving quality of pre-college educational programs, facilities and teacher qualifications and pay. Pay based on merit should be the norm.
College affordability is another major problem. It´s also related to poor academic and emotional preparedness -- exacerbated by a lower-middle class trapped in a spiral of economic stress and cultural decay.
Funding for pre-college system improvements could come from an "Invest in America Education Fund." The government would offer 15-20 year bonds to general public and corporations and redistribute funds to each state based on an equitable formula. Pricing bonds at low $100 to $500 denominations could insure a substantial participation. Investors would receive a 6-7% tax-free interest return monthly and other attractive return features. Seems like a better approach than borrowing funds from the Chinese and paying interest to them instead of to ourselves.
Other options are to redeploy Defense cuts to education with any remaining funds needed financed by continuing habit of selling Treasury bonds to foreign countries.
5. Aging of population and low birth rates, mean the number of people working to support private and public pension (Social Security) systems is becoming smaller and smaller (slightly less so than in Europe but still a major problem). This accentuates urgency to get people back to work as quickly as possible who are victims of downsizing, outsourcing, redundancies from mergers/acquisitions ... people who otherwise will become an extended underclass in our society. So, we really have no choice but to improve retraining/upgrading programs for displaced workers.
A core problem is that the skills of American workers are lagging behind technological change. A quality labor force does not magically appear by market forces alone. For years, the Japanese have been teaching us a good lesson how positive government, corporate, and cultural committments together prepare people for the tough world of competition by giving all citizens a fair playing field and a fair chance.
For America, this calls for a Human Capital development revolution much in the spirit of the GI Bill after WWII.
Funding to reduce the stress here can take many forms: increase the earned income tax credit; or apply a new tax against the payroll tax; increase unemployment compensation especially for those involved in retraining programs; have a regulation requiring firms (of a certain size) to contribute towards the retraining costs and combine this with a plan where the government and employee also share in the retraining costs, etc.
6. Another obvious funding source is to come to our senses that we can no longer afford the vast expense of our bipartisan ambitions to underwrite global security at 5-6% of GDP. This is bankrupting the Treasury. We must get it down to at least 3.5% of GDP, if not lower without sacrificing our national security of course.
As shown in earlier posts, in 2007 58-60% of total Federal Outlays -- including Off-Budget Outlays but excluding Social Security and Medicare (as these trust funds have their own Tax Revenue/Outlays) -- were for Defense ($.42 per Outlay Dollar including Veteran Benefits and misc. military costs included in other budgets)) and Interest on the Debt ($.18 per Outlay Dollar).
Including Social Security and Medicare in total Federal Outlays is mixing oranges and apples for policy decision making. Added result? ... the public and politicians get an artificial and distorted picture of huge scale of spending going to Defense and Interest on the Debt. Some experts say that over 80% of Interest on our Debt is due to Deficits from Defense expenditures financed by borrowing abroad over the years.
The remaining 40% of Federal Outlays spent on Human Resources, General Government, and Physical Resources is hardly a BIG WINDFALL of wasteful government spending as falsely propagandized by conservative politicians. Some savings may be possible here in so-called "PorkBarrel" discretionary projects but probably amounting to no more than $25-30 billion. (Much of the PorkBarrel expenditure is for fundamentally needed infrastructure improvements).
Whether Defense funds are borrowed and/or are Off-Budget is immaterial as either yields beneficial liquidity effects. The effect of cuts means that government liquidity from Debt standpoint and cash standpoint is improving ... releasing financing room for critical infrastructure or education Investments. This added liquidity in 2-3 years could amount to as much as $50-75 billion annually ... sufficient to finance a major part of needed social-infrastructure investments without intensifying Deficits.
SUMMARY
The "TWO ISMS," Conservatism and Liberalism, have long sort of paralyzed our country into the "either or" solutions to problems culture -- where a whole range of ideas blending the finest of both `ISMS´ never gets developed or represented sufficiently, often to the detriment of Mainstream America.
Our political divisions and cynicism may even disguise a deeper cultural discontent -- openly or subconsciously -- namely, how the commercial domination of our lives fills all the empty spaces in our culture, working against self-reflection and depth. Hype is life in the norm of aggressive Consumption and Slogans ... forming an impatience to think critically that is also spilling over into our political arena as well.
The problem of inflexible political ideology may indeed be a ROOT CAUSE of our problems today ... although your CAPITALISM RUN AMOK, Art, has certainly been on my mind for many years.
Pervasive kitsch and hype have come to be a sort of collective spiritual death ... i.e., the pouring out of any cultural content and sense of community (or we're all in this together spirit).
On a more hopeful note, my home state Maine has always taught me that elected officials can be much freer than they believe to vote for their conscience. Mainers have generally persistently voted for the best person and best idea and to HELL with rigid party ideology or narrow-minded dogma. A recent example of this non-conformist imagination comes to mind. Despite being the 3rd or 4th poorest State, Maine Republicans and Democrats came together very cooperatively to pass a universal health care.
WHY? Because it's just a matter of common-sense decency and community self-respect ... an Edmund Burke conservative care for community long lost in our national dialogue.
It's that sense of Country before Party inherent in European countries -- where 3 or 4 credible parties intensely and equitably represent all sectors of society resulting in many more nuanced ideas and compromises benefitting general society as well as the vitality of market mechanisms.
I'll finish this long treatise with a quote from my favorite President, Harry Truman:
"You can always amend a big plan, but you can never expand a little one. I don't believe in little plans. I believe in plans big enough to meet a situation which we can't possibly foresee now."
Well, the challenges facing us are truly BIG. They require immediate small Steps forming a strategic part of a BIG PLAN. This begs a return to the American bipartisan "CAN DO" Marshall Plan spirit ... merging the best of our conservative and liberal ideals and ideas ... solving huge problems pragmatically, prudently, fairly for ALL Americans.
I pray we can meet this challenge. If we do not, then we risk losing control of our destiny as a nation of "beginnings, great designs and vast expectations."
Frank Thomas, The Netherlands
Art,
I forgot to reiterate under point
2. in Section II concerning energy policy:
An easier direct step I favor, as many do, is to remove all current tax concessions to the oil companies (to extent legally possible). But I have no idea how much tax revenue is recoverable by this action.
Frank:
This is it? Dr. Reich and I come in second to Dutch soccer? The world, most especially the US, is in a steep dive; the yoke is broken and the rudders are frozen and you are watching Dutch soccer? What other lessons have you taken from Nero?
As usual, a fine position paper or book. To my mind, optimism is an inadequate term to define your solutions. You know me; ever the cynic. Rather than try and follow your numbering scheme I will just copy/paste some of your comments with which I take varying degrees of issue.
Whatever medium and long-term actions we take, I assume they should not worsen current Deficit levels in 4% of GDP range. Extreme commodity price rises in a recession cycle magnify necessity to control Deficits to keep Dollar from cascading further, thereby triggering ever higher oil prices. This requires creative, prudent, bipartisan ideas to offset program costs by appropriate mix of budget cuts(e.g., Defense), taxes and tax incentives.
Briefly, realistic forecasts of tax revenues under various Stimulus Options are needed before plunging into a disjointed melange of spend/tax/incentives/cost reduction actions...forecasts showing the interrelated effects of policy actions on Growth, Deficits and the Dollar.
Monitoring spending or revenues or any other monetary measure in terms of GDP makes sense but government is not like business, you can’t pass legislation addressing a problem and then turn on and off the faucet of funding or receipts. At best, an annual review could sound alarm bells but altering legislation, by the time it gets passed, may be too little, too late, or may be a bad fix due to timing, i.e., the economy fixed the problem.
Realistic revenue forecasts are even more difficult given the current economic dilemmas. Many firms facing losses due to the economic slowdown will be able to carryback those losses to prior year’s income and actually receive refunds from Uncle Sam of taxes previously paid. And/or they may have carryforwards to future revenues reducing or eliminating future taxes. After the fact, the latter is easier to forecast.
Significant job losses, with varying degrees of replacement jobs; new jobs, part-time jobs, taking two jobs, all make revenue projections extremely iffy. For the most part, actions must be taken and if they expand the deficit then further actions will be required to offset the new deficits. This is best handled, simplistically, through the tax system but constant tweaking of the tax system can create havoc. If you establish a research program for alternative fuels, for instance, you can’t just cancel or trim it back if deficits rise.
Fed monetary policies thus helped create the 90s' debt inflation. In 2001, the Fed launched a new phase of money printing to avoid deflation. It didn't work. Credit market debt sharply increased to an excessively high 320% of GDP in 2007 while growing 4 times faster than GDP growth -- hardly a sign of a sound, well-balanced economy.
It is always easy, in hindsight to second guess Fed actions. At the time their actions were necessary to try and get us out of a recession. Even though GDP recovered fairly quickly after the 2001 downturn, new job growth didn’t get back to positive, cumulatively, until 2005. They had little choice if pain was to be limited. Circumstances, and the Fed’s resistance to tight oversight, led to unintended consequences; a common occurrence in an economy the size of the US. We must keep in mind as well the charter of the Fed. Perhaps that needs to be expanded or altered in some way but that again becomes a huge political issue, not easily resolved.
That is WHY our nation must revert to stimulating Investments in key programs to counter a likely decline in Consumption and thus to support lower GDP growth rates of 2.5-3.0% over next 4-6 years. To achieve this, Savings must be stimulated by tax incentives. More savings will come about naturally as consumers buy fewer trivial and high ticket items; master the credit card disease assisted by tougher controls; and get educated in prudent personal financing behavior. This will also increase banking system liquidity in addition to banks raising their Safety Reserves to levels more in line with European banks.
There is no doubt that a lack of savings has had a negative impact in our economic welfare. Fixing or solving that issue might be more difficult than creating the Atomic Bomb. The American public will never accept, nor would the politicians attempt, any tighter controls on the availability of credit cards at the consumer level. It may be a huge flaw but you have to propose within the limits of what is possible. Though many are willing to accept, even seek, a greater government role in solving our problems, they have not yet moved to an acceptance of government being the nanny as regards their choices.
Tax incentives are a valid tool for moving behavior in a particular direction but there are conflictions. If you reduce tax rates significantly, at the same time you are muting the effect of further tax incentives to direct behavior. Re an earlier post of yours, prudent financial management would suggest retiring current debt would be the smarter reaction to reduced taxes, as opposed to increasing savings. From the consumer’s standpoint they both appear to achieve the same result. Granted increased savings create more options but in the eyes of most of those with a less than sufficient understanding of financial planning, freeing up credit, making more available, is of equal value. Few of the general public understand or care about the macroeconomic benefit of savings. To most, savings is purely a micro issue.
Tighter controls are certainly called for in limiting the exorbitant profits of the credit card industry. Currently, legal interest rates, by anyone’s definition, outside of the banking industry, are usurious. The multiple pages of applicable fees in credit card agreements are absurd, to say nothing of the size of those fees. Perhaps limits on max credit exposure on the part of the banks, via credit cards, could provide a limit on credit availability to consumers, somewhat establishing your European concept. This could minimize the amount of credit to consumers but would do little to encourage good use of what is available.
No doubt improved personal financial management education is called for. Once again though, you are suggesting cultural change that will be generations before becoming effective.
Currently US consumers are not faced with the problem of what to do with discretionary income. They are consumed (pardon the pun) with how to gain more discretionary income or how to get by with just their miniscule disposable income.
Even if legislation were passed minimizing the usurious interest rates and severely comprising fee structures, it could result in making credit card borrowing more attractive to consumers and therefore increase use again.
It is not quite clear, in your purview, the impact on potential savings increases, of your idea of increasing gas taxes and instituting road taxes. I’m also not clear why you keep excluding trucks from the road tax equation. Granted trucks, large ones, currently pay a road tax, but increasing it could prove an incentive to using more rail for cross continent shipments. Trucking industry takes a hit (they are the biggest influence on road degradation), but we can’t solve problems with equal pain all around. Some will have to hurt so that hopefully all can be better off.
Addressing this issue and its intertwining with more of your positions; understand that in our current dilemma reducing consumption could be suicidal. Right now we depend on consumption to drive GDP growth. Until we can get a handle on the other issues and settle on solutions, GDP growth is a necessity and increased or a steady level of consumption is the bridge; even though it could end up the “bridge to nowhere”. Increased savings can be argued to be somewhat equal to consumption on a GDP scale if it increases investment. The problem is that there is very little domestic investment taking place. Funds available for investment are more and more being diverted to overseas production/investment because of far greater returns. Infrastructure improvements, alternative fuels research programs, et al, could be an offset to some of that but it is also likely that these kinds of investments will not be undertaken without increased government spending and/or stipulation. If government has to fund these initiatives the continued leaking of investment dollars overseas will simply increase.
Tax incentives for domestic investment could also help but I do get sick and tired of having to incentivize US businesses to do what is best for the country. Given that a great portion of our huge corporations pay no income tax, tax incentives may not be a panacea either.
You do, in my estimation, have to get back to cause and effect coupled with viability of success. You know my views on ultimate cause, but admittedly there are numerous intermediate causes and effects that can be addressed:
1)Using troop withdrawals as trump or through whatever other arm twisting is available, we need to get Iraq to fund, going forward, our continued presence there. This eliminates a huge government spending hole.
2)The Fed, I think, should be able to ascertain that the current recession risk is due primarily to the inflation of higher oil and food prices. Economic growth is muddling along and is projected to continue to be positive. If the Fed were to start raising interest rates, which should cause an increase in the value of the dollar which in turn should cause a decrease in oil prices, which in and of itself, should add to economic growth, that should provide an environment for a greater assessment of solutions. A risky proposition I know but dire circumstances often call for out of the box remedies. It will not be a euphoric return to paradise but what we need now is breathing room; we are not quite yet in need of oxygen.
3)We do not need a plethora of tax tweaks. A tax cut here and an increase there is not the answer. We sorely need tax reform. We need to review the entire tax code and clean it up. We need to redefine what the goals of our tax system are, in a long term, “wholelistic” way, and then rewrite a fair, yet progressive, fix to the entire process. There will be a need for an immediate adjustment since the Bush tax cuts are about to expire and without adjustment there will be pain for the middle and lower classes. In my mind that should be the extent of the tweaking until an entire reassessment can be accomplished; an exercise that will take quite a bit of time.
4)A fresh review needs to take place regarding the federal government’s role in education. There is a tendency to feel that if federal funds are doled out then federal rules should go along with it. Likely a necessary evil of sorts but shouldn’t be cast in concrete. There are many issues with our school systems across the country. For every issue there a fifty million ideas for solutions. No doubt there is no one fix for all of them but I think we know that studies suggest that smaller classrooms result in better learning, net, net, net. If that be the case, then maybe the federal gov’t, in partnership with the state and local authorities, should look to aiding the funding for new schools, preferably multi-story buildings with attendant facilities for the disabled, to minimize land use and improve space efficiencies.
a.Then a collective program for increasing the teacher population. A very sensitive issue; currently there are loud voices for improving teacher pay, certainly needed, but it is a slippery slope because at some point increases in pay will lead to more and more entering the profession for the money rather than the dedication. This, in my mind, leads to the same problem as merit pay. There are few objective standards upon which to base merit pay, or sufficient levels of pay, for teachers. NCLB tries to do it with end of grade tests but that just leads us to teaching to the tests rather than a comprehensive, cohesive education.
b.Much disdain in passed around about the quality of teachers as a whole. I have a serious problem believing that the distribution of quality among teachers would vary much from what it was when I was in school and it wasn’t all that bad then. No doubt we need an ongoing evaluation process but focusing on that rather than other more important issues is barking at the moon. I for one could not be paid enough to manage a roomful of 5th, 6th, 7th or 8th graders, God forbid teenagers in high school. I have to believe that most entering the profession are truly dedicated - again, pay scales beyond a certain rate could alter that – and though some may need remedial aid here and there, their dedication will go along way toward making them viable at the profession.
c.Parental involvement is also tantamount but there is little that governments can do about that. It is purely a social dilemma, encumbered by the oft necessity for both parents to work and subject to the hugely detrimental effect of computers and TV.
Got off on a little bit of a tangent here but will get back to you with more cynical, CAN’T DO, reasons.
I didn't read for about a month, and now...wow, juicy. (it's June 23rd today.)
My comments:
1. f I scored a lunch with you, I would soooo try to understand economics. You really do, and I adore that.
2. You're not in government becaauusse? Oh, that's right, you're campaigning (that's what the blog is part about. campaigning, or preparing ;) Good luck.
God bless (annoying) America. It will be blessed to have good peeps like you and Barack in charge (and Hillary in charge of some things, but glad she's not up for the Presidency.)
Giving me $300 or $500 is simply putting a bandaid on a broken arm...
I need a job. I don't qualify for unemployment because I have never had a full time job. I have been out of college for 2 years and still nothing but temp jobs. I would much rather see creation of jobs than a fancy wellfare package. Teach me to fish...don't hand me one. I need to pay off my credit cards (the ones issued to me when I didn't have a job...yeah that was smart...)
It seems that you have resided on your lofty academic perch and live life through theory. Your comments about " white construction workers" and the already skilled were uncalled for and unfounded. Have you spent a day doing labor, or interacting with the workers of this society? The oppertunity is there for those of any race or creed already. Those that chose to work at making something of themselves will do so. Those who don't will not, regardless of any amount of money you throw at some program to make yourself feel somehow enlighted and superior. What will help EVERYONE is for the government to get out of the way and allow oppertunity for everyone to develop. Unfortuneately this Nation is governed by theorists and idealouges like yourself and not by those who have accomplised anything outside of accedemia. But alas that is how our system is setup, those with the abililty and the know how are out there making things happen in the real world. Your misguided socialist ideas will prevail and this great country of oppertunity we once new no longer be the land of the free and unlimited oppertunity.
徵信, 徵信社, 感情挽回, 婚姻挽回, 挽回婚姻, 挽回感情, 徵信, 徵信社, 徵信, 捉姦, 徵信公司, 通姦, 通姦罪, 抓姦, 抓猴, 捉猴, 捉姦, 監聽, 調查跟蹤, 反跟蹤, 外遇問題, 徵信, 捉姦, 女人徵信, 外遇問題, 女子徵信, 外遇, 徵信公司, 徵信網, 徵信, 徵信社, 外遇蒐證, 抓姦, 抓猴, 捉猴, 調查跟蹤, 反跟蹤, 感情挽回, 挽回感情, 婚姻挽回, 挽回婚姻, 感情挽回, 外遇沖開, 徵信, 徵信, 徵信社, 抓姦, 徵信, 徵信社, 外遇蒐證, 外遇, 通姦, 通姦罪, 贍養費, 徵信, 徵信社, 徵信社, 抓姦, 徵信社, 徵信社, 徵信, 徵信, 徵信公司, 徵信社, 徵信, 徵信公司, 徵信社, 徵信社, 徵信社, 徵信社, 徵信社, 徵信公司, 徵信社, 徵信, 徵信, 徵信公司, 女人徵信, 外遇, 外遇, 外遇, 外遇
徵信, 徵信網, 徵信社, 徵信網, 徵信, 徵信社, 外遇, 徵信, 徵信, 徵信社, 抓姦, 徵信, 徵信社, 外遇, 徵信社, 抓姦, 徵信社, 徵信公司, 徵信, 徵信社, 徵信公司, 徵信, 徵信社, 徵信公司, 徵信社, 徵信社, 徵信社, 徵信社, 徵信, 徵信社, 徵信社, 徵信社, 徵信,
Post a Comment
<< Home