Three on the economy

Three of the most interesting articles we've read on the economy this week have come from divergent sources: Paul Craig Roberts, former assistant US Treasurer and Wall Street Journal editor, and a theorist of supply-side economics; Mike Davis, on the editorial board of New Left Review and author of City of Quartz and Planet of Slums among other books; Dean Baker, editor at the Center for Economic and Policy Research, who has been warning the nation since 2002 about the danger of the speculative housing bubble. All three  appear regularly on websites offering the best political economic journalism in the country. Through the years of the Bush administration, we have read their prophetic analyses, which have helped us understand what is going on locally as well as nationally and internationally. At this point, when the nation is about as far away from "the end of history" as it can get and the government is rummaging around in the archives for a tattered copy of The General Theory of Employment, Interest and Money (1936), by John Maynard Keynes, looking for some ideas that worked in the Great Depression, Roberts, Davis and Baker offer useful insights and policy directions that might actually reduce some present and future suffering.Badlands Journal editorial board11-17-08Manufacturing & Technology NewsAmerica's Economic Crisis Is Beyond The Reach Of Traditional Solutions...Paul Craig Roberts http://www.manufacturingnews.com/news/08/1117/PCR.htmlBy most accounts the U.S. economy is in serious trouble. Robert Reich, an adviser to President-elect Obama, calls it a "mini-depression," but that designation might be optimistic. Russian economist Mikhail Khazin says that the "U.S. will soon face a second Great Depression." It is possible that even Khazin is optimistic.I cannot predict the future. However, I can explain what the problems are, how they differ from past times of troubles and why traditional remedies, such as the public works programs that Reich proposes, are unlikely to succeed in reviving the U.S. economy.Khazin points out, as have others such as University of Maryland economist Herman Daly and myself, that consumer debt expansion is the fuel that kept the U.S. economy alive. The growth of debt has outstripped the growth of income to such an extent that an increase in consumer credit and bank lending is not possible. Consumers are overburdened with debt. This fact takes monetary policy out of the picture. Americans can no longer afford to borrow more in order to consume more.This leaves economists with fiscal policy, which, as Reich realizes, also has problems. Reich is correct that neither a reduction in marginal tax rates nor a tax rebate is likely to be very effective. Reich, a Keynesian, has an uncertain grasp of supply-side economics, but as one who has a firm grasp, I can attest that marginal tax rates today are not the stifling influence they were prior to John F. Kennedy and Ronald Reagan. As Art Laffer said, there are two tax rates, high and low, that will produce the same tax revenues by expanding or contracting economic activity. Marginal tax rates are no longer in the higher ranges. As for a tax rebate, Reich is correct that in the present situation a tax rebate would be dissipated in paying off creditors.Reich sees the problem as a lack of aggregate demand sufficient to maintain full employment. His solution is for the government to spend "a lot" more on infrastructure projects on top of a trillion-dollar budget deficit -- "repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy." This spending would boost employment, wages and aggregate demand.I have no opposition to infrastructure projects, but who will finance the baseline trillion-dollar U.S. budget deficit plus the additional red ink spending on infrastructure? Not Americans. The U.S. savings rate is zero or negative. Home mortgage foreclosures are in the millions. Officially, U.S. unemployment is 10 million, but if measured by pre-Clinton era standards unemployment is much higher. Statistician John Williams, who measures the unemployment rate by the pre-Clinton standards, concludes that the rate of unemployment is about 15 percent. President Clinton "reformed" the unemployment statistics by ceasing to count discouraged workers as unemployed.For years, the federal government's budget has been dependent on foreigners financing the red ink. Countries such as Japan and China and OPEC suppliers of oil have huge export surpluses with the United States. They recycle the dollars by buying U.S. Treasury bonds, thus financing the government's red-ink budgets.The open question is: how much longer will they do so?Foreign portfolios are overweighed in dollar assets. Currently the dollar's value is benefiting from the financial crisis, as investors flee to the reserve currency. However, sooner or later the huge outpourings of dollar debts will cause foreign creditors to draw back. Already China, America's largest creditor, has sent a signal that that time might be drawing near. Recently the Chinese government asked, as they do indirectly through third parties, "Why should China help the U.S. to issue debt without end in the belief that the national credit of the U.S. can expand without limit?"Is the rest of the world, which has demanded a financial summit to work toward a new financial order, going to permanently allocate the world's supply of capital to covering American mistakes?If not, the bailout and the stimulus package will have to be financed by printing money. And the bailout needs are growing. Car loans and credit card debt were also securitized and sold. As the economy worsens, credit card and car loan defaults are rising. Moreover, AIG needs more money from the government. Fannie Mae's loss has widened to $29 billion despite the $200-billion bailout. General Motors and Ford need taxpayer money to survive. General Motors says that its GMAC mortgage unit "may not survive." Deutsche Bank sees General Motors shares "as likely worthless."Shades of the Weimar RepublicWhat Robert Reich and the American economic establishment do not understand is that the recession paradigm does not apply. There are no jobs waiting at U.S. manufacturers for a demand stimulus to pull Americans back into work. The problem is not a liquidity problem. To the contrary, there have been many years of too much liquidity. Credit has grown far more than production. Indeed, U.S. production has been moved offshore. Jobs that used to support the growth of American incomes and the tax bases of cities and states have moved, along with U.S. GDP, to China and elsewhere.The work is gone. All that are left are credit card and mortgage debts.Anyone who thinks that America still has a vibrant economy needs to log onto www.EconomyInCrisis.org and face the facts. Economists associate economic depression with price deflation. However, traditionally, debts that are beyond an economy's ability to service are inflated away. This suggests that the coming depression will be an inflationary depression. Instead of falling prices mitigating the effects of falling employment, higher prices will go hand in hand with rising unemployment -- a situation worse than the Great Depression.The incompetent Clinton and Dubya administrations, unregulated banksters and Wall Street criminals, greedy CEOs and a no-think economics profession have destroyed America's economy.What is the remedy for simultaneous inflation and unemployment?Three decades ago the solution was supply-side economics. Easy monetary policy had pushed up consumer demand, but high tax rates had curtailed output. It was more profitable for firms to allow prices to rise than for them to invest and increase output. Supply-side economics changed the policy mix. Monetary policy was tightened and marginal tax rates were reduced, thus stimulating output instead of inflation.Today the problem is different. The United States has abused the reserve currency role, thus endangering its credit worthiness and the exchange value of the dollar. Jobs have moved offshore. The budget deficit is huge and growing. If foreigners will not finance the widening gap, the printing presses will be employed or the government will not be able to pay its bills.The bailout funds have been wasted. The expensive bailout does not address the problem of falling employment and rising mortgage defaults. Treasury Secretary Hank Paulson could not see beyond saving Goldman Sachs and his bankster friends. The Paulson bailout does nothing except take troubled assets off banks' books and put them on the overburdened taxpayers' books, thus endangering the U.S. Treasury's credit rating.What the Bush Regime has done is to stick the taxpayers with the banks' mistakes. An intelligent government would have used the money to refinance the troubled mortgages and stop the defaults. By saving the mortgages from default, the banks' balance sheets would have been made secure. By failing to deal with the subprime crisis, Bush and Congress have added a financial crisis to the exhaustion of consumer demand and the problems of financing huge trade and budget deficits. Belatedly, Paulson has realized his mistake. On November 12, Paulson announced, "We have continued to examine the relative benefits of purchasing illiquid mortgage-related assets. Our assessment at this time is that this is not the most effective way to use [bailout] funds."The financial crisis has cost taxpayers far more than the amount of the bailout. Americans' savings and pension funds have been devastated. Americans in investment partnerships, who have been required by IRS rules to pay income taxes on gains in the partnerships' portfolios, have had the accumulated multi-year gains wiped out. They have paid taxes on years of "capital gains" that have disappeared, thus doubling their losses.America's economic troubles will rapidly accumulate if the dollar loses its reserve currency role. To protect the dollar and the Treasury's credit standing, the U.S. needs to curtail its foreign borrowing by reducing its budget deficit. It can do this by halting its gratuitous wars and slashing its unnecessary military spending which exceeds that of the rest of the world combined. The empire has run out of resources, and the 700 overseas bases must be closed.Can Americans afford massive infrastructure spending when they cannot afford health care? In Florida a Blue Cross Blue Shield group policy for a 60-year old woman costs $14,100 annually, and this is a policy with deductibles and co-payments. Supplementary policies from AARP to fill some of the gaps in Medicare can cost retirees $3,300 annually.When one looks at the economic situation of the vast majority of Americans, it is astonishing that the Bush regime regards wars in the Middle East and taxpayer bailouts of Wall Street criminals as a good use of scarce resources.American corporations, which have moved their production for U.S. markets offshore in order to drive up their share prices and provide their CEOs with multi-million dollar bonuses, can be provided with a different set of incentives that encourage the corporations to bring employment back to the United States. For example, the corporate income tax can be restructured to tax corporations according to the value-added in the United States. The higher the value-added in the U.S., the lower the tax rate; the lower the value-added, the higher the tax rate.Cutting the budget deficit by halting pointless wars and unnecessary military spending and reducing the trade deficit by bringing jobs back to America are simple tasks compared to confronting inflationary depression.The world has had enough of American irresponsibility and is taking away the reins. At the November 15 economic summit, the world began the process of imposing a new financial order on the United States in exchange for continued lending to the bankrupt "superpower." With bailouts eating up the world's supply of capital, continued foreign financing for Washington's wars of aggression is out of the picture.-- Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is co-author of "The Tyranny of Good Intentions." He can be reached at PaulCraigRoberts@yahoo.com. 11-16-08TomDispatch.comWhy Obama's Futurama Can WaitSchools and Hospitals Should Come First in Any Stimulus Package...Mike Davis http://www.tomdispatch.com/post/175004/mike_davis_keynesian_shock_and_aweAmerica's "Futurama" is defunct. The famous walk-through diorama of a car-and-suburb world, imagineered by Norman Bel Geddes for General Motors at the 1939 New York World's Fair, has weathered into a dreary emblem of our national backwardness. While GM bleeds to death on a Detroit street corner, the steel-and-concrete Interstate landscape built in the 1950s and 1960s is rapidly decaying into this century's equivalent of Victorian rubble.As we wait in potholed gridlock for the next highway bridge to collapse, the French, the Japanese, and now the Spanish blissfully speed by us on their sci-fi trains. Within the next year or two, Spain's high-speed rail network will become the world's largest, with plans to cap construction in 2020 at an incredible 6,000 miles of fast track. Meanwhile China has launched its first 200 mile-per-hour prototype, and Saudi Arabia and Argentina are proceeding with the construction of their own state-of-the-art systems. Of the larger rich, industrial countries, only the United States has yet to build a single mile of what constitutes the new global standard of transportation.From day one, Barack Obama campaigned to redress this infrastructure deficit through an ambitious program of public investment: "For our economy, our safety, and our workers, we have to rebuild America." Originally he proposed to finance this spending by ending the war in Iraq. Although his present commitments to a larger military and an expanded war in Afghanistan seem to foreclose any reconversion of the Pentagon budget, he continues to emphasize the urgency of an Apollo-style program to modernize highways, ports, rail transit, and power grids.Public works, he also promises, can put the public back to work. His "Economic Rescue Plan for the Middle Class" vows to "create 5 million new, high-wage jobs by investing in the renewable sources of energy that will eliminate the oil we currently import from the Middle East in 10 years, and we'll create 2 million jobs by rebuilding our crumbling roads, schools, and bridges."Of course, Bill Clinton entered the White House with a similarly ambitious plan to rebuild the derelict national infrastructure, but it was abandoned after Treasury Secretary Robert Rubin convinced the new president that deficit reduction was the true national priority. This time around, a much more powerful and desperate coalition of interests is aligned to support the Keynesian shock-and-awe of major public works.Rolling Out the DozersSince the Paulson bailout plan has become so much expensive spit in the wind, and with bond spreads now premised on the possibility of double-digit unemployment over the next 18 months, massive new federal spending has become a matter of sheer economic survival. As innumerable influentials -- from New York Times columnist David Brooks to House Majority Leader Nancy Pelosi -- have argued, a crash program of infrastructure repair and construction, likely to include some investment in the new power grids required to bring more solar and wind energy online, is the "win-win" approach that will garner the quickest bipartisan support.It has also been portrayed as the only lifeboat in the water for the ordinary steerage passengers in our sinking economy. The emergent Washington consensus seems to be that those five million green jobs can actually come later (after we save GM's shareholders), but that infrastructure spending -- if resolutely pushed through the lame-duck Congress or adopted in Obama's first 100 days -- can begin to pump money into the crucial construction and manufacturing sectors of the economy before the end of next winter.Unlike Comrade Bush's "socialist" efforts to save Wall Street, a public-works strategy for national recovery has had broad ideological respectability from the days of Alexander Hamilton and Abraham Lincoln to those of Franklin D. Roosevelt and John F. Kennedy. If Democrats can brag about the proud heritage of the Works Progress Administration and the Public Works Administration from the era of the Great Depression (ah, those magnificent post offices and parkways), there are still a few Republicans who remember the Golden Age of interstate highway construction that commenced in the 1950s with President Dwight D. Eisenhower. Indeed since the national shame of Hurricane Katrina, Americans have become outspokenly nostalgic about competent federal governments and magnificent public achievements.If one accepts the reasonable principle of supporting the new president whenever he makes policy from the left or addresses basic social needs, shouldn't progressives be cheering the White House as it rolls out the dozers, Cats, and big cranes? Aren't high-speed mass transit and clean energy the kind of noble priorities that best reconcile big-bang stimulus with long-term public value?The answer is: no, not at this stage of our national emergency. I'm not an infrastructure-crisis denialist, but first things first. We are now at a crash site, and our priority should be to save the victims, not change the tires or repair the fender, much less build a new car. In the triage situation that now confronts the president-elect, keeping local schools and hospitals open should be the first concern, rebuilding bridges and expanding ports would come next, and rescuing bank shareholders at the very end of the line.Inexorably, the budgets of schools, cities, and states are sinking into insolvency on a scale comparable to the early 1930s. The public-sector fiscal crisis -- a vicious chain reaction of falling property values, incomes, and sales -- has been magnified by the unexpectedly large exposure of local governments and transit agencies to the Wall Street meltdown via complex capital lease-back arrangements. Meanwhile on the demand side, the need for public services explodes as even prudent burghers face foreclosure, not to speak of the loss of pensions and medical coverage. Although the public mega-deficits of California and New York may dominate headlines, the essence of the crisis -- from the suburbs of Anchorage to the neighborhoods of West Philly -- is its potential universality.Certainly, in such a rich country, wind farms and schools should never become a Sophie's choice, but the criminal negligence of Congress over the past months should alert us to the likelihood that such a choice will be made -- with disastrous results for both human services and economic recovery.Saving Schools and HospitalsCongress naturally loves infrastructure because it rewards manufacturers, shippers, and contractors who give large campaign contributions, and because construction sites can be handsomely bill-boarded with the names of proud sponsors. Powerful business lobbies like the National Industrial Transportation League and the Coalition for America's Gateways and Trade Corridors stand ready to grease the wheels of their political allies. In addition, if the past century of congressional pork-barrel methods is any precedent, infrastructural spending typically resists coherent national planning or larger cost-benefit analyses.Yet saving (and expanding) core public employment is, hands-down, the best Keynesian stimulus around. Federal investment in education and healthcare gets incomparably more bang for the buck, if jobs are the principal criterion, than expenditures on transportation equipment or road repair.For example, $50 million in federal aid during the Clinton administration allowed Michigan schools to hire nearly 1,300 new teachers. It is also the current operating budget of a Tennessee school district made up of eight elementary schools, three middle schools, and two high schools.On the other hand, $50 million on the order book of a niche public transit manufacturer generates only 200 jobs (plus, of course, capital costs and profits). Road construction and bridge repair, also very capital intensive, produce about the same modest, direct employment effect.One of the most likely targets for a Congressional stimulus plan is light-rail construction. Street-car systems are enormously popular with local governments, redevelopment agencies, and middle-class commuters, but generally they operate less efficiently (per dollar per passenger) than bus systems, and at least 40% of the capital investment leaks overseas to German streetcar builders and Korean steel companies.Personally, I would love to commute via a sleek Euro-style bullet train from my home in San Diego to my job in Riverside, 100 grueling freeway miles away, but I'll take gridlock if the cost of rationing federal expenditure is tolerating the closure of my kids' school or increasing the wait in the local emergency room from two to ten hours.Obama, unlike his predecessor, has a bold vision, shared with his powerful supporters in high-tech industries, of catching up with the Spanish and Japanese, while redeeming America as the synonym for modernity. Lots of new infrastructure will, however, become so many bridges to nowhere (especially for our children) unless he and Congress first save human-needs budgets and public-sector jobs.A good start for progressive agitation on Obama's left flank would be to demand that his health-care reform and aid-to-education proposals be brought front and center as preferential vehicles for immediate macro-economic stimulus. Democrats should not forget that the most brilliant and enduring accomplishment of the Kennedy-Johnson era was Head Start, not the Apollo Program.If, after saving kindergartens and county hospitals, we someday hope to ride the fast train, then we need to rebuild the antiwar movement on broader foundations. The president-elect's original proposal for funding domestic social investment through downsizing the empire offers a brilliant starting point for basing economic growth on an economic bill of rights (as advocated by Franklin Roosevelt in 1944) instead of imperial over-reach and Pharaonic levels of military waste.Mike Davis is the author of In Praise of Barbarians: Essays Against Empire (Haymarket Books, 2008) and Buda's Wagon: A Brief History of the Car Bomb (Verso, 2007). He is currently working on a book about cities, poverty, and global change.11-17-08Center for Economic and Policy ResearchStopping Foreclosures With the Right to Rent: One More Time...Dean Baker(originally published in Truthout)http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/stopping-foreclosures-with-the-right-to-rent:-one-more-time/ Politicians often prefer complex solutions to simple problems. Nowhere is this more apparent than with the long list of complicated and convoluted proposals to address the country’s foreclosure crisis.Millions of people face the loss of their homes over the next few years. While the politicians in Congress have developed a wide variety of complex schemes in order to hold back this flood of foreclosures, including one passed into law last summer that provided up to $300 billion in guarantees for new mortgages on homes facing foreclosure, none have had much impact thus far.The unavoidable problem with these schemes is that it is difficult to design a plan that aids families facing foreclosure without giving an incentive to other homeowners to also default on their mortgage. In addition, it is hard to justify taxing the people who are struggling to keep up with their own mortgages in order to help those who default. It is even harder to justify taxing ordinary people to help out the bank executives who issued hundreds of billions of dollars of bad loans.As a result, to date these programs have not prevented a tidal wave of foreclosures and evictions. The number of foreclosure filings (there are typically two or more filings for every actual foreclosure) is now approaching 300,000 per month.For those not offended by simplicity, there is an easy solution. Congress can temporarily modify the rules on foreclosure to give families facing foreclosure the right to rent their homes at the market rate for a substantial period of time. Representative Raul Grijalva proposed such a change in the Saving Family Homes Act, which would allow homeowners the option to remain as renters for up to 20 years following a foreclosure.This bill would immediately give families security in their home, so that if they like the home, the neighborhood, the school for their kids, they would have the option to stay in the house for a substantial period of time. This also has the great benefit for the neighborhood in that homes will remain occupied.Perhaps more importantly, this change in foreclosure rules will give banks a real incentive to negotiate conditions under which homeowners can stay in their homes as owners. Banks do not want to become landlords. The bank will own the house after a foreclosure, but a house with a renter is worth much less to them than a house over which it has complete control.Giving the homeowner the right to stay as a renter hugely increases their bargaining power with the bank. The result of this change in foreclosure rules is that far more homeowners are likely to remain in their homes as owners.The beauty of this sort of proposal is that it is simple, can take effect immediately, it requires no taxpayer dollars, and no new bureaucracy. It also is not giving anyone a big bonanza. Homeowners are not likely to line up for a process that could end up with them being renters. And the banks will obviously not be thrilled about a rule change that will leave them worse off in trying to squeeze money out of homeowners.While the basic point of the right to rent is simple, it can be extended in various ways to further aid homeowners. Bernard Wasow at the Century Foundation has proposed some additional measures to facilitate the transition to rental status or possibly a return to ownership.  Daniel Alpert of Westwood Capital has a somewhat different version that creates a mechanism for homeowners to buy back their homes after five years.In short, if people want to add bells and whistles it is easy to do so. But the key to stopping people from being thrown out of their homes is simply to change the law that allows people to be thrown out of their homes. That one is so simple that even a policy wonk should be able to understand it. Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.