[R-G] [BillTottenWeblog] Stimulus Is for Suckers

Sun Jan 18 06:56:05 MST 2009

We Need a Recovery Plan that Will Last for Years

All those billions don't add up to much, but here's how Obama can get us
on track to a real recovery.

by James Galbraith, Mother Jones

AlterNet (December 12 2008)

President Barack Obama (how sweet those words) has already transformed
American politics. The GOP is in crack-up. Obama's coattails in Congress
give him leverage, and his vast public support gives him power. There is
an economic crisis and a demand for action to deal with it. More than at
any time since Ronald Reagan in 1981, what the president wants, he will get.

So, what should he ask for? How big and far reaching should changes to
the economy be? Nearly everyone in Obama's circle agrees that more
public spending and tax cuts are needed: a "stimulus package". The
cautious say $150 billion (about one percent of GDP), while the bold and
the worried say $500 billion (or just more than three percent of GDP).
Both focus attention on what is needed in 2009 - as if the economic
problem can be solved in a year.

That is almost certainly wrong.

When the free fall began, Treasury Secretary Henry Paulson and Fed Chair
Ben Bernanke argued that the problem with the economy was frozen credit.
Banks were unable to lend, they said, because they could not get the
funds. This was not true, as we discovered when Treasury gave the banks
the funds, only to realize that banks had no wish to lend them out.
Instead they used the money to build capital and on dividends and
executive pay. (Goldman Sachs, which received $10 billion as part of the
bailout, got good press when it announced its top seven execs would
forgo their year-end bonuses. But a government ban on bonuses was likely
coming, and by limiting the sacrifice to top managers, the company
retains leeway to spend the estimated $6.9 billion set aside for bonuses
on slightly lesser employees.)

In any case, banks did not wish to lend, and ordinary Americans,
desperately cutting costs, did not wish to borrow, and with their homes
underwater many had little collateral to borrow against.

What began as a housing collapse will not go away soon. Empty houses
wreck home values for their neighbors. The ratings agencies are
discredited, the investment banks are gone, and high finance is in debt
deflation. Foreign investors won't soon trust the market for US private
debt, even for blue chip corporations, so long as they remain saddled
with toxic health care costs. Regulation will have to be rebuilt. In
short, the money wells have been poisoned, and it will take time and
patient effort to clean them up.

The historical role of a stimulus is to kick things off, to grease the
wheels of credit, to get things "moving again". But the effect ends when
the stimulus does, when the sugar shock wears off. Compulsive budget
balancers who prescribe a "targeted and temporary" policy followed by
long-term cuts to entitlements don't understand the patient. This is a
chronic illness. Swift action is definitely needed. But we also need
recovery policies that will continue for years.

First, we must fix housing. We need, as in the 1930s, a Home Owners'
Loan Corporation to restructure failed mortgages on sustainable terms.
The basic objective should be to keep people in their homes by all
necessary means, except where borrowers committed willful fraud, so as
to stop the spread of blight and decay. Government can use its power
over banks to make this happen, as it has with IndyMac, the California
bank that is now, as a federally owned company, revising unsustainable
mortgages. But this is no small endeavor: The FDR-era HOLC operated for
almost two decades and at its peak employed 20,000 people.

Second, we must backstop state and local governments with federal funds.
Otherwise falling property (and other) tax revenues will implode their
budgets, forcing destructive cuts in public services and layoffs for
teachers, firefighters, and police. And when these public servants are
laid off, guess what? They have trouble paying their mortgages. General
revenue sharing - unrestricted federal grants to states and towns, a
program invented by Richard Nixon and killed by Ronald Reagan - is
required. Luckily it can be reintroduced quickly on a large scale.

Third, we should support the incomes of the elderly, whose nest eggs
have been hit hard by the stock market collapse. We can't erase those
losses case by case (nor should we), but we can sustain the purchasing
power of the group. The best way is to increase Social Security
benefits. Useful steps would include boosting the formula for widowed
spouses, ensuring a minimum benefit for retirees who worked their whole
lives in low-wage jobs, and allowing college students to receive
survivors' benefits up until the age of 22. But let's go further and
raise benefits across the board, which has not been done for a
generation. I'd say raise them thirty percent, and let the federal
government make the contributions for five years. This would be good for
the elderly, who could retire; good for working-age people, who would
replace the retiring; and good for the economy, since people who need
money spend it when they get it.

Fourth, we should cut taxes on working Americans. Obama proposes to
effectively offset the first $500 of Social Security taxes with a
refundable credit. It's a good idea, but can be expanded. If the economy
continues to spiral downward and a really large fiscal boost is needed,
let's declare a payroll tax holiday, funding Social Security and
Medicare directly from the treasury, until the economy gets back on
track. Workers would get an immediate 8.3 percent raise to help meet
their mortgages; employers would have the same amount to spend on wages,
job creation, or investment. (Not all efforts to jump-start the economy
deliver so much bang for the buck. See chart below.)

Is this the standard "liberal line" - borrow and spend? No. It is the
situation, not the philosophy, that demands this action both grand and
sustained. Economic recovery in an existential crisis like this means
actually building a new economy. For that, we need investment - to
restore our roads, rails, transit, broadband, and water systems, to
build parks and museums and libraries, to protect the environment. Right
now, states and localities can't borrow for these things. Creating a
National Infrastructure Fund, using Uncle Sam's borrowing power to put
money where it's needed, is one way forward. Federal capital spending
should be bond financed and exempt from budget rules, especially
pay-as-you-go. It makes no sense to finance projects whose benefits will
last for fifty years solely from tax revenues of today.

Finally, we must change how we produce energy, how we consume it, and
above all how much greenhouse gas we emit. That's a long-term
proposition that will require research and reconstruction on a grand
scale: support for universities, for national labs, for federal and
state planning agencies, a new Department of Energy and Climate. It's
the project around which the economy of the next generation must be
designed. It's the key to future employment and future growth - and to
our physical survival.

Energy transformation is key for another reason. Even during this
crisis, the world has supported the dollar. Why? Because no alternative
safe haven exists. Despite our faults, we have a well-designed economic
system, the enduring fruit of the New Deal and Great Society. Thus Uncle
Sam can borrow, at very low cost, whatever he needs - a terrific
advantage over the competition. But in the long run, the world will
support us only if we give something back. Ushering in new technologies
that the rest of the world can adopt in order to save the planet is the
right sort of gift. By helping to save the physical world, we may be
able to save our currency, our credit, and our economy as well.

Bang for the Buck

What a dollar of stimulus puts back into the economy when spent on ...

$1.73 food stamps
$1.64 extending unemployment benefits
$1.59 infrastructure
$1.36 aid to states
$1.29 payroll tax holiday
$1.26 refundable tax rebate
$1.03 across the board tax cut
$1.02 nonrefundable tax rebate
$0.48 extending AMT patch
$0.37 making dividend and capital gains tax cuts permanent
$0.30 corporate tax cut
$0.29 making Bush income tax cuts permanent
$0.27 accelerated depreciation

_____

James K Galbraith teaches at the University of Texas at Austin and is
the author of The Predator State: How Conservatives Abandoned the Free
Market and Why Liberals Should Too (2008).

http://www.alternet.org/story/112177/

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