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An economic plan that might have brought recovery from depression

Anyone can criticize while having no better ideas.  In fact, I would argue that, if you cannot put forward reasonable alternatives, you might not be qualified to criticize those who are, at least, trying something. In that spirit, I want to scope out a new economic recovery program vastly different from the economic plan the U.S. adopted under Bush and Obama or the German austerity program. While it would have created a much rougher ride at the outset, I believe it would have worked to rebuild a sustainable economy that we would now be experiencing. It may be too late, for we have already squandered what little reserve capacity we had — all of which this plan would require — on efforts that have already proven unsustainable. The haunting question is Do we have enough time and reserve capacity at this point to do it?

 

The German austerity plan is the right economic plan in the wrong season

Austerity can never cause an economy to grow. Even those who despise Keynes, who argued that government spending stimulates economic growth, are unlikely to argue convincingly that austerity creates growth. It has no creative power at all. What austerity can do is prevent the kinds of debt that kill growth. Austerity, in other words, is a brake, not a gas pedal. It can never create acceleration; it can only arrest decline.

The lack of austerity, however, (or, at least, lack of prudent spending) can certainly stack up enormous debt that kills economic growth. The car won’t accelerate when you hit the gas pedal if it has already flown off the road. So, the Germans are only half right. Lack of prudence (called “austerity” when taken to the extreme) certainly killed Europe’s economy; but they will not get the economy back by practicing it now. It’s odd but true that austerity can create poverty as easily as prudence can protect wealth. Germans are a staid bunch who love rigidity and austerity, though, so they keep pushing that lone idea as if it can solve the problems that were created by lack of prudence. Germans, after all, like to eat sour things like rotting cabbage in great quantities 😉

Economist Paul Kruegman is right to argue recently that austerity is what should be practiced during times of plenty. I argued the same thing for years in letters to the editor, but nearly everyone in the U.S. wanted to enjoy the feelings of prosperity on the backs of their children. (Tough medicine to hear, but that is exactly what Americans did for decades, and we are a people who should know better than to think that way … being sons and daughters of pioneers who knew austerity all their lives.) Reaganomics never provided true prosperity for the one simple reason that we were never paying for the good times we enjoyed. We were enjoying the good times by making certain that our children paid for them later on. It is easy to have the world’s most powerful military and to enjoy a juiced-up economy with rocket-like performance when no one is paying for it! We bought our good times by stacking up monumental debts. We did not practice prudence (a better word than austerity, which leans too far to extreme action.)

I argued for years that the United States should be paying down its debt (as it did briefly in the Clinton years) when times were good. Good times are for paying off debts, not compounding them because, if you cannot pay down your debt in the good times (or WILL not), then you certainly cannot and will not during times of shortage. If we’re enjoying times of plenty and are NOT paying down our debt, we can be assured of two things: 1) We’re not paying for our own pleasures, so we don’t deserve to have them. They are truly guilty pleasures, for we’re enjoying them at someone else’s expense down the road. 2) We’re using up our available credit to live high on the hog so that we will not have available credit when we need it. That is where we have now landed. No surprise to me.

If a nation ran a prudent budget when its economy was healthy, it would not buy yachts before paying down debts. In the converse: if a nation can only experience a robust economy by expanding its debt, then its whole economic model is flawed. Common sense would tell you that endless expansion of debt is not likely to be a good longterm plan. Debt is properly managed when it is used to expand the economy in lean times and to decelerate boom economies by paying down debt. Debt is a way of evening out the load. The U.S. miserably failed its obligation to pay back its debts when it had the chance, and that is a lesson we need to carry with firm understanding into our future if we want to avoid repeating the worst of our history.

Now we find ourselves in a situation where we need to juice the economy, but our debts are so high that credit agencies are all saying they will lower our credit ratings if we take out any more debt. Some scoff at that because lowered ratings have not hurt the U.S.; but that is as foolhardy as the profligate living we engaged in over the last forty years. The only reason the downgrade of U.S. credit ratings has not hurt us is that Europe has handed us an unexpected windfall exactly when we needed it most. Money is fleeing from Europe, so the U.S. looks like the lesser of other evils financially. It provides the least-rocky shore for a safe-haven landing during the present storm. In other words, the U.S. got lucky — or blessed. At any rate, it was none of our own doing.

That buys us a little time. If we use this windfall wisely, we will stop adding to our debt now and will finance our entire existing debt on longterm bonds to the fullest extent we can move it in that direction while we have the lowest rates we’ll ever see. That will save us from a world of hurt down the road. If we squander this, too, by thinking we can continue in our profligate spending, we’ll find our interest rates go way up on a mountain of debt that moves far beyond our management the day after Europe recovers from its problems. We have so maxed out our debt over the past decades, and especially recently, that we need to use this windfall with utmost prudence … and we are not doing that.

 

Here is an economic recovery plan for sustainable economics

I believe we would already have a sustainable recovery in process if we had followed a much different path. I use the word “sustainable” because the word “recovery” doesn’t work without it. An unsustainable recovery eventually becomes no recovery at all. It is the kind of “recovery” that is talked about endlessly today. The present so-called “economic recovery” is created only be government props, such as quantitative easing and enormous debt spending. As soon as the government/Fed support ends, we see the recovery begins to falter. It has no legs under it, and it never will because it does not require exercising legs in a way that builds strength. The current government economic plan is creating another stock market bubble that will pop like all the past ones as soon the government runs out ability to kick in increasing amounts of support.

Here is proof that the Bush-Obama recovery plan is not sustainable: the stock market surges every time it hears rumors about more quantitative easing; it goes flat every time it hears that the Fed plans no intervention right now. Though nothing changes, except what the government says it is going to do, the market surges or plunges. That means the market is addicted to Q.E. and other forms of government economic intervention. They are the air without oxygen that fills the present bubble. Q.E. has become like candy to a baby. The market cries for more and more and always will so long as we keep giving it more and more. It throw a tantrum when the goodies stop, causing the parent (government) to want to give in to more monetary relief. The present stock market is unsustainable without endless talk by the U.S., China or Europe of more quantitative easing or similar measures.

There was one and always only one way that we could have run the deficits we are have been running during the Great Recession without dooming ourselves down the road. Having accumulated a foreboding overhang of debt over the past thirty years, it was/is essential that we make certain any additional debt delivers a clear payoff to the next generation to give them any hope of balancing their books. There was a way of doing that. Instead of spending money bailing out banks, which gives the next generation nothing tangible, the U.S. government should have spent that money on building the kind of infrastructure that government does best. Here’s why:

Infrastructure is the one solid asset we can buy now with money that people in the future will have to repay while giving the future a way to manage its debt. Repairing infrastructure now saves people in the future from having to make those repairs by extending the life of existing infrastructure. Likewise, building infrastructure now (so long as we focus on infrastructure that will be necessary to accommodate the growth of our cities) saves people in the future from having to build that infrastructure. Thus, we would have been handing future generations valuable assets that we built at today’s cost in exchange for today’s debt. We would save them enough in their own time that they could manage the debt we hand them. We’d benefit from the new infrastructure and so would they.

This would hugely goose the present economy as government construction creates all sorts of supply jobs and support jobs in the areas that surround major construction projects. Our job problem would now be completely over if we had started down this path four years ago as there would be so many projects in the works by now. Instead, we bailed out the rich people who caused this mess. It would also lay a sustainable foundation for a good economy in the future, as good infrastructure makes for efficient economic performance.

The other thing we should have done was pay attention to what we were saying and live by our own wisdom. We bailed out banks that were “too big to fail,” but what did we do in order to save them? We made them even bigger! Therefore, again, we have accomplished nothing that is sustainable in our reconstruction of banks. The Fed lured and even coerced banks like Bank of America to swallow ailing institutions like Merrill Lynch. We constantly chose to solve the problem of banks being “too big to fail” by staying with our old ways of thinking and turning them into even bigger failures. Its a sickness we have in our thinking that blinded us from finding real answers. We also didn’t want the pain that would be involved in restructuring into smaller banks.

The right solution was structured bankruptcy. We should have parted down the failing banks into their units that were profitable enough to continue while letting the cancerous parts of the organism die. Instead, we added the cancer of dying banks to banks that were comparatively more healthy, turning the relatively healthy ones into the next ailing patients. We have created ever bigger monstrosities to tower over us and threaten us when they fall.

How absurd is that? We’re not very smart. We don’t even listen to our own wisdom.

There would, of course, be an incalculable cost to an economic recovery program that allows the leviathans to die. No one can know how many depositors would be damaged by their fall, which would cascade into many other banks collapsing. That would put many in the banking industry out of work, and it would leave depositors at those banks without their money. But it would rebalance society, and that is the only sustainable path. The FDIC, for example, would not cover the losses of the rich because its limit is far below what they have in deposits. Just as the government has created money out of thin air to give liquidity to banks, it could have done for depositors once banks failed without creating any inflation because it would not really be injecting any new money into the system. Instead, it would be getting monstrous failing banks out of the way and recreating those deposits in accounts at better-run institutions.

We created money out of thin air anyway and are talking about doing it again with more Q.E. Why do it to save the bankers who created the mess? That was nothing but cronyism and the worst expression of Reagonomics, which believes we are all indebted for our jobs to the rich “job creators.” How would it have created any inflation if we had let the bad institutions crumble or pare down to their only profitable parts and then replaced the lost money in the accounts of depositors at better-run, smaller, more manageable institutions? The money supply would remain the same. It would only be the institutions that would fail while the deposits were entrusted to more worthy parties. Was our government too blind to see that or was it simply more interested in protecting rich bankers?

We could have completely reshaped our banking industry into a leaner machine by letting the fittest survive with the new deposits, and we would have created room for new banks to sprout up and attract these deposits, creating more banking diversity. There is one caveat here, we’d have to mandate that no FDIC insurance money would go to any bank that hired an executive from the failing banks. That would not be just for the sake of being punitive. It would prevent the greedy people who created this mess from simply starting a bank in a new name with the same players. Let them die careerwise. Who cares? They can man a shovel on the road-building jobs of the new infrastructure program.

At the end of the day, we would have transformed our economy, instead of run a dying economy on endless life support. With the implementation of a few regulations, we’d have banks that were no longer too big to fail. Instead, we have created an even less diversified banking structure by keeping the oversized dinosaurs alive.Democrats and Republicans have utterly failed to restructure our economy because they were too busy looking out for the interests of the big banksters. We have more oversized reptilian banks that are too big to fail than we ever had. How is this a transformation of our economic fundamentals into something healthier? In four years, we have accomplished nothing that will prepare us for a better future.

Would there have been catastrophic problems to sort our way through under my sustainable economic development plan? Absolutely. But there are continual catastrophic problems to sort our way through on our present path, too, and what do we have to show for it but endless troubles still in sight? Likewise with Europe on its austerity plan. We have no economic reformation to show for the enormous outlay and risk we’ve taken and no better foundation for the future. We are giving CPR to dinosaurs, rather than seizing the day to evolve more adaptable economic structures.

Had we engaged in such a bold plan, we would never have nationalized the failures of capitalists. George Bush would not have had to announce, as he did, that he was putting his capitalist principles aside. We would have worked in the capitalist way to correct our failures, and we would not have caused the moral risk that is created by rewarding people for stupid and greedy practices. (The fact is, most politicians and business leaders don’t care at all about capitalism. What they care about is money … and lots of it. We ditched capitalism in order to save the rich as soon as capitalism’s failure-correction mechanisms kicked in because we didn’t want to face the austerity of correction.)

The only people we would have bailed out under my alternative economic recovery plan would be the more-or-less innocent individual depositors, not the people who created this disaster, given that the FDIC does not adequately insure the rich. Many retirement funds would have lost a lot of money, but many retirement funds lost a lot of money anyway … and may still lose more because there is no recovery yet in sight — no problems actually resolved for good. If we had let the dinosaurs die, we would have smarter bankers today because those still living would have learned something from seeing their colleagues fall into the ditches. The rapacious and foolish bankers would also be out of their way … no longer competing for limited nourishment. Banks would be much more careful in their practices even ahead of new regulations if they knew the federal government was not going to save their scaly necks.

How would we have survived this terrible fall? Infrastructure. We’d put unemployed bankers to work under the huge expansion of business created by massive development of improved infrastructure. We’d pay for that job-creating infrastructure by applying those trillions of dollars of deficit spending we’re presently engage on. It would cost the future generation the same fortune, but they’d have something to show for it at a price tag would likely seem cheap twenty years from now … just as it always seems cheap when we look back twenty years and see what we could have built a rail system for compared to what we have to pay now. They’d have the rail system, moving their economy at high speeds! They’d have improved school buildings so they could concentrate their money on teaching. They’d have new roads and less economic gridlock. They’d have alternative energy production facilities to power their economy. Etc.

The Keynesian are right, but so are those who disagree with them. There is a time for government spending to stimulate the economy, but it has to be done on construction of things the next generation will need in order to build a foundation for the future. Economic stimulus and austerity both require application at the right time to be effective. The time for Keynesian stimulus (vs austerity) is now. However, we already consumed our credit. The time for austerity was during all the seemingly flourishing economic times of the past thirty years so that we’d have ample credit available today. Had we paid down ALL of the national debt during those roaring times, we’d have the capacity we need now to build a new economy without the slightest risk to our credit ratings or interest rates.

 

An economic transformation plan

What I’ve outlined above is far more than the economic stimulus plan we have now. It would completely rejuvenate our capitalist economy. Instead, we have a badly patched old economy. It would provide a president with the opportunity to redirect the course of a nation if the president had vision, and that is clearly what our president has lacked. He has known we needed change but has had no idea what change we needed. In exchange for our huge deficit spending, we’d end up with alabaster cities … or, at least, shining infrastructure to leave behind for our grandchildren. We would have done something for them and not just to them for ourselves.

That’s what FDR did once he finally got it right and moved away from the austerity measures that initially deepened the Great Depression. He put people to work building vital assets that we have benefited from throughout our present lives, and the bill for those massive projects and for the huge military build-up seemed entirely manageable when the time came to pay it. We could have learned that from our history, but our polarized way of Democrat-vs-Republican thinking kept us from seeing what worked in the past and applying it today. Instead of learning from history, people spent their time arguing against it in order to retain their political beliefs. The religion of politics.

The projects that led us out of the Great Depression were built well so they have lasted (with normal maintenance and repairs) nearly a hundred years — high schools, dams, the parks and trails that we enjoy. We in the present got something for the debt that our parents handed to us. We benefited from it the entire time we grew up, AND we would have been able to pay down that debt had we be been less profligate, less greedy, less willing to live high at the expense of our grandchildren.

It may be too late now, for we have squandered what little remained of our reserve economic capacity. Still, I think what I’ve presented remains the one solution that does not push the entire problem ahead to the next generation. It still pushes the cost ahead, but, at least, but it solves problems for them by giving them something for their money, and that could have made the cost bearable for them. Using debt for other things like bailing out banks really gets the future generation nothing it needs. They can always create banks out of their own money … if we leave them with any money to save after they pay our bills.

Using debt on huge infrastructure projects would enable us to build around better energy practices. It would also enable us to strengthen old energy practices for the time being, such as by building safer pipelines. The remaining financial institutions would be the smart ones, rather than the big, dumb, rapacious dinosaurs that nearly brought the end of the world as we know it because of their stupid gambles. The downsized institutions that grew out of their remains would no longer threaten to crush the nation if they fell.

But we did not have either the courage or the vision for that kind of economic recovery program. Is that what we want to be remembered for? The people with no vision who lacked courage to create genuine transformation of their society?

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I encourage your feedback and ideas below, and here is some additional reading on sustainable economics and economic transformation: