In today's Washington Post, Ezra Klein makes three great points as to why "America Didn't Buy It" ("it" being the economic stimulus package and the administration's macroeconomic policies more broadly).1. The proposed "non-security discretionary spending freeze" will accomplish essentially nothing with regard to deficit reduction. Why not? Because "The whole game...is Social Security, Medicare and Medicaid." Because "Total spending for everything else, from agriculture to education to missile technology, is predicted to grow more slowly than the economy." Because a "spending freeze" that focuses only on non-security discretionary programs is "focusing on the part of the budget that's not a problem." Brilliant.
2. On the economic stimulus, this is an example of Econ 101, Keynesian "counter-cyclical" behavior by the government, in which "In good times, it should save and store, and in bad times, it should spend and borrow." That is, Klein points out, the "exact opposite" of what "holds true for businesses and individuals." And that's why, Klein correctly points out, it makes absolutely no sense that the federal government should "tighten its belt" right now, as "families across the country are doing." If government did that, it would mean the government was acting pro-cyclically as opposed to counter-cyclically, which would only exacerbate the recession by cutting the "G" portion of "C+I+G." That's what the "tea partiers" and many Republicans want, essentially something like what happened in 1937 -- a combination of deficit reduction and tight monetary policy. The exact opposite of what government should be doing - expansionary fiscal and monetary policy - in a recession.
3. As I wrote about yesterday, Democrats can't win by citing statistics, they need to tell persuasive and powerful stories. In this case, unfortunately, President Obama tried for almost a year to explain the stimulus to the nation, but finally "gave up" and started himself using the narrative about "belt tightening." As Klein explains, "instead of trying to convince [the American people] that deficits make good sense until job growth is back to normal, the administration is trying to appease those fears so it can get on with the rest of its agenda." That's the 180-degrees wrong story, but it's the politically easy story to tell, which is why we can expect to hear Democrats foolishly telling it. And, of course, losing the argument. What else is new? Sigh.
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Unfortuately, the majority of the American people either did not learn or remember the lessons of the Great Depression (and Roosevelt's failed experience/experiment with budget balancing in 1937).
ReplyDeleteTo paraphrase H. L. Mencken, no one ever went broke underestimating the intelligence of the American people. If you doubt that fact, go to notlarrysabato and see what the GOP economic ignoramuses are posting there or just look at what EJB posts on this site.
The systemic method for the elimination of interest debt is to control the quantity and supply of credit. Homeowners, businessmen, farmers, students, etc. will need access to low cost credit to refinance debt, maintain inventories, etc. In Virginia, and in this nation we allow the private banking system to control the cost of funding public programs, and private progress. Thathas not been working for us lately.
ReplyDeleteThe systemic solution is to do what N. Dakota has been doing for nearly 100 years...managing its own state owned bank.
Some experts insist that we must tighten our belts and start saving again, in order to rebuild the “capital” necessary for functioning markets; but our markets actually functioned quite well so long as the credit system was working. We have the same real assets (raw materials, oil, technical knowledge, productive capacity, labor force, etc.) that we had before the crisis began. Our workers and factories are sitting idle because the private credit system has failed. A system of public credit could put them back to work again. The notion that “money” is something that has to be “saved” before it can be “borrowed” misconstrues the nature of money and credit. Credit is merely a legal agreement, a “monetization” of future proceeds, a promise to pay later from the fruits of the advance. Banks have created credit on their books for hundreds of years, and this system would have worked quite well had it not been for the enormous tribute siphoned off to private coffers in the form of interest. A public banking system could overcome that problem by returning the interest to the public purse. This is the sort of banking system that was pioneered in the colony of Pennsylvania, where it worked brilliantly well.
THIS IS WHAT VIRGINIA AND THE NATIONAL GOVERNMENT SHOULD DO TO ACHIEVE REAL MONETARY REFORM AND A DEBT FREE SOCIETY:
The Non Partisan League (NPL), born in 1915, united progressives, reformers, and radicals to return control of North Dakota's government and economy to the people. Taking leadership of the state in 1919, the NPL formed the Bank of North Dakota (BND). Today it is the only state-owned bank in the U.S.
The bank is used as a tool for economic development. A beginning farmer revolving loan fund was originally established through a transfer of funds from the Bank of North Dakota's profits. With its' agricultural loans the bank has developed a reputation for being more lenient than other banks in pressing foreclosures.
Under the “fractional reserve” lending system, banks are allowed to extend credit (create money as loans) in a sum equal to many times their deposit base.
With a uniform 10 percent reserve requirement, a $1 increase in reserves would support $10 of additional transaction accounts [loans created as deposits in borrowers’ accounts.
The 10 percent reserve requirement is now largely obsolete, in part because banks have figured out how to get around it with such devices as “overnight sweeps.” With an 8 percent capital requirement, a state with its own bank could fan its revenues into 12.5 times their face value in loans (100 ÷ 8 = 12.5). And since the state would actually own the bank, it would not have to worry about shareholders or profits being siphoned off. It could lend to creditworthy borrowers at very low interest, perhaps limited only to a service charge covering its costs; and it could lend to itself or to its municipal governments at as low as zero percent interest. If these loans were rolled over indefinitely, the effect would be the same as creating new, debt-free money.
Dangerously inflationary? Not if the money were used to create new goods and services. Price inflation results only when “demand” (money) exceeds “supply” (goods and services). When they increase together, prices remain stable.