krebscycle

The budget of the United States is so bloated with give-aways to the wealthy, subsidies of dirty, obsolete industries, waste and inefficiency that it could be brought into balance rapidly while still increasing both investment in infrastructure and the kind of economic stimulus Keynes showed will boost economies out of recession.

Keynsian stimulus is a simple idea based on the observation that people who are working create wealth - they don’t just move it around.  If the government buys things and pays people to make things or to do other work or just gives unemployed people a living wage, their economic activity can create wealth. The government pays me to get my house insulated, I pay you to do the work, you hire laborers and buy equipment and supplies, your employees buy things from local stores which hire salesclerks, and so on. If this is done well, there is a multiplier  - each dollar of government spending generates multiple dollars of economic activity. And so when the government eventually reduces spending, the economy has a running start and keeps going along. Your home insulating business is chugging along, your employees are consuming goods and producing home improvements and so on. People were not just taking in each other’s laundry, they were building businesses, educating kids, inventing new products, and so on 

Keynes particularly advocated this program during a recession when the economy is in a downward spiral. As businesses fail, their ex-employees and suppliers and bankers all suffer and cut back on their spending which causes more business failures and lower government tax collections and so on. When the Great Depression started, Keynes was not widely respected by economists and politicians. So they tried austerity - the government cut back on spending and the theory was that things would eventually reset themselves. That did not work out so well. The economy got stuck in reverse and got worse and worse until FDR came into office and started spending. Government spending immediately stopped the fall and began revving up the economy. Keynes theory worked, the austerity theory did not.The same thing has happened in our time. The Europeans have tried austerity and are mired in recession, poverty, and increasing social unrest. The US tried stimulus and the economy recovered. There’s not really room for debate: Keynsian stimulus works and austerity hurts the economy. But as with FDR, because of political opposition, the current US government has not been able to spend enough on stimulus to boost the economy into full speed. FDR had to wait until the war started to boost spending high enough, but we do not. In fact, we don’t even have to increase government spending.

If you oversimplify what Keynes argued, you end up only thinking about total government spending. But Keynes never argued that just having the government spend money was stimulative - he argued for government spending that put money in the pockets of consumers and that otherwise increased domestic demand. Keynesian stimulus is government spending with a multiplier, but a lot of government spending has no multiplier. For example, the US government spends $200/gallon to get gasoline to soldiers in Afghanistan. That money does nothing for the US domestic economy - it just increases the debt.  The government spends $7,000,000,000 (seven BILLION) dollars a year to buy crop insurance for mostly big corporate farmers. Suppose the government let farmers buy their own insurance and let insurance companies sell insurance without government welfare,  and took half that money to hire teachers. At $50,000 for teachers (salary plus overhead), we could hire 70,000 teachers and scatter them across the country. Those teachers would rent apartments/buy houses, purchase goods, pay local taxes, save money in local banks, and also - by the way - teach our kids. That is, we could reduce government spending by $3 1/2 billion each year while increasing government stimulus of the economy and investing in the future via education.  Why don’t we do it? Big corporate farm interests have better lobbyists than school teachers. Pure and simple.

Or consider all the tax expenditures in the budget - because someone has to pay for tax breaks.  Bowles-Simpson estimated tax breaks like carried interest exemption that let Mitt Romney pay 15 % tax rates cost the rest of us over $1,000,000,000,000 (one TRILLION dollars) a year.  If that money went into pockets of ordinary people instead of into Caribbean gangster banks, it would create a lot of domestic demand and lift the economy. Same with money budgeted to be spent on the Iraq and Afghan wars or on oil subsidies or to reduce the cost of executive jets or  waste in Medicare or …

The bottom line is we can increase government stimulus of the economy, as Keynes proposed, while reducing total government spending because way too much of the Federal budget is corporate welfare.

Suppose I’m in debt, have no car, and get a job offer for a good job that I can’t reach by bus or train. If I could borrow money to buy a car  should I stay unemployed and hope for a miracle?

Suppose my company gets an order for 100 widgets at  $1million dollars and it will cost me $1/2 million to get the raw materials and pay for the labor and shipping to make those 100 widgets. Should I borrow the money or tell the customer to forget about it?

Suppose my city has factories closing and jobs being lost because the sea port needs to be dredged. Should the city borrow the money to reopen the port or should it just shut down?

As a business owner and Democrat, I am often amazed by what my Republican neighbors and colleagues say about government budgeting.  Markets are almost always based on credit - on borrowing and lending. The whole (legitimate) purpose of the corporate bond market is to allow companies to “borrow their way into profits”. The corporate bond market in the US is somewhere around eight trillion dollars.  We have records of Summerian farmers borrowing money against a wheat harvest in 2000BC or so. David Packard and Bill Hewlett needed a line of credit from the Bank of Palo Alto to keep their business alive in early days. Businesses borrow to get out of debt all the time and have as far back as people know.  And governments can also borrow for good reason.  How can anyone say something so absurd as ” you can’t borrow your way out of debt” ?

 In a command economy like the old Soviet Union,of course,  none of this silly borrowing takes place at all. Are the people who say ” you can’t  borrow your way out of debt” just against markets and capitalism altogether?  My guess is that they are just using a simple slogan that make them feel virtuous without having to think about what sorts of borrowing is good and what is bad. If I borrow that money for a car and decide to get a Rolls Royce even though I won’t make enough to keep up with the payments, that would be irresponsible. If I borrow money for my company and spend it on dividends even though we don’t have enough income to keep running that would be irresponsible (and illegal for a small business, not, unfortunately, for a business like Bain Capital big enough to hire smart lawyers.) If my country borrows a trillion dollars to fight a war in Iraq for no good reason anyone can find, that’s even worse.  Some borrowing is prudent and even essential. Some is irresponsible or even criminal. Is that so hard?

Since 2009, the USA has borrowed a lot of money, but has spent a lot of it wisely. That’s why the deficit is going down. Some money  went to pay unemployment benefits keep the economy from tipping over before the recession could end. Some of the money that went to loans to advanced battery makers and electric car companies and helped to create jobs and give us a valuable new industry ( and, yes, some of those loans didnt work out, so?).  Some money went to saving the big three auto companies. Some money went to Pell grants for students who will get jobs and pay taxes. It’s reasonable to argue about expenditures that are wasteful, but you have to do your homework and not just yell if you are going to make sense.

It’s infuriating that many of the same people who cheered as the GW Bush administration piled up huge debts for irresponsible or even corrupt projects are now telling us that they are “deficit hawks”. Where were Paul Ryan, Eric Cantor, and John Boehner when GW Bush doubled the Federal budget for things like the Medicare Advantage subsidy to highly profitable insurance companies? There was no way that debt was remotely justified and the whole country will be suffering the consequences for a long time.  And here in Texas, we have people like Rick Perry talking as if he were frugality itself while building up a monster debt ($31billion on Dept of Transportation alone) that nobody can even imagine how to pay back. Suppose you worked in a company where some of the partners built up a huge debt to pay themselves bonuses and suddenly started complaining when you stopped the waste and borrowed money to meet payroll and to get the business operating again? That’s what today’s Republicans and Tea Partiers are like. That’s why nobody sensible takes them seriously.

You can’t run a business, a household budget, and certainly not a country on simplistic slogans and pretending. I wish my Republican neighbors and business acquaintances and friends would act more like responsible citizens and less like people yelling into sports radio call in shows.

 During the fiscal crisis, the Federal Reserve Bank and the Treasury stepped in to take over many of the functions of the banking system. They showed they could do the job cheaper, better, and at less risk to the public. Extending this service would free up the rest of the market economy from our bloated financial sector and reduce the size and complexity of the regulatory system.We do not need private depository banks or the increasingly complex and expensive regulatory, subsidy, and bailout system that attempts to keep them from tipping over. The same forces that  defeated the Depression era bank regulation system - globalization, technology, the development of the shadow banking system and so on - have also made it possible to replace much of what those banks do with a simple public utility that would cost the public less and open up markets. The Federal Reserve Bank is the bankers bank, but there is no good reason it could not offer services directly to the public as an optional alternative to private banking.

The problem with depository banks is that the business model is  unstable. The banks accept deposits from companies and firms and then lend most of that money out at higher rates. A bank that can attract deposits for checking accounts and savings accounts that get low or no interest and that can turn around and offer mortgages at 6%, can be very profitable. In general, once the deposit base has built up, bank customers will deposit as much money as they withdraw, so the bank just needs to keep a small fraction of the deposit money on hand. But that “in general” is not the same as “always” . Some day by chance maybe more than the expected number of withdrawals will come in and the bank won’t be able to pay. Or the bank will make an error on who it lends to or get too greedy or there will be a recession that causes people to default on loans and draw down deposits more than usual. Chances are that eventually the bank won’t have enough cash to meet withdrawals and, without some quick rescue, depositors will panic and all try take their money at the same time, putting the bank out of business. Worse, bank failures are infectious: when the first bank collapses perhaps a business with an account at the bank will lose its funds for making payroll so its employees won’t be able to pay their mortgages at a second bank which will also tip over - and so on. And, in practice, banks tend to screw up in packs, making the same mistake at the same time: for example, wildly overestimating the ability of homeowners or real-estate developers or small businesses to pay just as boom turns into bust, and all falling over together.

By the late 19th century it was clear that modern market economies are so tightly interconnected and banks are so failure prone that governments have to regulate banks and moderate the effects of  of bank failures to prevent economic disasters. So every “advanced” nation has a complex system of bank regulations  and deposit insurance plus central bank loan programs. Banks can get short term loans from the central bank to keep from sinking under short term imbalances and depositors get their money back from some sort of government insurance if the bank fails. Regulators try to keep bankers honest and prudent. This model, after some fixes in the 1930s, worked reasonably well for decades but its clearly not working so well anymore. And anyway, it’s not that great a solution because it involves  subsidizing big banks and bloating the finance sector - something people nostalgic for the New Deal often fail to appreciate. The government guaranty for bank deposits and access to Fed loans allows banks to get capital from depositors cheaply precisely because they are so low risk. The system intrinsically gives a subsidy and advantage to bigger and bigger banks. And as the system increased the size and concentration of the financial sector, the increased political power of bankers led to weakening regulations and oversight which was amplified by changes in technology and world markets.

Our modern financial system is different from the system of the 1930s and the one of the 1960s: more interconnected, billions of times faster, and harder to understand because of both globalization and technology. Global computerized finance is incredibly difficult to police for risks. Should the government be in the position of judging whether a massive risk analysis  program at an international bank is correctly adjusting for probabilities over positions in 3 continents in 20 currencies on 100 time scales and with thousands of customers? Why should the public be a party to the risk of that portfolio at all? Fortunately, the same automation and computer technology that makes banking be so hard to regulate allows us to solve the problem of bank volatility in a much simpler way.

Suppose the government provided citizens and businesses with bank accounts and electronic payment services. Let’s say, deposits of up to $100,000 earn 3% plus inflation and deposits over that amount earn nothing. Maybe IRAs can pay a little more. Furthermore, business and individuals can qualify for credit up to a certain amount based on statistical measures and/or with appropriate collateral.  In short, we could let citizens and non-bank businesses also  access  government banking. If you want to borrow more or earn more then take your chances in the marketplace. But if you want to keep your savings, your cash deposits from your business, your operating funds, somewhere safe and convenient - go to the government bank.The government could do all this with less bureaucratic inefficiency than the current banking system requires. In the financial  panic of 2007-2009, the Federal Reserve Bank operated the commercial paper market without a hiccup - and made the government money. The private banks do not add much value to the clearing/savings system - on the contrary they add volatility and overhead. And they also direct investment capital into destructive gambling activities. If we also ended another subsidy of Wall Street by giving all 401K savers the option of a no fee 10 year treasury bond plan, this proposal would significantly reduce the size of the financial sector.

Such a system would have required a massive government agency 40 years ago but electronic banking enables a lightweight solution.  Instead of trying to fight the changes to the world economy that are due to globalization and automation and advances in statistics that permit some quantification of risk, this proposal is to exploit those changes and use them to simplify the system. We would still have private banks, but bank failures would lose their contagious effect because the core clearing functions of the financial system would just keep operating. Bank panics would be less harmful to the greater economy and would damp themselves out. And so, we could reduce the amount of government supervision of and support for the banking system. The current regulatory and insurance system makes the rest of the economy pay for the risky nature of depository banking. The end of the subsidy would lead to the success of innovative more efficient financial institutions like peer-to-peer lending and networked bond markets or reinvented mutual funds. These might not generate as many $100million+ fortunes for finance CEOs, but the nation can live without so many Hank Paulsons and Dick Fulds without much sorrow.

There are at least two important side advantages. One is that when the government wanted to increase the money supply, instead of buying bonds from bankers, it could just raise the interest rate on citizen deposits - or even just deposit a little money in each citizen’s account. That would be a more efficient and fairer way of increasing the money supply.  The other advantage  is that the government would not need to borrow so much money to run. Those deposits would represent the public’s investment in new railroads and schools and research and development and health care for old people: increasing national prosperity. Consider that nations in the EU now are begging banks to buy their bonds - and the banks have money to buy the bonds only because they have deposits which they only have because the government guarantees bank deposits!  The current system is a scheme that only makes sense to bankers - but they could get real jobs.