The economic situation really hasn't changed much in the last 12 months. The US economy is still barely growing, meaning the high unemployment rate won't get much higher, but also won't get much lower. The EU is still in the middle of a dire financial situation which is helping to keep a lid on economic growth, while China is still working at lowering inflation (although they are close to the end of the endeavor).
So -- how do we actually end this situation? From Bill Keller of the NY Times:
But while there are things a columnist can ignore (if Kim Kardashian ever features in this column, just shoot me), our failing economic ecosystem is not one of them. So for the past several weeks my airplane and bedside reading has consisted of sexy documents like “A Roadmap for America’s Future” and “The Way Forward” and “The Moment of Truth” and “Restoring America’s Future” and “Living Within Our Means and Investing in the Future.” I’ve also reached out to a few economists respected for the integrity of their science and their patience with economic illiterates.
The first thing I gleaned from this little tutorial will probably not surprise you: There really is a textbook way to fix our current mess. Short-term stimulus works to help an economy recover from a recession. Some kinds of stimulus pay off more quickly than others. Once the economic heart is pumping again, we need to get our deficits under control. The way to do that is a balance of spending cuts, increased tax revenues and entitlement reforms. There is room to argue about the proportions and the timing, and small differences can produce large consequences, but the basic formula is not only common sense, it is mainstream economic science, tested many times in the real world.
Yes, there is a simple way to solve the problem. And while I've been over it many times, let's revisit it again.
1.) Borrow money. Despite the incredibly stupid complaints of people about federal spending, the bond market isn't worried about the US' fiscal situation right now. The 10-year bond is trading right around 2%.
2.) Rebuild the nation's infrastructure: According to the society of civil engineers, the US' infrastructure gets a grade of D-. I recently noted a story from AgWeb that also illustrates the problem.
3.) Hire people to do the work. Considering that half the un\employed are blue collar workers (people that do things like ... construction) this would lower unemployment -- which also happens to be a big problem right now.
4.) This increases aggregate demand, which increases GDP. Once you get GDP growing at 3%+ for a few quarters, the economy because self-sustaining. This also helps to halt the debt/GDP growth rate.
SOOOOOOOO why don't we do this?
So what’s the problem? Why is our system so fundamentally stuck? Partly it’s a colossal, bipartisan lack of the political courage required to tell people what they sort of know but don’t want to hear. Partly it’s a Republican Party that, for its own cynical reasons, wants no deal with this president. Partly it’s moneyed, focused lobbies that swarm in defense of specific advantages written into the law; there is no comparable lobby for compromise, let alone sacrifice.Let me address the political problem, because I think it's the really big elephant in the room. The Democrats can't lead. Period. The president sends a proposal to the Republicans and then offers the "pre-compromised" version before negotiations get out of the gate. He has yet to figure out that he is hated -- as in really hated -- because of what he symbolizes: the end of the WASP power structure as we know it. And Congressional Democrats have no backbone. Case in point: perennial pain in the ass Joe Lieberman should have been given an office by the janitor (with an apology to the janitor) along with every meaningless committee assignment possible. Instead, he's a media darling.
Republicans now have the luxury of living in a fact-free world thanks to Fox news and talk radio. Ever wonder why a mere 6% of scientists consider themselves Republicans? Because Republicans are now completely fact-free in a majority of their statements and policy proposals. Here is but one example: sometime over the last year, Paul Ryan proposed a new budget plan with economic analysis provided by the Heritage Foundation. The plan started to unravel after Paul Krugman noticed the plan projected unemployment at 2.3% at the end of the decade. After that, a group of people (of which I was one) shredded the plan -- as in demonstrated that it was put together by a third-grader with a crayon. It got so bad that Heritage eventually took it down only to erase the more egregious assumptions. That's just one example of how fact free the Republican party has become.
The point to the above two paragraphs is simple: our political system is beyond broken and dysfunctional. I'm not quite sure where that is, but I do know it's a really bad place to be. And that is why watching the train-wreck that is the daily news is so frustrating: solving the problem is easy, but our political system has become so dysfunctional as to prevent that from happening.
21 comments:
Does the "borrow money" apply even when your deficit is running in the trillions of dollars or was it based on circumstances of much less levered balance sheets, and thus much better capacity to repay these borrowings?
If the "bond vigalantes" bid up our treasury rates we're in real trouble. If we borrow more it's only worse.
We need new, low carbon infrastructure. Conventional oil has peaked, driving up prices, & tar sands has low EROI and high CO2 emissions. Spending the money now to transition to a low carbon economy would employ millions lead to a sustainable future.
However, the Republican party is under the control of the fossil fuel lobby and the MIC. Thus, everything that we need to do is blocked.
-FishOutofWater
We live in a $14 trillion economy. Sometimes I wonder how much easier it would be to solve our problems if people didn't immediately have a visceral "that's irresponsible" reaction to any use of the word trillion.
In 30 years, we'll likely live in a $25 or $30 trillion economy. We are now at the point where big projects, costing trillions of dollars, will need to be seriously discussed and considered.
Is it a lot of money? Yes, but that's where we are as a society. We are a trillion dollar society. It's time we stop gawking at the fact that you can stack a trillion dollar bills halfway to the moon (or whatever the distance is) and start realizing that living in a society where trillion dollar projects need to be discussed is just where we are.
Braeburn,
The stimulus works to boost economy regardless of national debt-the revenues that come from the boost in economy can then be dispursed towards these borrowings or older debt as it is all the same at this point. Unless the stimulus contains some kind of political string attached.
Evidence that we have moved to a trillion-dollar frame of mind may account for why Americans blow millions on absurd priorities like a 4.7 million per year contract for Urban Myer or 6 million pay off to dump Turner Gill. No one seems to question all this; and that doesn't even approach the ratholes of professional sports. At the same time complain about the tax burden. There's a lot more besides our government that is out of whack. How do you fix all that? There's plenty of money in this nation. It's about priorities and standards.
David Milliken
Hale Stewart,
Unlike many number-crunchers and lawyers, you’re a good writer. I always enjoy your ‘notes’.
Regarding this one, I agree with most of what you say (more accurately, what you say seems too make sense – I lack qualifications to pass judgment). However, I very much disagree with you contention that “our political system is beyond broken and dysfunctional”. Clearly it works at times e.g.:
-The TARP and other rescue acts to “save the financial institutions”. One may disagree with the actions, but they were enacted in short time as per the administrations request (regardless of President not being a WASP)
-Also, in military matters: budget and actions (i.e. war), the government acts quickly and efficiently. Again, one may disagree with the actions but there is no evidence of dysfunction or WASP issues.
Accordingly, give evidence such as above that the government can be effective, then it logically follows that the failure in matters of the economy as a whole is not cause by dysfunction.
I would suggest that the government is de facto a plutocracy (government by the wealthy). Whereas, the plutocrats find TARP and military in their best interest; highway construction and the economy as a whole is not.
In short, the 1% has their way and 99% have no say (illusions of egalitarian participatory democracy aside).
Best
Tom
Anon,
When does our history show we have been effective at paying off our debt? History suggests that we have not, nor has the glorified European model. Borrowing more now, while being a somewhat curious fix for what ailes us, on the assumption that we will pay it back when things get better, fails the litmus test of historical reality.
If we don't want to borrow we could end the Bush tax cuts, use 1.6 trillion to stimulate the economy and reap another 1.6 trillion in savings over the next decade.
The people who would be hit by the tax increase already have the largest marginal propensity to save, and the people who would be employed by infrastructure projects spend most if not all of their paycheck. If the new tax revenue mostly came from money that would be stuffed into savings anyway, the multiplier effect of government spending 100% of that money and workers spending nearly 100% of that money would be a major boon to total output.
Braeburn,
Do you seriously want an answer to your question? If so, the answer is: it's entire history (notwithstanding the near default we had this summer). You seem to imply that there is something inherently wrong or evil about borrowing (I believe that view is supported by the Koran, but I haven's seen any Republicans cite that reference lately). On the contrary, borrowing is a part of any good business operation. It has it's dangers, clearly, but so do bridges and dams and nuclear power plants.
Please tell me if I'm interpreting "the 10-year bond is trading right around 2%" correctly: If I borrow $100 from "future guy" today, he'll be happy if I pay him $102 ten years from now? Is that in literal, nominal, terms? Or some sort of inflation-adjusted terms?
Just an FYI TARP was passed under GWB not Obama
Jim - I'm no finance guy, but under the 9th-grade math I learned, i think I=PRT, so investing $100 for 10 years @ 2% interest gets you $20 in interest, for $120 total repayment.
Boulder Guy,
Might be some compounding, too.
100% correct - so why isn't electoral reform your highest priority?
a corporation or a sovereign need never "pay off the debt"...as long as our real (inflation adjusted) interest rates are negative, it indicates a shortage of safe assets in the global economy; so we need to borrow more...
short term US government debt has become, at least in part, the worlds money supply; a million dollar Treasury bill is used as money by the international banking system or by a sovereign wealth fund in the same sense that you use a ten dollar bill in your wallet...thus, a contraction of the supply of the reserve currency (our treasury debt) would have a negative impact on the world economy in the same manner that a contraction in the domestic money supply would impact our nation's economy...
that was the rational behind the bush tax cuts; it became clear that if clinton surpluses continued, the financial system would soon experience a dearth of safe assets & would freeze up; so the tax cuts were initiated in order to keep levels of AAA assets high enough for the markets to operate...
that situation persists today...
'If the "bond vigalantes" bid up our treasury rates we're in real trouble. If we borrow more it's only worse.'
But, but, but - the nominal interest rate on 10-year government bonds is now below 2%.
As far as the politics - this blog post is so spot on!
David Milliken -
Your perspective is dead-on. Today I just read that some scientists at Berkeley received $6 million to research an earthquake early warning system for SoCal. There was outrage. Not huge, but let me use this as a convenient example.
Scientists at one of the best universities in the world. Researching earthquakes. For a metro area of fifteen million people. On a fault line, no less. Received money less than what FOUR individual Dodgers pitchers make in a single year.
And the punchline? The money came from a foundation. People didn't even have to pay for it, but some of them freaked out anyway because money went toward scientific research. Oh the humanity.
One gaping disparity that seems to go largely unnoticed is how entertainment is economically a much higher priority than infrastructure. People complain about potholes, then get outraged and vote out everyone who passes a $0.40 tax increase to pay for fixing potholes, then drop ten times that on a single coffee at Starbucks. That's a country in trouble, right there.
Thank you, Dragonchild. The problem is that any attempt to interject "values" of which we speak gets labeled "socialism." We get endless debate about who or what institution or what process has the right to arbitrate questions of taste, morality, value, etc. In other words who are we to challenge blind faith in the "cultural" choices made by the vaunted free marketing which is not so free after all --- except for the folks who can pay everyone off.
There's a typo:
"Once you get GDP growing at 3%+ for a few quarters, the economy because self-sustaining."
Should be:
"the economy becomes self-sustaining."
just another thought...economist karl smith showed that with interest rates as low as theyve been, we could eliminate all federal taxes today & borrow 30 years out, & make a profit on that borrowing if the country grows 1.1% annually or more over that 30 year stretch...by not borrowing now, when the rest of the world is paying us to borrow, and investing in infrastructure, renewable energy, job training, and our youth, we are missing a once in a lifetime opportunity...it's not crazy or unprecedented; we had a higher debt/GDP ratio coming out of world war 2, and eisenhower ran deficits to send returning vets to college & build the interstate highway system, and the debt to GDP ratio came down during the 50s expansion anyhow...
Great information! I’ve been looking for something like this for a while now. Thanks!
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