Always worth including in full… From New Deal 2.0.
Marshall Auerback presents an alternative to free market ideology for Frum & Co.
Amongst conservatives, David Frum has the great virtue of intellectual honesty, which is why he is generally persona non grata amongst those seeking to curry favor with the Tea Party movement. But he’s right: “For those of us on the free-market side of the debate, the question is even more haunting: What’s our countervailing idea? And if our countervailing idea is tax cuts, what is our reply to the obvious rebuttal that the Bush tax cuts have been in effect through the whole of this crisis, seemingly without effect?”
We have often posed the same question to the deficit hawks and hyperventilating hyperinflationistas: you decry more “wasteful” government spending, more fiscal stimulus, so what is YOUR solution? Debt deflation a la the 1930s? Debt jubilee? Widespread debt restructuring in which bond holders take a hit?
Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.
Let’s be clear: The “free market solution”, to use Frum’s terminology, is basically deflation. If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then nominal incomes and real output will be likely to fall. Money incomes and economic activity will tend to contract until private savings preferences are reduced (with essential goods and services taking up a larger share of household income as incomes fall), or until depreciation leaves businesses and households inclined to invest once again in durable assets. In the absence of any countervailing fiscal stimulus, common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies — that is, unless creditors are generously willing to renegotiate existing debt contracts en masse.
Now, I suspect that some of Frum’s fellow conservatives actually think this sort “cleansing” is good. They believe it on both moral and economic grounds. Maybe not all, but a number of the more extreme libertarians with whom I occasionally debate, actually embrace this argument. Fair enough. It’s not something I would advocate, but it has the virtue of being ideologically consistent with many of the tenets of a free market/libertarian orientation.
And to be fair to the libertarians who espouse it, they are undoubtedly correct in arguing that our persistent embrace of moral hazard over the last several decades (all in the cause of bailing out our reckless financial institutions) has put us in a much more tenuous position. Had we responded differently, say, to the Mexican debt crisis of 1995, or the failure of Long Term Capital in 1998, perhaps things wouldn’t have come to this pass. In the words of Hayek, attempts to combat the recession via the embrace of moral hazard has led to “malinvestment” — in the process delaying the necessary and painful process of adjustment (as well as setting us up prospects for even greater problems in the future).
Fair enough. That said, the consequences of embracing this extreme form of “austerianism” right now would be very unpleasant.
But Frum is right: if this is the optimal free market position, conservatives who embrace it ought to be honest enough to express it in the political arena and debate it openly. No more of these secret committees meeting with little or no public scrutiny (The Commission on Deficit Reduction is Exhibit A in this regard). And no more hypocritical lectures from Wall Street investment bankers, the crony capitalist welfare queens par excellence.
So Frum has posed the million dollar question to his fellow conservatives. Although the question wasn’t directed to me, let’s try to answer it from a progressive perspective.
Truth be told, our solution is not more of the same of what’s been on offer, a warmed over version of Rubinomics. The fiscal priorities of the Obama Administration have been horribly misplaced. Instead of trying to revive the productive economy, most of the recovery effort has consisted of cardio-pulmonary-resuscitation for Wall Street. Fearing what it might find if it actually examined the books of financial institutions in detail, the Administration put a select handful of them through a wimpy “stress test” after announcing that none would fail. Rather than closing massively insolvent institutions, it continued to allow them to operate “business as usual” and to cook the books to show profits so that they can pay out big bonuses to the geniuses who created the toxic waste that brought on the crisis. Not surprisingly, given their true underlying state, not many are keen to provide credit just now.
The short term palliative effects of the first stimulus package are wearing off; we are now back to confronting an economy where the underlying diseases remain unaddressed. If and when we finally overcome our obsession with arbitrary debt to GDP ratios, US government “borrowing needs”, “credit issues” and “interest rate risks”, we can focus federal government spending on programs which provide jobs and incomes that will restore the creditworthiness of borrowers and the profitability of for-profit firms.
Although Frum suggests that “the American federal government moves very slowly,” there are in fact ample stimulus programs that could take effect instantly. The only prerequisite is the necessity of government to start writing checks: Via revenue sharing with the states, the Federal government could ensure that no state and local government has to lay off a single worker or cut back a single existing program, which avoids big losses to communities and enhances the capacity of local government to fight recession. Add emergency revenue sharing to states and cities by picking up increased shares of Medicaid, (which has suffered drastic cuts in eligibility and coverage), and enables states to restore Medicaid benefits to more people, thereby furnishing some general household budget relief. Have government temporarily pay most of the cost of COBRA coverage for laid off people who lose their health insurance, and allow people over age 55 to buy into Medicare. Expand Unemployment Insurance to cover part time workers, extend eligibility period, and increase benefit levels. Roll back tuitions at state universities and community colleges, and increase Pell Grants — contingent on universities not increasing costs to students – -which enables young people to spend the recession in college rather than clogging unemployment rolls or graduating with huge debt burdens. Similarly, colleges are spared the need to cut programs and lay off people in a recession. Professor James K. Galbraith sets out some useful criteria for good stimulus:
1. Open-ended support for the current operations of state and local governments, for the duration of the crisis, including open-ended support for public capital investment. Basically all the resources being released from private residential and commercial construction should be taken up in public building, to the extent physically and organizationally possible.
2. Comprehensive foreclosure relief, through a moratorium followed by restructuring except in cases of demonstrable borrower fraud. There is no alternative to establishing a large retail-level agency to evaluate and restructure mortgages on a case-by-case basis.
3. Increased Social Security benefits, say by thirty percent, and a cut in the eligibility age of Medicare to (say) 55 years of age. The first of these measures would work to offset the cataclysmic drop in equity wealth of the elderly population as a whole, while favoring the poorer members of that population. The second would permit many older workers to retire, while freeing firms from the burden of managing employee health plans for older workers. Since the shift out of private wealth is likely to prove permanent, these increases in publictransfers to the elderly should be permanent as well.
4. A payroll tax holiday to restore effectively the purchasing power of working families. By setting the payroll tax rate at zero (and letting the government write a check to the Social Security Trust Fund for the uncollected sums), tax relief can be delivered at large scale and with immediate effect to the working population. Later, if growth resumes rapidly, this measure could be scaled back.
5. An energy program, under a long-term planning framework adequate to meet the climate crisis, but also sufficient in the near term to reduce demand for oil as the economy recovers and to quell speculation in the oil markets. This is necessary to prevent inflation of volatile commodity prices once the feedback loops start firing in an upward direction.
6. Programs, in the spirit of the New Deal, to hire people to do what they do best, including art, letters, drama, dance, music, scientific research, university teaching and the nonprofit sector, including community organization. (”A Critique of the Geithner Program”, Jan. 28, 2009)
And finally deploy government spending in a way which REDUCES unemployment, rather than arises as a consequence of it. We therefore suggest a new approach: a Job Guarantee Program. The U.S. Government can proceed directly to zero unemployment by hiring all of the labor that cannot find private sector employment. Furthermore, by fixing the wage paid under this ELR program at a level that does not disrupt existing labor markets, i.e., a wage level close to the existing minimum wage, substantive price stability can be expected. Other benefits could be provided, including vacation and sick leave, and contributions to Social Security and, most importantly, health care benefits, providing scope for a bottom up reform of the current patchwork health care system. As we have argued before, the Job Guarantee program should remain a permanent feature of our economy, in effect acting as a buffer stock to put a floor under unemployment, whilst maintaining price stability whereby government offers a fixed wage which does not “outbid” the private sector, but simply creates a stabilizing floor and thereby prevents deflation.
There are good ideas out there, but there is a distinct failure of political imagination and courage to implement them. With any hope Frum’s provocative article will spur a healthy discussion on the possible solutions, rather than a retreat to tired, discredited economic shibboleths.
