Tuesday, September 4, 2012

The economy: part deux

So how do we fix it?

First and foremost, we need to focus on what matters: jobs.  And right now, the focus, both left and right, is primarily on deficit reduction.  You actually hear people say from time to time things like "we need to cut spending and reduce the deficit so we can increase the number of jobs in our country."  That's like saying "we need to eat more waffles, so we can rotate the tires on our cars."  It's like saying "we need to stop watering our lawns, so we can spay and neuter our pets."  It's like saying (I can do this forever) "we need to ride our bicycles, so we don't get wet when it rains."  Deficit reduction is a good thing, but it has nothing whatever to do with job growth.  Nothing whatever.

In fact, there's no evidence at all suggesting that high deficits are currently harming our economy, not in any way.  If deficits were harming our economy, we'd see it in inflation and in rising interest rates.  Anyone out there try to buy a car lately?  I don't know that I've ever seen interest rates this low.  The deficit could become a problem, at some undefinable point in the future.  It isn't doing harm right now. 

(At this point, I suppose it's also worth pointing out that the Romney/Ryan proposed tax cuts are not balanced by their proposed spending cuts, and that their plans will, by the best non-partisan economic analysis available, increase the deficit from about 1 trillion dollars a year to about 3 trillion. So even if the deficit were a serious problem right now, the Romney/Ryan plans will make it considerably worse.  Just sayin'.)  

No, what's needed is more stimulus.  What's needed is more money pumped into the economy. More money circulating, more money spent by consumers, more demand.  More demand equals businesses expanding, new business start-ups.  We're in a liquidity trap caused by a demand-side recession.  Liquidity traps can last for years; they don't just solve themselves.  (Ask Japan; their demand-side recession lasted twelve years.)  Government spending cuts pull money out of the economy.  We need more money in the economy.

We can see it right now.  The single biggest factor holding back our current recovery is public sector layoffs. The private sector has been creating jobs--not as many as we'd like, but job growth has been fairly strong.  But private sector job growth has been counter-balanced by layoffs by state and local governments.  Teachers, firefighters and cops. And that has all sorts of other negative implications, like an education system where class sizes have never been higher, preventing good teachers from being effective.  

So what we need is not cuts in federal spending.  What we need to do is to spend more, not less.  The federal government can stimulate through paying for infrastructure improvements (always a good idea anyway).  The federal government can give money to states and municipalities that are hurting, allowing them to re-hire cops, firemen and teachers.  I think mortgage debt relief and student loan debt relief would also prove stimulative.

Where is that money going to come from?  Well, we'd borrow it.  And it's not true that we're mostly borrowing money from China.  Most of our debt is held domestically, by Americans.  The federal government can, under these present conditions, borrow money at essentially zero percent interest; that's how favorable the rates are.   
I know this is all counter-intuitive. Debt is bad. Families can't survive if they spend that much more than they bring in.  I happen to live with a deficit hawk; my wife manages our personal finances with steely-eyed vigilance; if we need to make a purchase, we can and do pay cash.  (In fact, we're not spending very much, which makes us part of the problem!)  But the federal government is not a family. 

Federal debt is not a bad thing.  Deficit spending is what defeated Hitler.  Deficit spending is what created the federal highway system.  Deficit spending is what created the infrastructure that created the wealthiest nation in the history of the world, with the strongest middle class, and the greatest possibilities for rags-to-riches success stories that the world has ever seen. 

But aren't we piling debt on our grandchildren's shoulders?  Is it sustainable, won't we have to balance the books eventually?  Sure.  But I'm less worried about my grandchildren than I am with my children, with the current generation of college graduates who can't find jobs, who did everything right, got into good schools, worked hard, got good grades, and still have to live at home with their parents in a kind of suspended half-way house to prosperity.  I'm worried about families right now who lost their jobs and are over-qualified for the only jobs available.  I'm worried about unemployment and underemployment right now.  I'm not saying 'the future will take care of itself.'  But full employment will increase the tax base, and deficits will fall.

Keynes said (I'm paraphrasing) the time for austerity is during a boom, the time for spending is during a bust.  Counter-intuitive or not, we need more stimulus.  We need to stop this focus on deficit reduction and focus instead on jobs, on the middle-class, on making it possible for our kids to live the American dream.  That's what both parties are saying right now; those are the rhetorical themes that dominated the Republican convention and that will dominate the Democratic convention.  But their plans have to match their rhetoric.

There's also a lot of talk in both conventions about 'bold leadership' and 'new ideas' and 'making the tough choices.'  Let's start by questioning all the current conventional wisdom.  Mainstream analysis in the media says 'it's time for more spending cuts.'  'It's time for austerity, time to tighten our belts.'  Most mainstream commentary agrees that the deficit is the big issue we need to address right now.  Most economists disagree.  In my next blog, tomorrow, I'll talk about those economists, the ones who have a track record that suggests we should listen to them. In the meantime, at least keep an open mind.  We need jobs.  That needs to be the priority.  Not deficit reduction. 


  1. (This was too long, so I am seperating it into several comments.)

    Comment 1

    I agree that we can't solve things through cutting programs. We need to expand programs that are an investmentin the future, and we need to be smart about how we do it. And, there are lots of really good, evidence based programs that we KNOW work, that we can use to get a good value for our money. Here are a few of my examples:

    Preschool - We know that kids who have at least a year of preschool before going to kindergaerten not only do better in school, they are more likely to graduate, more liekly to not end up in the juvenile or adult prison system. They also have better social skills, and are more likely to be involved in volunteering throughout their lives

    Small class sizes in public school - There have been studies that show class size matters, and it matters no how good a teacher is. Grade school classes who have at most 20 students, middle school classes of less than 25, and high school classes of 28 are the highest class sizes can get and have consistent learning happen with all of the kids. Really smart kids with stable homes, regular access to food and medical care will always adjust to a large class. Students without those advantages are the ones most impacted by class sizes being larger. A teacher simply doesn't have the time to learn all of the ways each student learns and processes information when class sizes get too big, and so it is hard for teachers, especially in middle school and high school where they only have a student for one period each semester. With over 200 kids a day going through a teacher's classroom (because classes of 40 students is common) it is impossible for that teacher to make sure each student is being taught in ways that are most meaningful to them. With standardized testing added into the mix, large class sizes are setting our students up to fail. To see some info going on right now, in Oregon, this link might be useful. http://www.oregonlive.com/education/index.ssf/2012/09/the_writing_imperative_oregon.html

    State Sponsored child care - Many families struggle with finding and affording childcare. If we really want to get money circulating, that money needs to be earned. When parents are paying a third of their salary for childcare, they not only have less money to sprnd, but the larger the family, the more likely it is that they simply can't sfford to work. I know a number of families in our area who have more than two children.

    One friend, whose husband had to take a huge pay cut just to keep his job, has been looking for a job. She has been offered several jobs that pay $10 an hour, but since they have five kids under nine years old, childcare would cost more than having her stay home with her kids.

    She shared with me that she cried for weeks after she found out she was pregnant with their fifth child because it was two weeks after he husband was offered the choice between being indefinately laid off, and taking a 30% pay cut.

    Before he was laid off they were saving 10% of their salary, on top of their 10% tithing, and still have enough to pay all of their bills with a comfortable cushion. They were within 18 months of being ready to shop for a home, with a downpayment of 20-25%. Twenty months later, they have used half of their savings just to survive, and they no longer think that owning a home will be part of their future.

    Having childcare available that was clean, safe, supportive and flexible to their family needs would have allowed her to get a job almost as soon as her husband took the paycut. They would be in a home, and there would be so much less stress on their marriage and children.

  2. Comment 2

    Most people really don't understand what this means, so I am going to break it down into the parts that I think are most important, and hopefully to help with understanding what infrastructure means.

    Roads: Local roads, especially in more rural areas are often patched, but not resurfaced, for about 10 years. In places with moderate weather that doesn't impact roads all year round, (there really isn't such a thing) roads should still be resurfaced every 5-7 years. We have some roads near our home that haven't been resurfaced for 20ish years, because the county hasn't had the money, unlike highways (which I will talk about next) provide jobs everywhere in the country, and most of the contracts are given to businesses in the counties where the projects happen. An infusion of money, based on the length of non-state and non-Federal roads and highways, (that have not been repaved in the last 4 years) for every single county, would create jobs EVERYWHERE in America.

    **Personally, I think that making sure that money is distributed based on need, not based on a system that rewards states disproportionally because of political connections or lobbying, is really important. There are some large cities that have lower unemployment rates. While some areas are slightly above or below the national average, every county has people who are unemplyed, and who want to work. These kinds of jobs also are more likely to have health care and other benefits provided. All of that adds value to the community too.


    Many of the same reasons that apply to roads applies to highways too, but there are even more benefits that come with highway maintenance projects. Given that for a large number of communities, the only way goods are transported to those communities is by truck. Having well maintained highwways makes trucking and transportation less expensive, which means that not only do the costs go down, but sice goods are moving faster, it is possible to get a larger variety of items moving theough the country. Highways are also a major way that we move ourselves around the country, and the easier it is to travel, the more people will travel. Those travelers spend money along the way, as well as at their destinations, which helps move some of the money from dense city areas, out into the more rural ones.

    Power Transmission:

    While a lot of the local power lines are maintained by the local or regional utilities that use them for their customers. Generally that means they get replaced if they go down, but as the economy has slowed down, more often there are patch jobs done, instead of stringing new wire. In the long run, new lines, and burrying the lines in places with frequent problems, will mean fewer power outages and disruptions. So, there are great long-term benefits for the country, on top of the short-term benefits for the workers replacing the lines. That much additional work would allow the industry to train a greater number of apprentices, which means that there are more qualified line men, who can respond to large power outages and natural disasters.

    High Speed Internet:
    The are huge portions of the country, mostly in rural areas, that still do not have high speed internet connections available. In communities that are struggling to keep businesses and people in their communities, the lack of high speed connections can often make the difference between having businesses stay and more businesses moving to the area, and having businesses leave and the loss of the local economy. There are also benefits for local schools and adults who are able to access online coursework.

    There are tons of other things that we know work! (I am happy to provide more, but this seemed like plenty for now.)

  3. The one thing from the tax cuts that I do think makes sense is to cut business taxes, but only for businesses that actually create new positions and hire new employees. Similar to other programs, the January 2013 payroll would determine the current number of employees, and new jobs created after that would be elligible for a tax break for the first two years on all jobs created that are maintained for those years. Each year, after the second, the number of emplyees would be increased as the number of people who have earned the business a tax cut would be added to the original number. (This makes sure that jobs aren't created and then uncreated to game the tax break system.)

    There are two other very pro-employee programs that I think would make a lot of sense. They are not pro-investor, so you might even say that they would create employee owned companies whose business is to create jobs, NOT profits.

    Create a 5th Year MBA program that guarantees students up to $5 million dollars at the end of the program to start an employee run business that creates a minimum of 100 jobs within the first 6 months of opening. As long as the company reaches 500 jobs by the end of year three, and all of the employees make a minimum of $50K a year, the founder of the company will receive a one time, tax free payment of 3 million dollars or half of the profits from the company, whichever is higher. During those three years the company will pay no taxes, so that the entire focus can be on growing the brand of the company and its capabilities to employ more people.

    After year three the company would still be eligible for tax breaks for additional positions created, but otherwise it would pay taxes at the same rate as any other business. The employees of the company will all receive a yearly bonus, based on the number of new employees hired in the company, on top of their minimum salaries. No matter what the base pay of the employee, all employees receive the same bonus. As the company grows, salaries can and should continue to grown, but the most expensive employee, (as figured by salary plus all benefits) can't make more than 20 times the what the lowest paid employee does.

    I would also like to see a program that gives grants to people who want to start small companies, that doesn't just give them a loan, but also gives them access to a variety of experts to help them figure out how to grow there companies in smart ways. Someone who wants to run a small business that will support their families, and give a service to a community, should have access to expertise that will allow them to grow to the size that makes sense for them. After ten years, the repayment of loans should make the project self supporting, while allowing small business owners to get the expertise to make money, pay taxes, and serve their communities.

    I am sure there are a lot of other programs that could be instituted to create companies with a focus on creating jobs, rather than having the focus on profits, without the companies being non-profits.

    Anyone else have any ideas?