A Midnight Thought on Whether a Bit of Keynes can Fix This Mess

(10 am. – promoted by ek hornbeck)

From Burning the Midnight Oil for a Green Keynesian Revolution (Midnight Thought First Draft posted on Agent Orange)

The thing about the New Deal … it provided a lot of “relief”(1) to a lot of people in desperate shape. But what cured the Great Depression was not the shock absorber of job guarantee programs like the two public works administrations and the Civilian Conservation Corps.

What cured the Great Depression was the massive Keynesian stimulus of World War II. Even before the US got into the war, armaments industries ramped up production in response to domestic re-armament and orders from overseas … including the gimmick of Lend-Lease to make sure that the UK had the money to buy the product of US arms factories.

We can do the exact same thing with the economic disruption that is coming, and if we learn the lessons of the Great Depression, we can do it again … with something far more useful than fighting another World War.

(1. Note that while the term “relief” is perhaps adequate for a soup line or emergency shelter, it is completely inadequate to express the impact of the most significant employment programs of the New Deal on the individual sense of respect and self-worth of those working in the programs.)

The Cure for Unemployment is a Job

It is true that Cyclical Unemployment is a symptom of an economic downturn … and Long Term Unemployment of a symptom of a long-term policy of keeping the economy below top gear … but it is also an economic bad in its own right.

In a modern industrial economy where the most broadly based active participation in the economy is paid work, denial of access to a job is denial of the right to participate in the material provisioning of society.  And the least inflationary means of ensuring that access of employment to the widest number is a direct Job Guarantee at a living wage.

And we, by which I mean collective action of our government mobilizing individual action of us, can do it. There are all sorts of hypothetical alternative realities where it will not work, which many of my colleagues in economics delight in exploring, but in our world, if there are things that need doing, unemployed people, and a capacity by the country to produce the means of subsistence for those unemployed people, the idea that there is a “financial” obstacle to the government employing the unemployed is pure nonsense.

(For more on some of the aggro in the previous paragraph, see Professor Bill Mitchell of Newcastle and How Economics is Failing Us. Its from the Spring of 2000, October 4, but rest assured that Economics is still failing us in this same way.)

The Financial Collapse will Undermine National Demand for Years

When Japan had its financial meltdown after its housing bubble went south … and on top of much less ingenuity in financial gimmicks promising easy returns if the holder would only agree to stand in the middle of a road on the promise that no traffic was going to be coming along … it went through ten years of economic stagnation punctuated by three recessions. This was in the middle of the Boom 90’s in the United States, and we didn’t pay it much mind … but that is what happens when a financial system has a massive low quality portfolio to make good.

It will be harder to finance real investment in productive capacity, and harder to keep the confidence racket of ramping up consumer borrowing to make up for stagnant consumer incomes. And those in the top 1% of the income ladder who received all the pay rises in this decade, who could borrow to spend, are going to be reacting to the conversion of all those paper profits into paper losses with a reduction in real spending.

Now, continued slack standards on financial institutions could moderate the short term bind on credit, but only at the cost of risking further rounds of financial institution meltdowns. So tight credit is the best of the bad options available.

That leaves the two remaining growth drivers as exports and government spending. And of course, if economic activity picks up worldwide, that will jack up crude oil prices again, which will rebound on our import bill.

As far as standing back and waiting for the return to “normalcy” on the back of the private sector, that could easily be a decade.

The Government Can Pick Up the Slack

We have an economy of around $14 trillion dollars. If every dollar injected into the economy leads to an additional dollar of consumer spending out of the increased income (a “multiplier” of 2), then the government can add an extra 10% to national income by spending an extra 5% of national income, which would be around $700b.

Of course, the current economic slide is being cushioned to a certain extent by the budget deficit in the range of $400b. Shifting as much of that as possible from wasteful overseas military adventurism to spending domestically would, in fact, help, since spending directly overseas fails to be a stimulus to the US economy. And that goes for both the new “hot” adventurism of Iraq, and the “habitual adventurism” of having a 700+ base network originally designed to encircle the Soviet Union under the policy of slogan of “containment, and being expected to somehow magically be of use against a stateless network of terrorist groups that cannot be geographically encircled.

However, if we are around a 3% deficit now, and expand that by 5% to an 8% deficit, that would be a genuine short term stimulus to pick up the slack while the financial institutions get their houses back in order.

Supposing that we shift $100b from overseas military adventurism to domestic spending, and add $700b on top. Is there anything we can spend $800b on?

That is enough money to retrofit our houses for energy independence, retrofit transportation in our cities and our suburbs for energy independence, electrify and massively expand the capacity of our Strategic Rail Network, provide the national HVDC trunk network to connect all of our sustainable renewable energy resources to all of our regional grids, retrofit our energy-intensive agricultural system toward a renewable energy base in the medium term and a sustainable production system in the long term, and provide an Energy Adjustment Fund to help individuals equip themselves for the New Energy Economy.

On the one side, we have more than four decades backlog of projects since National Peak Oil to convert from an oil-based economy to an economy powered by sustainable renewable energy, and on the other hand the serious prospect of a lost decade of economic growth if we do not find a way to spend a lot of money.

And, as in WWII, if we borrow enough to spend that much money, the long term economic impact depends on the long-term consequences of the spending. The US emerged from WWII with roughly half of global GDP and the most productive, best paid workforce in the world. We can emerge from the reconstruction of our economy on a sound Energy footing with a massive reduction in our energy trade deficit and a big stake in major export markets of sustainable power producing equipment and technology all around the globe.

Sometimes Opportunity Knocks Once

We are, of course, far more dependent on imports than we used to be. And any nation dependent on imports has to worry about not just unemployed resources available overseas, but also about the ability to finance the imports that are needed.

At the moment, a lot of those imports are tube socks and cheap electronic gizmos from China. And at the moment, China is riding the legacy of Mao’s population-promotion policies in the form of a massive demographic wave of young adults, for which it has to keep providing jobs or, at the very least, the prospect of jobs, in order to avoid political revolution.

However, China will not be forever desperate to keep ramping up its exports at the expense of standard of living. The One Child policy means that the demographic wave will crest, and once it does, China will be in a position to be far more choosy about what it exports and the terms under which it exports. Or else, it will not successfully negotiate the balancing act, and political turmoil will physically disrupt the supply of consumer staples from the new workshop of the world.

Ramping up our public debt for a massive Energy Economy Reconstruction will, of course, push us from having an Importer’s Dollar to having an Exporter’s Dollar … and that is all to the good, because it will ensure that a larger share of new productive capacity to provide the equipment to produce the renewable, sustainable power will be located right here in the US, as opposed to the more expensive European Union or Japan.

Long Term Financial Reconstruction

And of course, fixing the financial system is straightforward. It may require a lot of refinance, but the primary way to get back to the robust prudential balance sheets of the 1950’s is to put the financial regulations back in place that have been ripped out over the past sixty years in pursuit of quick profits at the expense of less prudential cover.

It is, after all, that restoration of prudential regulation that will insure against any inflationary impact from the infusion of dollars newly created by the Federal Reserve.

Did I mention Opportunity Only Knocks Once?

Did I mention opportunity sometimes only knocks once? So get knocking those doors and banking those phones. If Obama is elected, then as the crisis unfolds, his administration may act in the full measure of the crisis, or it may meet the crisis with half measures, but there is no doubt that his policy is already heading in the right direction.

And if McCain/Palin is elected, we are royally screwed, and the question becomes whether we lash out too nastily against a nation too well armed in new-clear weapons on our way down.