[THS] Mike Whitney: Fix the Economy?

[The Harder Stuff in news and commentary]

http://www.informationclearinghouse.info/article25927.htm

Fix the Economy?

We Have Know-how

By Mike Whitney

 July 12, 2010 "Information Clearing House" - -There are remedies for recession, and
the remedies are well known. But fixing the economy requires special medicine, fiscal
stimulus, and if the patient does not take the medicine, he will not improve. It's not
enough to have the medicine sitting on one's nightstand. It must be ingested before
recovery can begin.

Opponents of stimulus say that it doesn't work. But before Obama launched his $787
billion recovery program, the economy was shedding 750,000 jobs per month for 6
consecutive months. Manufacturing and exports were plunging faster then during
the Great Depression. Now unemployment has leveled off at 9.5% and
manufacturing, exports, retail and personal consumption have all rebounded. This
did not happen by accident. The economy is responding to government spending.
Stimulus works.

   There's nothing mysterious about stimulus. It's quite simple and does not require a
degree in economics to understand. Spending creates economic activity; economic
activity creates growth. Full stop. The economy does not care if households  are
spending or if the government is spending. It doesn't matter. The result is the same--
more economic activity, more growth. The opposite of spending is saving. When
consumers save--as they are now because their balance sheets are underwater-- and
businesses save--because consumer demand drops off; then the economy can shrink
very fast unless the government steps in and keeps the economy running with deficit
spending. Thus, personal savings equal government deficits.

This is what British economist John Maynard Keynes figured out; how to soften the
business cycle, how to make capitalism less savage and less crisis prone. Keynes
developed his theories during a period when many intellectuals and workers groups
had given up on capitalism altogether and turned to Marxism as an alternative. These
people saw a version of capitalism that we see today, where bankers and corporate
chieftains control the political system and use it to rip off investors with toxic
mortgages, or drag the country to war on a pack of lies, or despoil the environment
with impunity. Every generation has its Tony Haywards and Goldman Sachs.

Keynes dignified capitalism; elevated it. (perhaps more than it deserved)  He believed
that free markets created a better environment for personal liberty and happiness.
But he did not believe that the market was "self correcting", or that markets operated
best when left alone. Government has a role to play in the business cycle, and when
it performs as it should, a great deal of pain and human suffering can be avoided.

Keynes believed that governments should try to keep their budgets in surplus. It's
true; Keynes was not the "Big spender" that his critics think. In Robert Skidelsky's
timely and invaluable book, "Keynes: The Return of the Master", the author dispels
many of the illusions about Keynes. Skidelsky believes that Keynes would have
opposed the "financial innovations" which led to the present meltdown. As he notes,
"Complexity for its own sake had no appeal for him."

Skedelsky's book is not only informative, but beautifully written. For an English major
like myself--who still has trouble wrapping his mind around simple economic ideas--
the book is a real sunspot.

So there is a way out of recession, a way to sidestep the excruciating downward
spiral of debt deflation, high unemployment and social unrest. There are ways to
tame capitalism so that a criminal elite are not killing people in foreign countries, or
fleecing investors with their garbage securities, or poisoning entire sections of the
country with their  pollutants. But fixing the system requires medicine; regulation,
stimulus (when needed) and accountability.

Right now, demand is weak, Obama's stimulus is running out, and the economy is
beginning to teeter. Housing prices have begun to fall (again), consumer spending is
off, businesses are hoarding, consumer credit is shrinking by nearly 5% per year,
manufacturing has begun to slow, bank lending is down, and the Fed has ended its
bond purchasing and liquidity programs. Without additional government spending,
the economy will slip back into recession. The recovery is stimulus driven; it is not self
sustaining.

Austerity measures are precisely the wrong remedy, just as cutting off unemployment
benefits or slashing federal aid to the states is the wrong remedy. These actions
reduce spending, weaken the economy and clear the way for depression. Again, this
is already "settled" economics. The GOP needs Obama's recovery plan to fail to
improve their chances for a landslide in the November midterms. It's all politics. The
fearmongering about the deficits is more of the same; politics. Belt-tightening is not
the way out of a slump.

Principled conservatives believe that "the bad debt must be purged" before the
economy can recover. But this is economics, not religion. The economy functions
according to some very basic principles and doesn't care about our moral
pretensions.

Some conservatives are too focused on the money supply. But in a liquidity trap--
where interest rates are already "zero-bound"--the Fed can pump up the money
supply (the Fed has increased banks reserves by over $1 trillion) and the economy
will still contract. Milton Friedman was wrong; money supply does not drive the
economy. Spending does. The money must get into the hands of the people who will
spend it, which is why the economy runs better at full employment.

What's needed now, is more investment. But businesses have set aside a record
amount of cash because there's no need to increase capacity when the health of the
consumer is in doubt. Who will buy their products, that's the question? That's is why
Keynesians focus  aggregate demand rather than on money supply. Consumption
and investment are both spending and--as we noted earlier--spending generates
activity and grows the economy. Money sans velocity (the rate of spending) achieves
nothing; the economy will continue to languish. Presently, there is no suitable outlet
for investment because households are cutting back to patch their balance sheets.
Government can help by increasing deficits and putting people to work. Then
business investment will resume, state revenues will increase, and the economy will
rebound. Deficits work.

Fearmongering about the deficits is a political calculation to win elections and
strangle popular social programs. It has no economic value. If deficits were a
problem, the yields on government debt (US Treasuries) would go up. But yields are
historically low and headed lower. The GOP says that deficits are a problem. The
market says that deficits are not a problem. Who is right and who is wrong? Smart
people will trust the market and ignore the political opportunists.

There is no danger of inflation. Repeat. There is no danger of inflation. The
inflationists are wrong, just like the deficit hawks are wrong. They have been wrong
for the last three years and they will continue to be wrong for the foreseeable future.
The CPI is falling, commodities are teetering, gold is hanging by a thread. Without
fiscal stimulus the economy will contract. And Fed chair Ben  Bernanke is likely to let
the economy contract by suspending quantitative easing (the bond purchasing
program) until after the midterm elections. Why? Because Wall Street is mad that
Obama criticized the banks publicly.  The financial sector has its shifted support to
the GOP. As an agent of the big banks, Bernanke will act on their behalf and
withhold support until after the elections.  That will ensure  two years of political
gridlock until Obama steps down in 2004.

The reason that so many professional economists (Stiglitz, Baker, Reich, Thoma,
Weisbrot, Krugman etc) are frustrated with policymakers, is not because they are
"ideological" or "Keynesian" or narrow minded, but because the matter has already
been settled. We know what needs to be done to revive the economy. It's just a
matter of doing it.
~~~~~~~~~~~~~~~~~

More Poverty By Any Measure
 
By Christine Vestal
 
More than 15 million Americans are unemployed, homelessness has increased by 50 percent in some cities, and 38 million people are receiving food stamps, more than at any time in the program's almost 50-year history. 
http://www.informationclearinghouse.info/article25924.htm