Rethinking the US stimulus package

11 နိုဝင်ဘာလ 2009

The failure of the US administration to adopt a truly Keynesian package for stimulating the US economy is likely to lead to further crisis and misses the opportunity to transition to a green economy.

I know that many Democrats are reluctant to criticise the fiscal stimulus package out of a desire to support the President and not make the administration more vulnerable to Republican attacks. I understand that reluctance in the present political circumstances. However, it is also the case that the 'stimulus package' is not really a true Keynesian stimulus, as it was very much a composite Congressional package.

A Keynesian stimulus implies a very carefully selected set of areas in which to spend the government funds in order to maximise the redistributive effect on income - via employment- to those who are either presently unemployed or on low incomes. This is in order to support an increase in aggregate demand, by directly stimulating the creation of additional employed work.

It is also a feature that the spending should to the extent possible be very cost effective in terms of how many jobs are created per dollar of expenditure. There are professional journals on Keynesian policy that contain empirical studies of these issues and the efficiency of different types of expenditure in relation to the number of jobs created.

The multiplier effects of job and income generation are of course also extremely important, as it is a basic insight of Keynesian economics that the lower income quartile(s) has the highest propensity towards expenditure of any incremental increase in income (whereas higher income quartiles tend to save the increase - or invest it). 

The multiplier effects are essential to the desired stimulus effects, to restore aggregate demand, and thus, according to Keynes, alter the perception of investors as to the expectation of future profits and growth, thereby encouraging them not to hoard capital but to invest it.

It is clear that the present version of a 'fiscal stimulus' package may leave something to be desired on many of these grounds. If you send over 700 billion dollars into the US economy it will of course register on the statistical measures later and seem to produce an increase in economic activity. That may be a bit deceiving however in the longer term, and especially if the stimulus spending is withdrawn.

In addition to the shortcomings of the present stimulus, there is also the great lost opportunity in relation to both the bail-out of the financial system (and the Wall street financial oligarchy with it ) and the partial nationalisation of major automobile firms.

It would be preferable to use over 100 billion of government funding not simply to restart failing US auto companies, who are many years behind their global competition, but to convert the production of auto factories to produce the huge amount of mass transport equipment - rolling stock, track equipment, tunnel borers for underground metro lines, software for systems of mass transport, etc, which the US overwhelmingly imports from abroad (especially from the EU) because US companies don’t have the technology and production capacity for this sector due to US over dependence on the private automobile.

If the US is serious about breaking its oil dependence, reducing carbon emissions, and making a rapid and successful transition to the new green economy and new growth sectors in technology and become a domestic producer of these innovations, then public money, in alliance with private, and organised through new investment 'guidelines' or even 'directives' laid down to the major banks that have received public money- would enable this transition to be effected much more quickly and effectively, which would benefit the general public interest.

Obama's team need to do much more and think differently about the stimulus and the opportunity of public investment in this all important period of economic transition. If the present policies prove ineffective, and I believe there is a chance they will, then that will not enhance the political position of either the President or the Democratic Party. It is very important that the strategy and policies of the stimulus and public investment therefore be urgently reconsidered and a new course charted out.
The scenario at present started from a  a Greenspan induced super bubble, which burst catastrophically, plunging the real economy into the 'paradox of thrift' where everyone everywhere simultaneously cut back spending and investment. This set off a 'syndrome of economic contraction', leading to a substantial government recapitalisation of the banks (and other financial companies), which amounted to the 'socialisation of losses' (while continuing the principle of the privatization of profits- even after the public bailout. It is now  leading (as predicted by theory) to the 'liquidity trap' where, as Keynes explained, you can give the banks all the money you want (or have) but you cannot force them to lend it in these circumstances.

It would be different of course if Obama had  nationalised the banks outright, in which case he wouldn't have to worry about shareholder interests nor fluctuations on the stock exchange of bank equities. Yet because the bailed-out banks anticipate yet further rising unemployment, bad loans (ie defaults and bankruptcies) and resultant slow growth- they will continue to be reluctant  to invest- while also trying to write down their substantial losses and rebuild their capital base.

In the short term (or even longer) this means the recapitalised banks (thanks to public money) will actually raise interest rates and cut off credit lines for all but the safest clients- thus further restricting the whole credit system and contributing to the syndrome of economic contraction- thus setting off yet further bankruptcies and more unemployment . The  recent CIT bankruptcy is a symptom of this pattern, with perhaps yet more of these to come...)

The government's response of  'credit easing':   pumping money into the financial system, via the central government treasury and the private based Fed system, in order to increase the money supply is also providing a new avenue for dealers such as Goldman Sachs to reap super profits from activity in the bond market.

It seems ever more likely that the US is headed to Irving Fisher's classic 'Debt Trap' pattern, where the public deficit expands exponentially, as it has done in Japan since the early 1990s and up to the present -  and will then follow the 'politics of recession' where politicians all and sundry join the chorus calling for urgent budget cuts and retrenchment in public services, wage restraint or even reductions, etc. This is nothing other than a conservative and entirely misguided reaction to the crisis - which will have the inevitable effect of making the economic contraction syndrome even worse. This is what we are facing.

The real causes of the crisis lie in the  decline in real wages in the US, growing income and wealth inequality, increasing poverty, increasing concentration of corporate power, consolidation of the financial oligarchy and its influence over the US treasury, the removal of the Glass-Steagall Act (which allowed and legalised the formation of 'universal' banks), along with  the deregulation of the US commodities exchange markets which permitted an avalanche of volatile speculative short term capital movements into basic commodities futures, including oil, grains, basic metals. This deregulation of commodity markets caused a rise in food prices globally and a 'food crisis' (FAO says 1.1 billion people currently face famine).

The solution lies in reversing all these underlying trends ie to

  • resist and stop all cut backs in public spending and services,
  • re-target the fiscal stimulus and public investment to maximize multiplier effects and support employment and aggregate demand over long term,
  • restore real wages to long term trend line in relation to growth and productivity increases,
  • increase state pension payments and other state payments including unemployment insurance payments in particular,
  • pass new anti-trust and anti-monopoly laws to curtail the excessive power of major corporations
  • shut down all tax havens globally once and for all with no exceptions,
  • restore progressive taxation and reverse decades of regressive taxation tendencies that shifted the burden from corporations and the rich to the middle class, and working poor,
  • nationalise some of the major banks and also companies and direct their investment strategy towards a transition to green carbon neutral technologies and new public transport infrastructure for every single major US city.

These are necessary first steps. Unless and until the administration and the people who put Obama into power begin to demand and mobilise around a programme rather like this - the crisis will continue and indeed the roller coaster ride may well get even more precipitous (as it did throughout the 1930s).