A Brighter Tomorrow

With the country facing enormous challenges and few solutions in sight, we convened a Diablo Think Tank to ask some of the brightest minds in the East Bay a not-so-simple question: How do we fix it? Here’s what they said.



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Key to topics:


                                       

Politics      Social Security      Health            Energy          Education        Economy


"Craft a New, Smarter Stimulus to Create Jobs"

Jack Rasmus

Expert on Economics

Professor, Saint Mary’s College


 

Jack Rasmus is a professor of economics and politics at Saint Mary’s College who has closely studied the current economic crisis and the government’s response to it. His latest book, Obama’s Economy: Recovery for the Few, due out in March, offers a number of alternative responses to what he calls our “epic recession.” 


Can you explain the current economic crisis, which many people find to be very complex?

Understanding what needs to be done requires understanding what happened and why it didn’t work up until now. We are in a unique kind of a contraction. It’s not a normal recession. Therefore, normal policies—tax and spending, interest rates and so forth—have not gotten us out of it.

We didn’t get a broad-based recovery. Why is that? In the $787 billion [stimulus package], about 38 percent was tax cuts and another 38 percent was subsidy spending—meaning money given to the states, to the unemployed, subsidizing health care costs, and so on. And maybe about 10 to 15 percent was in long-run infrastructure projects.

My argument is that that was ineffective on three accounts. First of all, in this kind of a financially induced contraction, you have a problem with confidence. And tax cuts do not get translated into investment, which is what you need to create jobs. They get hoarded. And business needs to be able to see people who are going to buy their products.

[Second,] Obama’s fundamental strategy was: We’re going to give subsidies to the states; we’re going to give subsidies to the unemployed; and that will buy us a year, after which the tax cuts will take effect, and the spending will occur. But the spending did not occur. … Subsidies don’t create jobs. You need to invest and create jobs to have a true sustained recovery.

And then we had another 10 percent, 15 percent in long-term infrastructure, alternative energy, electrical grid, and all this stuff. It did not have a short-term impact. So, we’re stuck three years later with the number of unemployed we had three years ago: 25 million people [according to the U-6 unemployment rate].

There are three areas that Obama has not addressed. One, jobs: With 25 million people unemployed, you’re not going to get consumption. There’s been no real jobs program except tax cuts. Second, housing: There’s been no housing program. [Third,] Obama never fundamentally addressed the problem of the state and local government financial crisis. He gave them temporary subsidies. So, we have those three crises that have not been addressed policy-wise that are causing us to be stagnant and bouncing along the bottom.
 

“You need to invest and create jobs to have a true sustained recovery.”


So what do we do now?

One of the hallmarks of the last three years is that large corporations are sitting on $2 trillion in cash, not investing it. At the same time, the Federal Reserve spent $9 trillion to bail out the banks. We gave them a lot of liquidity, but we didn’t get rid of their bad debts. So, the banks are reluctant to lend, mostly to small and medium business—construction firms and retail and so forth. In other words, the money that went to the bailout got bottled up.

Somehow, you’ve got to restructure the banking system so the banks will lend.

We need to create a utility banking system in this country. What that means is that the government becomes a bank for consumer loans and consumers only. There’s no reason why the government should not issue money—not through the banks, but directly—to stimulate housing. We could be loaning people money to buy homes at 3 percent—the 30-year bond rate. That would stimulate the housing industry.

The government owns most of these [bad] mortgages. They’ve been sold to Fannie Mae, Freddie Mac. The government could go in there and say, OK, we’re going to adjust the principal and interest so you can stay in your home, or so your home isn’t negative equity. That would free up an awful lot of money for consumption.

Now, on jobs: If business won’t invest in jobs, the government has to directly invest in jobs. To do that, you need to reform the tax system and tax structure in order to spend on direct job creation—short-term, immediate job creation—without increasing the deficit.
 

So, raise taxes.

Now, where would you raise taxes? You’ve got $1.4 trillion—multinational corporations holding their cash offshore. Not bringing it back because they want to avoid the 35 percent corporate tax rate. There’s also about $4 to $6 trillion that’s been put in 27 offshore tax shelters in the last 30 years. That’s where all the wealthy in the world are stashing their cash so they don’t pay their taxes. Repatriate that.

And the dividends and capital gains tax rate at 15 percent is ridiculous. We’ve never had a situation where it was so low and so far below the actual top income tax bracket. The top income tax bracket is 35 percent, but the wealthiest 1 percent of households pay on average about 16.6 percent. There’s no reason why they shouldn’t be paying the historical long-run average that they had been paying until George [W.] Bush came into office.

You’ve got to attack debt, and you’ve got to attack income distribution, if you want a long-term, sustained recovery.
 

Speaking of debt, what about cutting the deficit?

If you think austerity works, look at Greece. You cannot deficit cut your way out of a recession; it’s just not possible. It’s not that fiscal policy is wrong; it’s that the type of fiscal policy was ineffective. [The stimulus] was a terribly crafted recovery package, and we’re seeing the consequences of that. [But] austerity will work even less. We are on our way—with a recovery that can’t get going— into a double dip. And we’re going to cut even more.

 

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