Cross posted from DKOS and the European Tribune. All recomendations appreciated.
There seems to be a now near universal consensus ranging from the moderate left to the far right that world economies need to be “stimulated” by large scale state borrowing and expenditure to avoid a global economic meltdown. The only issue in dispute seems to be where the stimulus moneys should go. Should they go – in order from Right to Left – to:
- Buy toxic assets – thus restoring the banks who own them to solvency and then letting business go on more or less as as usual. Taxpayers are sure to lose big time even if there is a recovery in asset values, and fraudulent banking practices will have been rewarded.
- Bail out banks in return for share capital. This is generally done at inflated prices to help tide the banks over and avoid wiping out existing shareholders completely (to restore “confidence” to the market!) but at least there is some prospect of taxpayers getting some of their money back.
- Force mergers and acquisitions to “rescue” insolvent entities. Problem is that this creates even bigger “too big to fail” entities which then require even bigger bail-outs – see Citigroups take-over of Wachovia which turns out to have been in better shape than Citigroup itself…
- Bail out “too big to fail” real economy entities like GM, Ford and Chrysler – without addressing the reasons those entities were failing in the first place – even in the good times.
The above solutions seem to be largely about trying to save Capitalism as we know it, keeping existing shareholders somewhat sweet and “confident in the markets”, keeping existing managements in place, and doing nothing very much structural to prevent similar problems elsewhere or even re-emerging in the same place after the initial bail-out moneys have been expended.
Indeed if the ultimate refuge is to be “too big to fail”, the logical solution is for corporations to engineer a series of mergers and acquisitions to ensure that the taxpayer can always be held to ransom. So what are the alternatives?
The underlying problems are that assets were hugely over-inflated, those who have borrowed against those assets often cannot afford to pay the interest on those loans, and the resultant lack of confidence and liquidity in the markets is destroying the ability of the real economy to function. Banks simply aren’t lending in sufficient volumes, and consumer confidence is so low that even previously profitable firms are in big trouble.
So why not address these problems at source rather than filling the coffers of those who were so greedy and incompetent they could not even run a sustainable business in the good times?
So what are the elements of a more equitable and sustainable solution?
- Reduce interest rates (already happening) which improves the ability of borrowers to repay, reduces foreclosures, improves consumer confidence, and helps to restore some value to assets which have now probably bombed to below their longer term sustainable values. This is also socially (and inter-generationally) more equitable as it reduced the tax those who don’t have money have to pay to those that do.
- Invest in physical infrastructure (public transport, sustainable energy, communications) which can increase the longer term productive capacity of the economy and thus reduce the effective burden that paying interest on all the additional state burden will create. In practice, almost no state actually repays its national debt – but it funds the additional interest of additional borrowing by increasing its productive capacity. Thus (whatever Keynesians might say) it is preferable to invest in potentially productive assets rather than pay people to dig holes and fill them up again.
- Invest in social infrastructure (schools, hospitals, social housing, medical benefits and social services) because this addresses many of the underlying problems at source – unemployment, lack of consumer confidence, lack of personal liquidity, a generally more risk averse culture, and the huge social inequalities created by free market capitalism untrammelled by appropriate regulation and social provision.
There is one fundamental insight which must be addressed in this debate and which is almost as invisible to the dominant narrative as the “invisible hand of the market” is to everyone else: Long term, gross inequality of income and wealth is not only unjust, but hugely inefficient as well.
Money borrowed and spent in bail-outs to the rich accentuates the fundamental problems of the accumulation of capital in fewer and fewer hands as identified most famously by Marx. Firstly, that wealth tends to be spent disproportionately on conspicuous consumption by the rich rather than productive investment in the real economy. Secondly, there is only so much that even the super wealthy can consume, and so it is never sufficient to generate consumer demand sufficient to reflate a major economy as a whole – even with some “trickle down” effects. Thirdly, the huge social tensions that result create an enormous need for expenditure on very expensive police services, legal industries, prison services and external wars designed to distract the populace from the more real problems closer to home.
On the other hand, money borrowed and spent on physical and social infrastructure creates jobs, increases consumer confidence, develops the productive capacity of the economy, reduces the costs associated with crime and gross social inequality, and creates a safer, happier, and more productive environment for all.
Thus if Obama is to spend huge amounts of money on a “stimulus package”, he should focus it on delivering on his own electoral promises of middle class tax cuts, improved medical benefits, improved educational and social services, and investing in a more sustainable and productive infrastructure for the nation. Much more of that money will also stay within the economy – creating “multiplier effects” of increased jobs, consumer confidence, and restabilising bthe housing market – than if the same money was spent on bailing out the ultra rich who simply got too greedy for their own good – and who tend to move their assets abroad in any case.
It would be a long and painful road for Obama to travel. Short term there would be some catastrophic collapses of “too big to fail” banking and industrial consortiums. But those business models have failed even in the good times, and bailing out those businesses now would be throwing more (and scarcer) good money after bad. In a few years those jobs will be replaced by more sustainable jobs in construction, renewable energy, education, healthcare, and social services. Bad wars and an explosion in social unrest and criminality will be avoided. Well run businesses will prosper in a safer, fairer, and more stable environment where the boom and doom merchants of disaster capitalism have no place.
Obama has four years to turn the economy around. Any time and resources he wastes on shoring up the Bush legacy is time and money he won’t have for his own. Continuity and confidence are important, but the most important thing is that he believes in the people who voted him into power. They are not the ones who voted for the war in Iraq and who are now waging a war against their own people. Short term movements in the Market are simply not Obama’s problem. His problem is whether the American people will have a viable and sustainable economy and more equitable society in four years time.
