Tuesday, December 23, 2008

Yes, it could be worse than we would like to think

So says economist James Galbraith in The Case for Spending More Washington Independent 12/17/08:

We are in a full-fledged debt deflation, a credit collapse. It is not just an unwillingness to lend. It is also an unwillingness to borrow, and a collapse of the collateral – of home values and secure incomes – which people need in order to borrow. This is a failure at the very heart of the system, and if left untended it could both continue spiraling downward and go on for many years.

This is not a shock, like oil prices hikes or high interest rates, to a healthy system. It is not just worse than previous recessions. It’s qualitatively different. There is no source of growth in sight. Consumption and investment are being hit hard. And with the flight to the dollar, exports, which have been the one bright spot this past year, are set to suffer a sharp blow. We now have to address the economic crisis, recognizing that we have just one shovel left in the shed, and that is public spending. [my emphasis]
Not to freak anyone out just before Christmas, more than they're freaked out already anyway. But you'll need something in mind when your Republican relatives start telling you how the New Deal caused the Great Depression, right?

Galbraith's broad policy suggestions:

  • Revenue-sharing from the federal government to states and localities to replace tax revenue lost at those levels. Which is, to put it mildly, a serious and immediate problem. (See California counties brace for the worst by John Wildermuth San Francisco Chronicle 12/22/08; Chiang issues harsh warning on cash crunch Sacramento Bee Online 12/22/08. Chiang being the state Controller and the harsh warning being that California could be basically bankrupt in two months.)
  • Create a federal Infrastructure Fund that could loan money to states and localities for capital projects.
  • Set up a present-day version of the New Deal's Reconstruction Finance Corporation (RFC) which rescued companies with "a combination of loans and workout plans".
  • "[R]educe the age of Medicare eligibility to the age of 55." That would relieve businesses of significant healthcare costs. "And it would provide the opportunity for many workers who would like to retire but won’t do so because they can’t afford to lose their health insurance".
  • Provide assistance for overstretched mortgage borrowers "to save the existing housing stock, stop the spread of blight, the abandonment of homes, and the homelessness that results from an unchecked wave of foreclosures".
  • Increase Social Security benefits beyond the cost of the regular cost-of-living adjustments.
The things Galbraith proposes go far beyond anything that has been considered respectable by our opinion-makers and political leaders, for the most part, until a couple of months ago. But, as he says, "The risk of doing too little is far worse than the risk of doing too much."

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