Calling All Keynesians
At a time when the economy needs vast and purposeful help from the federal government, America faces a peculiar handicap: Neither political party really believes in liberal economic intervention or knows how to do it. Democrats are still not over their infatuation with Hooverite fiscal austerity--embracing budget surpluses, bemoaning deficit spending. Other than serving their wealthy friends, Republicans work at dismantling government's ability to steer and stimulate the private economy. Both parties are enthralled by the most conservative advisers, Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Robert Rubin (now at Citigroup), who counsel caution. Democratic Senate majority leader Tom Daschle expressed doubts about any stimulus program, fearful that next year's budget might go into deficit.
This reluctance to act boldly will have to change very quickly. The economy was already in contraction before September 11. It needs hundreds of billions in new federal spending--yes, deficit spending--to counteract the great shrinkage under way in consumption and business investment. No one knows the severity of what's unfolding, but false optimism will make things much worse. Acting too fast and spending too much have economic risks, but none compare to what can unfold if Washington is too timid.
Back to basics. As John Maynard Keynes and American originals like Marriner Eccles, FDR's Fed chairman, taught, when the economic engine starts to seize up, government is the only force capable of jump-starting it--pulling idle capital into real investment while bolstering the incomes and confidence households need to buy things. It does this by borrowing the money from private sources--running large federal deficits financed by Treasury bonds--and spending the money in ways that generate waves of collateral economic activity. Deficit spending is not an unfortunate side effect. It is the necessary cure. America is especially vulnerable now to a deepening contraction because Washington is flush while companies as well as households, particularly those in the bottom half, are mired in debt. An aggressive government stimulus program is essential to regenerate the wherewithal--and the motivation--for business and families to renew their spending. If we are truly at war, the government must also do this in ways that renew social trust and a sense of equity. Patriotism cannot endure if the reigning ethos continues to be "winner takes all."
The $15 billion bailout for the airlines is a disgraceful start. Washington couldn't avoid aiding these terribly mismanaged companies, but it demanded nothing in return for the taxpayers or the workers being laid off by the tens of thousands. When Congress bailed out Chrysler twenty years ago, Lee Iacocca volunteered to work for $1 a year, labor got a seat on the board and the government took warrants in exchange for its cash infusion, later redeemed in full. This time hapless Democratic Party leaders refuse even to demand that the CEOs stop ripping up union contracts. The insurance industry is next in line for a handout, and there will be others. If more bailouts follow the same pattern, America's newfound unity will swiftly curdle into bitter resentments.
The agenda must be of sufficient scale to make a difference--and pump out money quickly. Top-end tax cuts, the Republican answer to all questions, are particularly inappropriate; companies and capitalists aren't likely to invest when consumers are cutting back. Particularly laughable is the reflexive Republican call for a capital gains tax cut, as if investors need an incentive to sell stocks.
The government's $40 billion emergency appropriation for reconstruction and the military is only a hesitant start. Washington should immediately ship $40 billion or $60 billion (or more) in revenue sharing to state governments that are being forced by balanced budget requirements to cut spending or raise taxes. And rather than cut domestic spending to pay for the huge bundle just approved for the Pentagon, Congress should fully fund domestic programs--particularly those in education, nutrition, housing and health. Congress should also act immediately to aid those workers being laid off through no fault of their own. A sensible program would extend unemployment insurance to thirty-six weeks and raise the average benefit to $300 a week. Special provisions are needed for short-term, contract and part-time workers, who would otherwise not be eligible for assistance. The Economic Policy Institute estimates that a decent unemployment insurance program might cost $30 billion a year.
On a grander scale, America has huge unfilled public investment needs that can easily cost more than $1 trillion over the next five years. The money can buy things people and society want and need:
§ Education. School boards have a backlog of thousands of desperately needed school construction and repair proposals. A $40 billion school fund could generate construction jobs and contracts across the country in a matter of weeks.
§ Health. One essential defense against terrorist attack with biological or chemical weapons is to rebuild our decayed public health infrastructure--laboratories, public hospitals and clinics, and properly staffed public health departments with modern computer and communications systems.
§ Transportation. To counter highway congestion and the nightmare of air travel, the country needs to develop alternatives like high-speed trains. This takes planning and time, but many projects are ready to go. For example, MAGLEV Inc., a Pittsburgh consortium, has been seeking federal funds to demonstrate a high-speed train that could get to Philadelphia in ninety minutes.
In addition, Congress can swiftly get money into the hands of those most likely to spend it. The next tax rebate can be targeted to low-wage workers who got nothing from the Bush tax cut; it would pump about $10 billion into the economy. The government could require all contractors to boost pay to a living-wage level. Aggressive new wage standards should be part of the government's quid pro quo for corporate bailouts. Indebted families need "stretched out" payment terms so they can keep spending.
After decades of conservative government, the list of needs and possibilities is long. Alert citizens must understand that it's time for Washington to act boldly, on a scale commensurate with the challenge. They must awaken Washington politicians from the stupor that suffocates imagination.