Alternative Insight

The Economic Crisis
Part 3 - Towards a Solution

The well intentioned Obama administration preserves concepts that have guided United States economic life, even if preservation conflicts with a lasting recovery. The preservations accommodate what is considered to be a free enterprise system, but what has shown itself to be a free wheeling and free money system. Although creating imbalances and shocks throughout the world and being mainly directed to benefit multi-national corporations, the policies maintain a global system. The benefactors of globalization praise the socialization of the international economic system and, except when policies benefit them, criticize proposals for regulating and socializing aspects of national systems. Considering a global landscape littered with closed banks, boarded houses, fallen enterprises and disgruntled populations, can't we conclude that the present economic system needs an overhaul? The economic system ran less on capital re-investment and more on handouts from the government, from cheap credit to consumers, and from dubious financial arrangements. The world's richest nation didn't behave well enough, didn't produce enough, didn't save enough, didn't spend wisely enough and didn't place its people ahead of its money managers. Smug economic planners self-congratulated themselves with slogans and ignored contrary expressions. What a disaster.

Compounding the 'unforecasted' decline, we have unproven recovery mechanisms. President Obama has conceded that after temporary recovery, the U.S. economy can't return to the past, a good start, which is marred by a difficulty - those who guided the decline have significant positions in guiding the recovery. From where do the advisors obtain their information and with whom do they consult? Economists differ on almost all recovery plans, making the entire process a piece of guess work, but economists are good at picking up the pieces after faulty guesses.

So, what to do? Well, one approach is to take the 'did nots' and turn them to 'do's.'

Reverse the thrust
The government's principal thrust to relieve the economic crisis replaces consumer debt and spending with public debt and spending. By this endeavor the government certifies objectionables; debt has driven the economy and the government has no innovative tools to thwart the downfall. Most of the public spending is directed to social programs - a worthwhile objective - but isn't the procedure backwards? Doesn't the U.S. need viable and productive industries to provide wages for spending and collateral for stimulating credit? Isn't credit secure if there are active industries that employ workers? Isn't credit only an addition to purchasing power? Let's also be aware that a major portion of easy and uncontrolled credit might continue to purchase imports, which means other nations accumulate reserves while the U.S. accumulates debt. The debt cannot be repaid without continuous economic growth, and economic growth cannot occur without industrial revitalization.

Industrial revitalization is not a random act but favors export industries and industries that can compete with imported goods. By this action, money and purchasing power remains within the U.S. borders. Yet, President Obama's plans don't sufficiently consider assistance to export industries, which reveals a lack of understanding of the need for investment in those industries.

Investment in manufacturing also revives a service industry, which, in an industrial economy, depends initially upon spending from wage earners of a huge manufacturing industry. Unless credit is used, services cannot be purchased without the purchasing power that emerges from worker payrolls. The latter payroll is the catalyst for spending on services. A spiraling and multiplying effect allows worker expenditures to ripple through the service economy.

Another reason for increasing exports is to repair a crippled globalism.

Making globalism effective
Some economic pundits claim the economic crisis started from an imbalance between nations that consumed too much and produced too little (U.S.) and nations that consumed too little and produced too much (China). Revival of U.S. manufacturing for the export industries adjusts the imbalance and balances the current account by trade rather than by debt to foreign governments. This adjustment might be the key component for renewed prosperity.

Increased exports reduce foreign debt, increase domestic purchasing power and maintain the value of the dollar. The latter phenomenon invites foreign investment and deters investment from leaving the nation. Many central banks sense the dollar has become too unstable. Since a global system cannot be stable with an unstable reserve currency, proposals for a new international reserve currency are being made.

China, which is the U.S. leading creditor, promotes the way to establish a new international reserve currency that is detached from the currency of a particular nation. The Governor of China's central bank, “suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.” Russia follows: On March 16, 2009, Russia suggested that, “the G20 summit in London in April should start establishing a system of managing the process of globalization and consider the possibility of creating a supra-national reserve currency or a ‘super-reserve currency'.” The proposed mechanism benefits a China that has an undervalued currency, does not have a floating exchange rate and wants its reserves distributed throughout the world rather than being locked to one nation - the United States, whose currency might be greatly overvalued.

To many observers, Great Britain's refusal to lower the value of the pound, as a means to stimulate exports, was a major cause of the Great Depression. Due to World War I, Great Britain had large foreign exchange losses and needed exports to recover the losses. However, a combination of World War trade disruptions and merchant fleet sinkings, which reduced its maritime fleet, eroded Britain's trading position in world markets. Apparently, customers for British traditional exports of textiles, steel and coal had been significantly reduced during the war and the reduction remained in that condition after the war. Nevertheless, in April 1925, Chancellor of the Exchequer, Winston Churchill, made the pound convertible to gold at a level that made British exports more expensive on world markets. Economic recovery immediately slowed. To offset the effects of the high exchange rate, the export industries attempted to cut costs by lowering workers' wages, which reduced purchasing power. The economic difficulties of one of the world's most powerful nations rippled through other economies and eventually caused a global depression.

Fast forward to year 2009 and we find the United States with a severe trade imbalance, refusing to lower the value of its currency, and asking automobile workers to cut wages in order for its exports to be competitive.

If the U.S. is too recalcitrant, China is not easily intimidated. Imagine the effects of having the Asian dynamo dump its reserve dollars - the dollar will fall precipitously, U.S. credit rating will be degraded, and the U.S. could face super-high interest rates or bankruptcy. A more appropriate balance of trade makes either likelihood unlikely. Wouldn't it be preferable that the U.S. retire its debt with China by selling goods to China rather than by signing IOU's?

Reforming globalism does not stop with establishing a new international currency. Continuous shifts in labor, manufacturing, and resource usage create constant dislocations and cannot go unchecked. The U.S. government claimed that the failure of insurance company AIG could bring down the entire global economic structure and AIG management claimed that bonuses were necessary to maintain a few hundred AIG employees or AIG would go bankrupt. We have learned that the health of the global economic structure depends upon a few persons in one company (AIG). Can that be true? If so, can that be permitted?

Meanwhile, U.S. automobile workers, who had labored for decades to improve their wages and benefits, are being forced to make concessions; a retrograde procedure that shows a globalism malfunction. Globalism is evolving into a race to the bottom, which fortunately does benefit the bottom, but as shown, can soon leave everyone empty.

Globalism must benefit all peoples, including those of the western world, and not primarily the multinational corporations who seem to be controlling the global economies for their own purposes. Trade agreements need to be rewritten with agreements on protection against global warming, environmental deterioration and overuse of natural resources, and with provisions for medical and social security benefits for all populations.

However, before the Obama administration works to reinvigorate the global economic system, it must first get the U.S. system in order. This arrangement is guided by tax policies, regulation, and economy restructuring.

Tax Policies

Who is going to pay for the huge government spending in the recovery programs? It must be the U.S. public, the conglomerate of wage earners, investors, businesses, pensioners and government workers who comprise the U.S. economy. The value of a particular program is a matter of debate. The distribution of payments is also debatable, but not debatable is that taxpayers (and previous tax cheats) must shoulder the burden. There are good policies and bad policies - is the government spending revenue properly? There are not good taxes and bad taxes - only fair taxes- is the government charging taxes fairly?

Those who constantly shout for lower taxes equate with those who don't want to pay their fair share. Never mentioned is that taxes are already low. Not readily apparent is that taxes have been lowered by 'tax expenditures,' which are special tax benefits to certain kinds of taxpayers or certain activities engaged in by taxpayers. These “tax expenditures” are the deductions, exemptions, and credits to taxpayers. They decrease government revenue, rather than increase expenditures. The home interest deduction, 401K plans, exclusion of employer contributions for medical insurance premiums and medical care are examples of revenue lost to the federal government as a result of tax expenditure provisions. From A New America Report - Tax Expenditures and Social Policy, Part 1, April 2009: "For fiscal year 2009, the federal budget includes $948.157bn in tax expenditures—55% more than all non-defense discretionary spending ($609bn)—with more than $700bn going to individuals.....and, three expenditures alone will cost the federal government nearly $2 trillion in foregone revenue over the next five years."

Most of the tax expenditures benefit the more wealthy taxpayers. From the same New America Foundation Report:
"According to the Center on Budget and Policy Priorities, the bottom 20% of taxpayers benefit almost exclusively from refundable tax credits ($89bn in 2007) such as the Earned Income Tax Credit.
By contrast, the gains from much larger categories, such as exclusions from income ($326bn) and itemized deductions ($153bn), accrue to the top income quintile, more than any other group.

Although home ownership rates did increase from 63.8% in 1986 to 69.0% in 2004, 2003 data show that high-income households benefited disproportionately from the home mortgage interest deduction: Those in the $50,000 - $74,999 tax bracket, claim an average of $4,068 in home mortgage interest deduction while those in the $200,000 and over bracket claim an average of $14,374 in home mortgage interest deduction."

It's not taxes that need to be reduced; it's the uncontrolled and less necessary government spending that needs to be reduced. Two good-starts to reduce government spending target military and uncontrolled health expenditures - not the meaningful parts of them, but the waste, corruption and excess profits that exaggerate their value. The defense and health industries earn huge profits from huge lobbying efforts. Their contribution to the security and health of the nation don't match the government expenditures awarded to them. Abolishing earmarks, pursuing tax cheats, and attending to careless Medicare spending will assure that government deficits are reduced.

Deregulation had a primary purpose - to transfer government oversight of certain industries to managers of those industries. Deregulation delegated responsibility. The corporate world of investment and commercial banking, finance, mortgage lending and other deregulated industries failed to act responsibly.

Consider the results of deregulation of several deregulated industries:
Financial - complete failure
Banking - corruption, failures and scandals
Mortgage - faulty loans, housing bust
Transportation - degradation of rail and bus travel
Telecommunication - expansion of new telecommunication services with higher costs in local telephone
Television - expansion of cable television and higher costs
Power - greatly increased costs and scarcity

Deregulation initially spurred competition, but eventually led to bankruptcies in high tech industries (dotcoms, fiber optics), mergers leading to oligopolies (too big to fail), decline of famous research institutes (AT&T Bell Labs) and consumer financing of services (cable TV), with subscribers paying increasing and excessive charges for development of extraneous services (in cable TV and wireless phones) that many did not want.

Renewed regulation starts with reinstallation of the Glass-Steagall Act, which separated commercial and investment banking industries. It continues by simplifying the complexities of bank organizations and financial arrangements that induce speculation (derivatives, short selling, credit default swaps) and prevents irresponsible investment. Regulation considers the ever rising costs of energy, higher education, pharmaceuticals, transportation and entertainment, all of which demand cost controls. Regulation does not deter industrial growth. It provides, where necessary, a common set of rules, so that competition can be equitably expressed.

Instituted methods for resolving the economic crisis are not the ultimate solution to an economic crisis. A failed economy, constantly subjected to panics and severe recessions, demands an economic restructuring.

Economic Restructuring
Restructuring of the economy does not proceed from an ideological agenda. It proceeds from needs that cannot to be compromised. Notice that despite a year of free fall to an ever increasing crisis, neither the National Association of Manufacturers (NAM), bankers associations, financial houses, nor business groups have gotten together and proposed a means to escape the crisis. Only the government has responded rapidly, actively and meaningfully.

An economy that has operated as "trickle down," by which much has been given to many, now has reached a peak, and it's time for something for all. Share the wealth and lessening inequality in distribution of income are not just idealistic expressions or populist proposals; they are sound economics. More equitably distributed wages and spending power lessen social grievances, reduce social problems and increase domestic spending. More equal distribution of wealth has also been associated with improvements in national health. Fairness to all reflects as benefits to all, including a lower need for government spending on social programs.

The less than perfect but more equitable distribution of wealth and income comes about by mandating tighter wage differentials and by adjusting tax policies. Distribution of income also corrects programs that unfairly redistribute income, such as those in which government programs favor groups simply because they are better organized, give subsidies to those who are already well off, cater to the pleas of well-heeled lobbyists, and lack means testing before shifting funds equally to wealthy and poorer citizens.

The Federal Reserve System, organized in 1912 to prevent financial panics and minimize recessions, has not been successful in its endeavors and needs an overhaul. Its fiscal policy function, which regulates credit by controlling interest rates, is a must for a free enterprise system that can easily bankrupt itself with excessive credit. Why the Fed performs poorly with a meaningful charter needs careful study. Fed limitations and how to repair its defects should consider isolating the central bank from political considerations and business interferences. A guide for the Federal Reserve System shifts from fast growth backed by excessively employed debt to smoother and more comfortable growth backed by more employed workers.

Partial or complete nationalization of essential industries has already occurred. Although considered temporary, the business community has had no problem in accepting government investment in financial, automobile and insurance firms. Nationalization is no longer a bad word but considered essential for industries that cannot regulate themselves, are easily corrupted and serve a public need that mandates their success. Properly serving public need and guaranteeing success is not always fulfilled by profit motivated enterprises. This has been shown to be true in the health, retirement, higher education and transportation industries.

Uncontrolled and ever rising health costs, health care cheating, the promotion of unnecessary drugs, and selling of disease as if it were a commodity, beg for a central authority to maintain the U.S. health system. Add the continuous increase in the elderly population and the growing spread of pandemic diseases and the federal government will have no alternative to being the manager of a national health plan that cares for all its citizens. The disease factor has conditions similar to a wartime crisis that can only be resolved by governmental authority.

Coupled to a national health plan is a national pension plan. Corporations have complained that pension plans and contributions to Keogh plans jeopardize their operations. The Social Security system has degraded to a pay-as-you-go plan by which the social security taxes (FICA) of the employed directly support the benefits of the retired. The U.S. already has a 'quasi' national pension plan. Why not make it definite and relieve the stress and burdens of corporations and citizens who ponder all their life for meaningful security?

Public federal, state and local funding for higher education is already impressive. Nevertheless, the high cost of tuition in prestige universities continues the process by which those who control the wealth of the nation pass this control on to their heirs. The U.S. trains the advantaged rather than giving advantage to those who most need training. President Obama has recognized this lack in higher education and is remedying the problem. Nevertheless, an improved effort, which supports state funding of higher education and assures U.S. leadership in mathematics and sciences rather than in financial scheming and scams, is appropriate.

The transportation industry has forfeited its right to convey passengers. The airline industry has never shown an overall profit since its inception. Bankruptcies, mergers, and cut-rate airlines, which force out well constituted airlines and then turn sour, have characterized the fliers in the skies. Bus lines for short term travel have become awkward and slow movers of people. The once esteemed locomotive industry still does well in moving goods cheaply and efficiently, but has distanced itself from passenger travel. This leaves the public with its ever present automobile and an inefficient use of energy resources.

Mass transportation is a high priority for the U.S. consumer. Effective in most other nations, even for short distances, successful mass transportation systems can be less expensive and more energy efficient than personal transportation systems. Integration of airline, bus, train and even rental autos into one huge system that uses available advanced technology, presents an opportunity to create a more comfortable, less congested, less expensive and more energy efficient people mover infrastructure that provides great benefits to the economy. President Dwight Eisenhower's most popular contribution to the U.S. economy was the construction in 1956 of the interstate highway system. Fifty years later, the interstate highway system needs to be complemented by a similar government plan for mass transportation, which has potential to be the most popular contribution to a renovated U.S. economic system.

Of course, those who have all they need will fight to keep more than they need and deny needs to others. They will call everything that doesn't satisfy their greed as socialist. Their pleas will fail. Those who enjoy reading about the rich and famous are now realizing they have been deprived to make others rich and famous.

alternative insight
may, 2009
slightly updated, Jan 2010