The Cure for the Republican Economic Bird Flu

The Republicans/Conservatives have infected the global economy with an economic bird flu crisis. Luckily there is a cure.

The type of economic crisis that we are in consists of two distinct stages. We are now in the second and increasingly lethal  stage. This crisis is global in its scale and degree of its reach. It is affecting all of our major institutions along with the most common and traditional ways of thinking about politics and the economy. A widespread default on student loans alone could trigger another collapse.

U.S. "At-Risk" Student Loans

Empirical problem solving requires that we examine both stages and draw logical conclusions about how to repair the damage already done. Then take steps to correct it. The way
I see it,the two stages for this crisis are:

  1.  How did we get here?
  2. What can we do now to prevent the worldwide economic meltdown towards which we are hurtling?

Phase 1: How We Got Here-The financial crisis of 2008

The current economic downturn is a continuation of the financial crisis of 2008, during which the bankruptcy of Lehman Brothers (the world’s third-largest investment bank at the time)
and the subsequent consolidation of other large commercial and investment banks jeopardized the entire financial system with imminent collapse.

Banks had spent the previous decade fueling a credit boom with increasingly risky loans. They were led to believe (primarily by American International Group, Inc.) that they could manage these risks, which encouraged further risk-taking with not just investors’ deposits but commercial businesses’ deposits as well.

The result was that bad debts became stacked up on more bad debts inside bank balance sheets, which were intentionally hidden by increasingly complex financial products.

Confidence in the whole system lurched when those at the bottom of the debt pile – the US subprime mortgage holders – began to default. Lehman Brothers subsequently collapsed due to fraudulent claims by AIG that they were adequately reserved for such an occurrence. Because Lehman was so large, its failure created suspicion regarding the viability of the rest of the entire U.S. financial system.

The response of western governments was to use their own powers of borrowing to support the banks. The Bank of England estimates that the total cost of bailing out the UK financial system alone was £1.3 trillion. That sum represented more than ten times the entire NHS budget.

Stage 2: The State Debt Crisis and Where We Go From Here

Through political and actual arm-twisting at the end of George W. Bush’s second term in office, the immediate crisis was halted but not resolved. Yes, private financial institutions were saved from collapse. But the cost of preventing their collapse was increased public debt.

A major political fabrication by the GOP has been that increased public indebtedness was caused by excess public spending. The truth however, is that it is the direct result of the 2008 financial crisis.

But states, too, can default on their debts. The risk of this increases when economies are weak,  since they cannot find the funds needed to repay debt through taxation. And across the old developed world, in North America and Europe, economies are stagnating.

National debts are held inside the banking system. Sovereign default therefore threatens banks.

This is the stage of the crisis in which we are now embroiled.

  • A financial crisis that was avoidable and likely criminal was transformed into a crisis of sovereign debt through bailouts.
  • A recession that cut tax receipts and raised the cost of life-saving benefits is now morphing that sovereign crisis right back into the financial system resulting in an intertwined public and private debt crisis.

A crisis that Conservative political parties across the globe are attempting to use in a massive power grab at the expense of the “lower classes” of citizens.

The Economic Bird-Flu That Started in the U.S. Spreads to Europe

The crisis of sovereign debt is most acute inside the Euro zone because of the properties inherent in the manner in which a single currency operates. The euro, created in 1999, has suffered chronic unevenness. Each country, as a requirement of entry, fixed its exchange in relation to other euro members. Over the last decade, northern Europe and Germany in particular squeezed real incomes, cutting costs for its exporters. But fixed exchange rates meant the other countries could not devalue in order to compete.

Although exports from the north became cheap for the south, large trade surpluses (where a country exports more than it imports) developed in the north, especially in Germany. These naturally corresponded by creating large trade deficits (where imports exceed exports) in the south.  Since export earnings were recycled through European banks, as debt which flowed straight back to the south, this enabled the south to keep on buying from the north.

The result was foreseeable and most certainly expected. Surplus and savings on one side (Germany and to a lesser extent France) were inevitably matched by deficits and debts on the other (Greece, Spain, Italy, Ireland, Portugal).

This imbalanced system would have continued until Germany virtually owned the rest of the Euro zone countries, but the plan was shattered by the events of 2008 in the U.S.

European countries already indebted in the south, were suddenly saddled with much higher  debts essentially overnight. Greece, the smallest and most vulnerable,  was the first to violently feel the strain. Its sovereign debt became almost immediately unpayable, with interest payments alone forecast to reach 15 per cent of GDP next year. Greece will almost certainly have to default, despite loan after loan from Germany at exorbitant interest rates.

French and German banks hold about 69 per cent of Greek debt. A messy default by Greece threatens financial calamity, despite Greece’s total GDP being roughly the same as Delaware’s. But Greece’s creditors cannot yet agree on how to manage the process.

Default is inevitable for Greece and a likely scenario for Spain, Italy, Ireland and Portugal. The inevitability of this risk is freezing up financial markets across the industrialized nations of the world resulting in the equivalent of a system that is deadlocked. The U.K. has officially slipped into a double-dip recession.

The cure, according to Conservatives in both Europe and the U.S. Republican Party?

Austerity and Stagnation.

Conservative politicians in power across the developed world have demanded austerity by cutting public spending and(supposedly) enabling debts to be repaid quickly…but from where would this miraculous repayment come?

Austerity cripples economic growth. This is not even questionable, it’s a given. An indisputable fact. As spending cuts bite:

Austerity vs U.S. Economic Solutions

  • Firms sell fewer goods and services
  • They cut salaries and make enforce redundancies
  •  Economic activity freezes up because of weakening demand for goods

This is exactly what Greece, Spain, Italy, Ireland, Portugal, and now the UK are encountering.

Austerity benefits financial assets (normally held by wealthy individuals or corporations) at the expense of economic activity (demand). It is self-defeating, it takes the greatest toll on the poor, and Conservatives know it.

The Economic Bird-Flu That Started in the U.S. Is Now Spreading to Asia As Well

The slow decay of the developed economies is now even menacing fast-growing new centers of economic growth because of fewer and fewer customers for goods and services produced.

  1. China, which had blown through the previous financial crisis, is now experiencing its own recession, with orders declining as its major export markets stagnate.
  2. As Japanese experience shows, stagnation, compelled by debt, can last for decades.

A genuine global recession has gone from possible to probable.

The Cure for the Economic Bird Flu

The old system and the methods for economic models are clearly broken beyond repair. A new economic model is obviously needed. There can simply be no expectation that a return to the old economy, fueled by debt and carbon can succeed. At least not for the general population.

New ways of thinking about the economy are urgently needed, that challenge the dominance of financial markets and debt-fueled growth. It’s time to:

  1. Radically transform the financial system from democratizing the banking system to writing off bad debts and stamping out unbridled speculation and tax avoidance.
  2. Restart productive economic activity.

That means ending austerity, ensuring banks lend to businesses,  and using public investment to create new, low-carbon infrastructure.

  1. Refocus and re-balance our economy with a plan for jobs that regenerates local economies, reduces inequalities and establishes a 21st century industrial strategy.
  2. Overhaul the tax system to shift the burden off jobs and incomes and onto assets and pollution.

Even if growth returns, we cannot go back to the old ways any more than we can go back to calculators, plumb bobs, or protractors.

The answer to all of these problems is simple in nature and in implementation. It’s not perfect, nor is it perfectly fair. But it is more fair, it’s virtually immediate, and it’s more effective than any plan that has been mentioned by any politician or economist that I’ve seen.

I keep coming back to it and I will state it again in clear and simple terms: It’s simply:

The One-Penny-Solution

As of the end of the governments 2011 fiscal year, the deficit was approximately $15 trillion dollars. The U.S. can run, but we simply cannot hide given the rocky state of Europe and China’s problems. Neither can we continue to ignore our huge deficit without running the risk of total economic chaos given the facts above regarding Europe’s pending failure to effectively deal with their own currency/fiscal problem.

  • FIRST AND FOREMOST: In order to make this a plan that is bullet-proof to political piracy, the law would have to stipulate that the funds collected under this assessment can be used only, and irrevocably for debt reduction, as of a static date and amount, (i.e. FYE 2011 & the Federal Deficit was approx. $15 trillion) unless 80% of both houses of the Congress and the President agree to change it in any way(i.e., in case we’re attacked). But an 80% approval of BOTH  Houses of Congress and the President’s signature would assure absolute necessity.
  • The paragraph ABOVE would alleviate any “tax and spend” argument because the sole purpose of this plan would be deficit reduction and to could never be used on new spending. Furthermore, once the deficit threshold amount as pre-determined is reached, the entire plan ends. Again, to make a change would require 80% of BOTH Houses of Congress to approve eliminating any chicanery involving ad hoc amendments.
  • Part 1 of the assessment phase would place a one-penny-per-dollar Federal surcharge on all consumer goods AND services for the sole purpose of being applied to the Federal Deficit as defined in paragraph #1 above.
  • Even at today’s extremely low GDP of $15 trillion, the consumer portion of the deficit reduction tax would reduce the deficit $150 billion per year. This is a greater reduction than was the mandate for the failed so-called “super committee”. Because the surcharge is tied to consumption, as the economy recovers and GDP increases, so too would the rate of deficit reduction. In Year #2, if GDP = $18 trillion, then $180 billion would go towards reducing the deficit, and so on.
  • Part 2 of the assessment phase would be tied to Wall Street and is already supported by a growing number of concerned citizens, organizations and even OccupyWallStreet. Americans for Financial Reform, which is a coalition of more than 250 economic, union, and activist groups, explained why it’s backing the tax:

A small tax (i.e., 1/3ȼ on all financial market transactions) has the potential to raise significant revenue and simultaneously limit reckless short-term speculation that can threaten financial stability.” This one small surcharge will add trillions more to deficit reduction over time for those who enjoy Capital Gains favorable income taxation.

  • No exceptions, no exemptions. No ceilings, no floors. Every citizen, every prisoner, every non-resident alien, every temporary worker, every single person enjoying the rights and freedoms that come with literally being on American soil, would be contributing to reducing the debt created over the last forty years that now threatens the U.S. economy. There could be no finger-pointing, no blaming “the other party”, no “class-warfare”. This financial crisis is tantamount to a world-war crisis. In World War II EVERYONE in the U.S. was rationed on sugar, rubber products, etc. This deficit reduction/demand-growth plan would be a small price to pay for not only financial freedom, but a path back to fiscal responsibility via increased growth through both higher employment and higher demand.
  • As lagniappe, the actual mechanics of the plan are easily implementable, as most states are already set up for collecting and remitting sales taxes; these surcharges would instead go to Uncle Sam’s debt. This would also prevent any “tax and spend” possibilities because the sole purpose of this plan is deficit reduction; never to be used on new spending.
  • By expanding the tax base to encompass all goods and services, everyone in the country would be contributing to help alleviate the mess. No one could claim “tax and spend”…..or, ”the poor pay nothing”…or, ”the rich should pitch-in too”, etc. The wealthy could not employ armies of accountants to avoid the taxes; poor people receiving government assistance would still be contributing to the deficit reduction; criminals, non-citizens, even prisoners who currently purchase items from correctional commissaries would be contributing to this deficit reduction.. It would virtually assure that every person in the country is contributing to the debt without placing an impossible burden on any one group.

“Normal” politics could resume. Balanced budgets could be argued. Appropriations could still be based on, well, whatever the heck they base them on now. Politicians could continue berating one another.

The important part of this entire plan is to remove the cover from whom politicians have been hiding for far too long. Their constituencies.

If Republicans want to still make bogus claims that people earning wages over $1million per year after taxes are “job creators”, let them sell it to the public. Make a balanced budget amendment with teeth in it. None of it would be tied to this plan. Smokescreens would disappear. But by gosh the deficit would be retired, and the laws of supply and demand would once again reign supreme.

Once legislation is on the books, politicians, even from opposing parties, have little incentive to change it. Markets don’t want counterproductive measures. For credibility, what matters is the nature and the composition of the tax, the clarity of the purpose, and a finite schedule.

This one simple plan would lower unemployment faster, and put us on a path to fiscal health. And, by strengthening our growth, it would help the world economy, too.

This policy is not nuanced. It is a sledgehammer. The key element is dynamics. It uses a credible plan to lower a long-term fiscal problem, while not taking immediate austerity measures that would raise unemployment when what the U.S. needs most is growth.

Current measures aren’t working. Sooner or later, politicians and citizens will demand a plan that does.

This is that plan that will save the world economy. And it’s based on one penny-not politics.
Harvey Gold

 

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