Our Recovery Dilemma

What we all know and don’t like to say is that when all the federal fiscal balancing is done, now and for future years, we will still wind up with both austerity and increased debt in a recovery that will take a long time in some areas and very, very long time in others.  Sustained growth would yield higher tax revenues, lower safety net costs and tolerance for the 15% or so increase in payroll taxes that would make our Social Security and Medicare cost problems “go away” without reductions in benefits.  How can we get there?

OUR PRESENT PLAN – “PUSHING A WET NOODLE”

Wary of public debt for Keynesian-type stimuli, we have resorted to experiments in creating artificially low interest rates.  We should know better.  A little lower rate won’t reverse basic business judgment.  The problem has never been that there is not enough money lying around, it’s that not enough is being used productively.  To accomplish that goal, we must draw the money out by creating some better lending and investment opportunities.

BETTER INGREDIENTS – THINGS THAT HAVE WORKED! 

·         The Federal Reserve system – a good idea, keep it.

·         Federal Reserve Notes – keep them, for the vast majority of our currency needs.

·         United States Notes were issued as a currency between 1862 and 1971, paying for the Civil War and a plethora of expenditures that built the American economy.  Some remain in circulation today. They have circulated side-by-side with Federal Reserve Notes since 1913.  These are both Legal Tender Notes, value resting solely on their status as “Legal tender for all debts, public and private.” Circulated in too great a quantity, they can equally well cause inflation.  When the government needs money, it can sell Treasury Notes to the Federal Reserve Bank to obtain Federal Reserve Notes.  Alternatively, it can simply print US Notes, and skip the debt-creating. 

·         The government can spend money into the economy, lend money into the economy or lose money into the economy and in any case accomplish Keynes’ basic stimulatory objective.

·         State economic development banks and agencies have proven effective underwriters, creating investments like economic development bonds and industrial revenue bonds that sell readily to private sector investors as conservative investments without any form of public guarantees.

·         Several nations have successful national economic development banks.

·         A national economic development bank in the US would not be a federal agency and would not be burdened by restrictive mandates like the Fannie Mae, Freddie Mac, the Post Office or Amtrak.  The whole point of having such a bank would be to identify tomorrow’s profitable industries and facilitate their development as a lead lender, attracting other lenders and investors.

·         Is Solyndra a good example?  No.  A national economic development bank would be based on the best underwriting practices of private banks…no, even better than that, the best underwriting practices of state economic development banks and agencies.

·         Why a national economic development bank?   Because only it could be capitalized by the use of a limited issuance of United States Notes.  It could also attract capital into the poorer states.

·         What else would be special about it?  The abilities to use zero-cost up-front money, to concentrate investments so as to create transformed investment environments, and to be transformative for local economies.  Think Silicon Valley, or the transformation of areas like the Jersey City, NJ waterfront.

WHY BOTHER?

This opportunity for the suffering won’t come about without institutional study.  With political pessimism and cynicism now all the fashion, it is easy to lose sight of the fact that a little effort can actualize our power to do good.  Policy question:  If it is within our power to do good, shall we refuse to do so?