A Proposal to Generate A National Economic Development Bank in the U.S.

In our February newsletter we promised to present 12 ways to improve our economy using these sustainability-oriented criteria:

(1) Use of targeted investments in the economy;
(2) NO increase to the national debt;
(3) NO damaging austerity today or tomorrow;
(4) NO sacrifice of tax revenues.

Think tanks, we welcome competitors!!!

In our March newsletter we proposed the re-introduction of debt-free United States Notes. For a fuller history, see Prof. Richard Striner’s article. We noted that many economists have responded to our idea, falling into two categories: (a) those who explicitly accept it as an immediately available tool and (b) those who tacitly accept it but worry about the political aspects of change to the status quo…whether “anything good” could happen in our present political climate, or whether Congress would go to excess if it again utilized its constitutional power to print money. We do not find the latter concern to fit the nature of our present Congress, and Congress has not historically abused its power to create money in the same way it has its powers to create debt and to create austerity (as in 1936, when most economists believe the “second depression” was so triggered). None of the “reticent” economists we quoted last month has suggested that issuing debt-free United States Notes could not be done again, or that it would be difficult to determine an appropriate limit to the dollar amount issued so as to avoid any risk of “hyperinflation”… as was avoided in the $787 billion ARRA stimulus. At least an equal issuance of debt-free United States Notes should be an option free of inflation worries. They would circulate side-by-side with Federal Reserve Notes, as they did between 1914 and 1971.

Now the question is, how would they best be used? They could be used as they were in the Lincoln administration, for general government expenses. They could be used to fund infrastructure projects, again as during the Lincoln administration. A mark of the greatness of the Lincoln Administration (and the Republican Congress of the time) was that as an initially bankrupt government they not only fought and won the Civil War but also provided for the reconstruction, the westward expansion and the industrial revolution by funding a vast network of infrastructure – all without creating unmanageable debt. What a great subject for another Lincoln movie!

Despite the present excess capacity in the economy and the well-proven effectiveness of Fed measures to dampen inflation if and when that becomes a concern, we propose balancing increased demand caused by an infusion of new money by using some of it to foster increased supply of key inflation-prone items like medical care, food and sustainable energy. Along with targeting the kinds and locations of economic development most needed, these things could be done by chartering a National Economic Development Bank (NEDB) to be initially capitalized by debt-free United States Notes. It would have many of the characteristics of state economic development banks across the US and of national economic development banks throughout the world. A May, 2010 article in The Economist points out that the credit crisis of 2007-2009 was softened in major countries that have such banks, citing Brazil, India, Russia and China. The China Economic Development Bank has had a powerful domestic economy-building role as well as well as an international trade role. A recent book on it by Henry Sanderson and Michael Forsythe has been reviewed by Erica Downs of the Brookings Institute.

Our NEDB would not have to be constantly funded, due to loan repayments. With a zero cost loan fund, there would be strong prospects for profitability in all cycles, and thus for selling subscriptions. The first Bank of the United States, which was oriented to lending for economic development, drew upon subscriptions. The charter of the NEDB would protect the public interest, but the public interest overriding any limiting mandate would be that it simply operate profitably. It would create money by lending and re-lending money against “fractional reserves”, like present banks in the Federal Reserve System. It would leverage money by joining commercial banks or investors in economy-spurring loans and investments, and/or do so with state economic development banks or agencies. Money and banking is supposed to be something we’re good at. Why let ourselves be out-done by the Chinese?

A National Economic Development Bank could do much to prompt a full recovery. We can print some money and use it to acquire valuable investment shares and loan assets. We can strengthen our economy and get our debt under control without short-changing grandpa on the social security he paid into or making it more difficult for grandma to pay for a visit to the doctor using Medicare.

We’ve heard both plans…Isn’t accelerating growth better?

We Have Seen the Enemy, And It Is Not As Fearsome Now

...Let's be done with the Fiscal Cliff

A couple of years ago, the world was divided between those who thought we might yet plunge into another Great Depression,  and those who thought their Depression-type Keynesian responses might lead to a wreck of the ship of state.  Fears of debt-fueled stimuli added to fears that demographics would drown us with Social Security and Medicare costs.  “Change something!” they cried, like the mate on the bridge of the Titanic.  We now find ourselves in a corner… but is it in a sinking ship?

Tax reform is the first solution the parties have agreed to.  Unproductive subsidies are low-hanging fruit.  So are questionable deductions… but let’s keep in play the word “questionable”.  Many of these are integral to specific business decisions.  The Tax Reform Act of 1986 suddenly curtailed Historic Preservation Tax Credits, ruining investors in publicly-responsive projects.  Proper studies of subsidies, deductions and credits will require time.

Simple tax rates could be addressed right away.  Were we not paying slightly higher rates, prior to the Bush cuts? Can we place fully 100% of the burden on one class, the “rich”, and expect to have a healthy political dynamic?  It’s hard to argue we should beg from the rich or borrow money from foreign countries to subsidize our FICA taxes, when by paying about 15% more than what we are paying now we could cover the cost of benefits more of us will enjoy longer in part because of our increasing life-spans.  We should all pay a little more in taxes, even if just a very, very, little more, not as much as we did pre-Bush.  There is no reason why the upper middle class cannot take even a wee step in the direction of paying the same taxes they did in a pre-Bush, pre-McMansion mentality. 

Then comes the subject of the short-term spending cuts – those that are at least emotively critical.  An 11^th-hour formula could be an across-the-board cut of 5% to every agency – adjustments later as needed.  Those who have had to bring a construction project back on budget understand the institution of a “haircut” as a community experience.  If you absolutely have to cut 5% from an agency’s operations, you re-schedule undertakings, simplify them, bargain harder, allow a little attrition to occur, have a little Chris Christy style heart-to-heart with overly-demanding public service consumers at the “counter”, or resort to the refreshing discourse or a masonry foreman with his crew as he seeks to beat a storm front:  “Push!  Keep it moving! Push!” The crew of a good foreman knows this will only last to a needed break, and wouldn’t have it any other way.  So will properly-led government workers.  The business economy will not be as concerned over a 5% federal cut as over total uncertainty over a line of business, because they have faced 5% cuts themselves and know very well business can go on.

Well, that’s our posture for an eleventh-hour plan for the immediate Fiscal Cliff issues.  It can be accomplished with a modicum of faith that the long-term issues now have enough attention that they can be addressed within a sane time frame that Congress can control.  With 535 members of the House and Senate, why not 50 small committees to each properly study maybe 4 issues over 2 years – a couple of hundred specific aspects of our quest to bring our long-term finances under control?  Why not disallow bundling, so their work will have the best chance of producing results, or allow a line-item veto?  A lot of little and indisputable steps like cutting outright fraud in Medicare and having Medicare buy patents on drugs it buys so many of – if that can be shown to be an economic winner – would have as great an effect as packaged bills that attract televised ideological posturing spectaculars. 

How about eliminating earmarks?  How about letting the government return to creating money the constitutional way for certain purposes, by printing it, without buying every dollar needed from the private banks of the Federal Reserve System, at the cost of a significant portion of the national debt?  There are things we could do to build the economy without costing one cent to the national debt through borrowings, or through guarantees or revenue losses, as described in our last newsletter.  More ideas will come, from us and many others.  In fact, there are a lot of good ideas we can explore, if we nick away at the problems one at a time rather than through super-committees and marathon bargaining sessions where no one even knows exactly what is being talked about.  We can get past this hurdle of a created deadline without swallowing the “Fiscal Fly in the Ointment” – a better term than we have been using - at a time when the economy is, after all, improving.  “Bully!” we think T.R. would say.                     

After the Surgery, How to Save the Patient

The surgery over, Dr. Simons checks on the patient. With him are three interns – two who are certain they want to practice medicine, and then Marlene, who is uncertain about whether she might rather become an economist.

Dr. Simons doesn’t like what the monitors show. He listens here and there with his stethoscope and places his fingers on key arteries and fleshy areas. “It is important that the blood be flowing throughout the body”, he explains. “I am looking for signs of a clog, signs of blood building up in one area and not circulating properly. The heart must be beating strongly enough, and efficiently enough, and the blood pressure within bounds. We must also be alert to impurities in the blood. Why do you think this patient is recovering slowly?” he asks the interns.

Paul, eager to impress, suggests that new European cure. “Bleed the patient. It will take out the bad humours and eventually restore the patient to health.” “Oh sure, just like austerity cured Europe’s economy”, quipped Marlene. “What?” says Paul, “We are talking about blood and the body here, not money and the economy.”

Roger disagrees. “This patient’s recovery is too sluggish”, he declares. I think we should put more blood into the body, but spike it with caffeine, like the energy drinks we use to keep awake. That will stimulate the patient back to health.” “I couldn’t agree less”, says Paul. “This patient is in fragile health, and a big dose of caffeine in the bloodstream would act like a toxin. Whoever heard of giving a transfusion of a blood-caffeine mix? The toxin would do as much harm as the blood does good.”
“Well, it’s done all the time in economics”, Marlene stated. “Consider the American Recovery and Reinvestment Act. Didn’t we pump money into the economy, and debt at the same time, by using Federal Reserve Notes as the basis for the money infusion?”

“I do not need the boldface, Marlene, and I must bring this conversation down to earth” says Dr. Simons. This patient has lost blood in surgery, and needs a transfusion. Fortunately, he has provided two pints of his own blood pre-surgery. Assuming they have not been hoarded away somewhere or impounded for some other purpose, they will be available to restore him to health. Otherwise, we will have to resort to the blood bank.”

“Two pints”, interjects Marlene. But isn’t that just a small part of the total amount of blood in the human body? A margin, as we would say in economics?” “It is, but for reasons that will be later explained, it will do nicely. Two pints of blood, and not mixed with any foreign substance that would act as a toxin – like caffeine, Roger, or like… debt, if you prefer, Marlene”. “So what you mean is, you want to use the ‘United States Notes’ of blood instead of the ‘Federal Reserve Notes’ of blood. You do know the difference....” “Yes, a prior life… but we must talk later about your lack of subtlety”, said Dr. Henry C. Simons. “A two-pint transfusion of unadulterated blood, STAT.”

There followed a talking-to about lack of subtlety (“I thought it important, considering most people only think of such things while multi-tasking a mouse, donut and coffee before the real day’s work begins”). Marlene’s ears stung as she made her way home – a meandering, pensive walk it would be – around Washington Circle, then right at Dupont, for the long walk home down the avenue.
Hallowed ground here - but so lifeless, this morning, after what she had just been through…ivory towers on the Left, ivory towers on the Right, where she knew the great minds were beginning to ponder, “What do we dare talk about today? Must we start out the new year pretending again that the cause of the recession-and-debt was fiscal-fiscal-fiscal, or dare we to finally step on some big-money toes and get to the heart of the matter (so to speak) - the malfunctioning monetary system?”

From the moment Dr. Simons had seen the monitors askew, he had realized a correct diagnosis and timely action were imperative – a necessity of working in the real world of medicine; an example to other professions. “I want to live that daringly, that decisively”, thought Marlene to herself. Maybe she would stay in medicine, after all.
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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?