Friday, December 5, 2008

The Root Cause

What Should Obama Do? The above question, referring to the economic crisis, was posed to me by a friend who often comments, especially lately, on my commentaries. I would have a very difficult time answering that question because what Obama should do is radically different from what I would do.

Nonetheless, there are several areas in which I am in substantial agreement with the President. (My god, what a great relief it is to write about an American President without feeling compelled to be derisive, derogatory, caustic and spiteful.) For sure, massive investment in infrastructure, especially focusing on electric transportation, is something that cries out for happening regardless, so now’s a perfect time to tackle those needs. Increased unemployment benefits, food stamps, assistance to state and local government are obvious responses to the hardship that is/will be felt across a wide spectrum of society. Renegotiation of mortgage loans under foreclosure is another obvious no-brainer (though equally obviously, there can’t be many brains in Washington or it’d already be happening).

There’s an additional factor that desperately needs action that we might agree on, but for different reasons. That is America’s rotten health care system. While we both would concur on the social and ethical reasons for reform, there is an equally important economic reason, which we wouldn’t agree on; that is, the need for job flexibility and short work weeks.

Obama has totally bought into corporate-oriented conventional wisdom that requires manic pursuit of a return to growth by any means possible – bailouts, borrowing, income tax cuts, lower interest rates. Any straw in the wind is being grasped to try to rescue and reinvigorate that fundamentally destructive and bankrupt world view.

People are cutting back on consumption because they have less to spend based on declining wealth – falling asset values - or loss of employment or because they wisely understand the need to save for trying times ahead. Economic activity is thus declining sharply which is good for the world, bad for the old economy. If unemployment spikes as a result and you believe, as I do, that contraction is a good idea, then the only solution is sharing the available work. Stimulus packages will keep the economy from crumbling but won’t bring full employment.

Besides, people need to work less as a matter of principle – more leisure, more time for social life, less money for consumption. This can not happen as long as America has an employer-based health care system which encourages employers to work their staffs longer hours. Thus, single-payer health care is an absolute prerequisite for the purpose of slowing life down and improving its quality. A single-payer bill was submitted to Congress with 93 co-signers but hasn’t received a single hearing so don’t hold your breath; nobody in power wants to upset the insurance, pharmaceutical and health care industries.

The US is projected to have a trillion dollar budget deficit this year as a result of reduced revenues because of the downturn and the cost of stimulus packages and bailouts. The addition to the national debt as a result should not be taken lightly: these are perilous times to take on massive new debts. We are hearing a lot of talk lately of the renowned economist of the 30’s, John Maynard Keynes. In response to Hoover cutting back on government spending to reflect a downturn in revenues caused by the 1929 economic crash, he suggested that government should do the opposite and increase spending to get the economy moving again. He argued that deficits could be made up later on upon recovery.

The problem with invoking him now is that he advocated building up surpluses during good times to balance the deficits of the bad whereas we are beginning this economic meltdown after a string of massive deficits. It can be argued that those large government deficits, along with obscene levels of personal debt are what had kept the economy from stagnation since the start of the Bush disaster. America was essentially on a compulsive borrowing binge.

Therefore, I’m totally opposed to any form of tax breaks except those relating to the least fortunate members of society. The average doctor earns $265,000 per year, so that nearly half would receive a tax break under Obama’s tax cut plans for those earning less than $250,000. They undoubtedly have everything they truly need in life so whatever they would spend the money on would be bad for the world and should not be produced.

As I’ve ranted and railed about ad nauseum recently, the last thing we need to do is rescue the old economy of profligacy, waste and mindless debt-fueled consumption. To that end, the wealthy and corporations should absolutely be reined in.

While I wouldn’t advocate a return to the 91% personal income tax rate of the fifties and sixties, taxes on the wealthiest should be raised to at least 50 or 60%, not only to raise money but also to curb unnecessary consumption. Corporate tax rates should also return to rates of the past sufficient to restore the fifty-fifty ratio of income taxes once paid by corporations and individuals.

Corporations are creatures of the state and must be tightly supervised. For more than a century they have enjoyed the privileges of personhood with none of the responsibilities. When a person commits a crime they are taken out of circulation, when a corporation does, they are slapped with a small fine and thus encouraged to be on their merry thieving ways.

There are several ways the corporations have of controlling the American agenda. The most important and insidious is advertising; it is the root of corporate evil. It’s worth reiterating the stunning conclusion of a study done on the effects of advertising on pre-school 3 to 5-year-old kids. When served mcdonald’s burgers in plain and company wrappers, 80% said the burger in the corporate-logoed wrapper tasted better. America’s children are being educated for the corporate bottom line before their personal health. For the need for luxuries before the health of the planet. Americans are told it is their duty to buy things they don’t need and often can’t afford, thus building mountains of debt, for the sake of the economy.

I would remove advertising from deductible business expenses, except for a reasonable amount needed by a small local business, maybe $25,000 per year. People don’t need to be encouraged to consume, it’s already a natural response: old things wear out, new innovations come on the market. People will continue to consume without the encouragement of advertising, just not so much of the mindless sort. Let corporations compete based on producing quality instead of slick marketing.

Slowing consumption requires reining in credit. Even as Citigroup is showered with $320 billion in public welfare, it charges nearly 30% interest on credit card debt, for many people making it difficult to ever clear their debt. Thanks to a corporate funded Congress, bankruptcy laws were changed recently to make it harder to erase those debts, even putting credit cards on an equal footing with child support.

Credit has its importance; easy credit is a mistake. People need to be encouraged to save. I got turned off to credit with my first experience. I bought an article - don’t remember what, it was nearly 50 years ago – on a six month payment plan. After 2 months the article broke, but I had to keep paying on it and I thought, this is nuts. In the fifties, you could buy a car with 20% down and two years to pay. If you had to sell before the term was up, you had some equity in the vehicle. Today, with no down and 7 years to pay, you have to take large sums out of your pocket to sell within the first two years: that is crazy.

Tightening credit is a good idea. Let homebuyers bring a 20% down payment with them and let the government subsidize mortgages for the bottom half of society. Anybody with a solid history of work and responsibility should have access to their own home. In recent years they’ve been excluded from home ownership by artificially high prices. Prices which only could’ve risen with the help of ‘innovative’ subprime mortgages.

The Root Cause of the current economic meltdown is too much money in the hands of the wealthy and powerful. They have time on their hands, they are obsessed with making money and often have no scruples. With money to burn they have created an economic bubble, a Ponzi scheme of epic proportions; one that is bringing hardship to people all over the world.

Therefore, excessive wealth must be curbed and all forms of speculation taxed. Even a small stock transaction tax would discourage short term speculation. Let investment be for something more than pursuit of a quick buck; something that embodies lasting value. International currency transactions should be taxed and the proceeds used for development aid to the world’s poor.

Unfortunately, Obama’s picks for his economic team do not leave much room for confidence since they are uniformly on the corporate bailout side. They helped to create the deregulation that is responsible for the current crisis and most likely have no other idea how to fix the system than repeat the mistakes of the past.

Repeating the mistakes of the past will only dig the hole deeper with debt that will have to be paid eventually, and paid with even more pain than it would take to start to work it down now.

I realize my economic prescription involves a severe deflation with serious consequences, but, I would argue, no more serious than the impacts of propping up the old economy. At least, we would come out with a sustainable, well-being oriented lifestyle designed to benefit the majority who’ve been left out in these past decades of conservative trickle-down economic thinking.

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