The debate over federal government action to promote jobs has been plagued by a number of false assumptions that are encapsulated in the word “stimulus.” More confusion has been added under the banner “timely, targeted, and temporary” – a supposed formula for a successful “stimulus.” The idea behind the slogan was that the financial collapse could be quickly undone in two steps: first, a bailout to quell the financial panic so banks would lend and then the stimulus to get consumers spending again.
In reality, the U. S. economy will falter for many years unless a government-led reform recognizes new economic and environmental realities and confronts the challenges before us. We can return to full employment by creating jobs that lay the foundation for shared prosperity, or we can wait for the captains of capitalism to rescue us under the same trickle-down paradigm that has failed so spectacularly. Facing peak oil and global competition for scarce natural resources, we must repair and reform the physical and intellectual undergirding of our economy to build a broad base of prosperity.
Why the Old Economy Can’t and Shouldn’t Be Revived
False optimism for a quick recovery ignores the fact that U. S. economic growth from the Reagan era through 2007 was built on weak foundations. That economy could best be described as “bubble-licious.” The media touted periods of rapid growth of GDP, but most workers knew that their own economic situation was stagnant or sinking. Instead of good times, we actually experienced a series of overvalued assets leading to bailouts, including:
- The Savings and Loan scandal cost U. S. taxpayers $124 billion between 1989 and 1993.
- The 1997-8 currency debacles beginning with the Thai baht and other southeast Asian currencies (including Malaysia’s, Indonesia’s, the Philippines’) and later affecting South Korea, Japan, Russia, and Brazil. Crony capitalism, real estate bubbles, and bad loans fueled a crisis that eventually led to IMF/World Bank bailouts of181 bn and aid from Japan of30 bn.
- The oil and commodities bubbles of 2007-8, which caused serious and continuing hunger throughout the developing world and which precipitated …
- The housing collapse in the United States, which precipitated …
- The financial collapse. The bailout has cost U. S. taxpayers and the Federal Reserve over2 trillion (out of a theoretical maximum of over23 trillion in grants, capital injections, loans, and guarantees comprising all the programs devised to deal with the crisis).
Experts tell us we are beginning to see a collapse of commercial real estate loans that may set the financial world on its ear yet again and drive the bailout cost still higher. The FDIC has bailed out 115 banks this year and is running low on funds, yet 400 more banks are at risk of failure.
(Note: A bailout occurs when rich people get money to cover losses they would otherwise absorb based on their market transactions. They may be owners or employees of the collapsing corporation or they may be creditors of that corporation. Usually, the cost of the bailout is at least partially off-loaded to the poor and middle classes.)
To a large extent these debt-driven bubbles arose from two main trends:
1. Deregulatory fever that heated up under President Reagan, burned through Bush I and Clinton, and blazed in a frenzy of self-parody under Bush II. All these years of unrelenting propaganda about the benefits of completely free markets masked an orgy of tax giveaways and corporate welfare (think Halliburton).
2. Speculation caused by mounting inequality. After a quarter century of this deregulatory excess, the top 1% of earners in the U. S. had 23.5% of the income in 2007, a rate last seen in 1928, just before the Great Crash. Plainly put, the rich didn’t know what to do with the fabulous sums they accumulated. Greed caused many of them to borrow money in order to multiply profits on risky investments. The insatiable drive for ever higher returns diverted investment in the “real economy” (physical assets, factories, and service delivery processes) in favor of ever-more Byzantine financial assets. (As a result, the share of GDP attributed to the finance sector rose from 4% to 8%.) When the investments went bad, the chain of debt broke, and a financial panic ensued. The financial collapse led to further concentration of banking, leaving us more vulnerable in the long-term to another financial panic.
A major reason the old U. S. economy cannot easily be revived is that various mountains of debt – mortgages ($14.5 trillion), consumer borrowing ($2.7 trillion, up from $1.7 trillion in 2000), trade deficits ($7.0 trillion since Reagan was inaugurated, of which over two-thirds is attributable to Bush II), leveraged buyouts, and government ($10.6 trillion when Obama took office) – cannot just be piled higher. It is especially tragic that government borrowing during the Reagan and both Bush presidencies was wasted on wars and profligate defense buildups, corporate welfare, and tax giveaways to the rich. Ironically, government borrowing is the primary tool needed now to rebuild a just and productive economy. Thus, we must use government borrowing judiciously for projects that enhance sustainable capacity and ruthlessly eliminate waste and subsidies for unproductive activity.
A second aspect of unsustainability is that the infrastructure upon which real economic wealth is built has been allowed to decline. The decaying transportation, water, and educational foundations of our economy will not sustain prosperity unless we take the time and energy to rebuild them. The American Society of Civil Engineers estimates that it would take an investment of $2.2 trillion over five years to bring 15 categories of infrastructure into good repair. The categories cover water and sewage, waste disposal, energy, parks, and school facilities. 
Thirdly, the U. S. economy cannot continue the trend of wasteful spending and massive increases in health costs. While U. S. health costs amount to 16-18% of GDP, no other developed nation spends more than 12%. Worse, the share is continually rising while producing no health benefit. We are wasting nearly $1 trillion every year in the health sector. Furthermore, U. S. reliance on employers to contribute to premiums for about 59% of the population creates an incentive to move jobs to other countries. The high and rising cost of health care has replaced wage increases for many millions of workers over the last several decades. No wonder U. S. workers feel that their standard of living is declining. Finally, while there is an abundance of high-tech care and some excellent care provided in the U. S., the health system as a whole and the health of the U. S. population rank low among developed nations.
Environmental damage, resource depletion, and climate change comprise a fourth reason why the U. S. economy cannot and should not be “stimulated” back into its old patterns. The U. S. continues to engage in massively wasteful energy and land use patterns compared with other developed nations while Congress continues to subsidize unsustainable crop practices and industrial livestock management techniques that befoul land and sea while providing a diet that undermines public health.
Environmental damage throughout the world affects the U. S. because, in a globalized economy, we are so dependent on raw materials from other countries. Continued unabated, the global pattern of resource use and pollution – driven disproportionately by U. S. economic hegemony – threaten to undermine economic growth. In addition, the U. S. and the rest of the developed world face increasing pressure from the developing world to compensate them for environmental damage – such as resource depletion, species extinction, droughts, flooding, shrinking glaciers, desertification, and exported toxics -caused by the developed world. Surprisingly, the cost to repair environmental damage worldwide (not including the cost of projected damage due to climate change) is estimated by Lester Brown of the Earth Policy Institute at only $110 bn per year – less than the yearly cost of the Iraq war! This would provide for planting trees to sequester carbon and protect waters, restoring farmland and rangeland, protecting fisheries, stabilizing water tables, and conserving endangered species.
On top of ongoing environmental damage, the entire Earth faces a dire threat from climate change, which will be the topic of the Copenhagen conference in December 2009. We have experienced a 1° F increase of a possible 10-11° F projected by scientists, yet dramatic changes are already noted in glaciers, coastlines, desertification, and the frequency of extreme weather events. The costs of continued climate emissions are an externality that are not included in market calculations but that will soon grow to sufficient physical and political magnitude to force some accountability mechanism. Despite the clout of the coal and petroleum industries, there is a mounting tendency to see the need to reduce carbon emissions as an economic opportunity. Thus, international pressure is mounting on the U. S. to contribute to worldwide environmental cleanup and to drastically reduce carbon emissions.
Implications of the Physical and Financial Legacy of the Old Economy
When we consider the waste in the health sector, the costs of environmental repair and climate change mitigation, and the massive amounts wasted on war and military procurement, it is difficult to see how the U. S. can remain competitive unless drastic reforms are successfully implemented. In general, U. S. multinational corporations can survive and even flourish by moving jobs overseas, but the vast majority of U. S. citizens are stuck with declining economic prospects unless major reforms are undertaken at least on the scale of the New Deal.
Without a “New New Deal,” we are headed for many years of “L-shaped recession” featuring continued high unemployment and further deterioration in standard of living for most Americans. While the record of our federal government at managing projects may not seem encouraging, it offers the only alternative. Economic output consists of three components – consumer spending, business investment, and government spending. Consumers are not spending and will not return to previous levels any time soon because of unemployment and the credit squeeze. It makes sense for households to cut back in order to pay down that $2.7 trillion in consumer debt. In addition, the character of consumer spending over the past several decades has exacerbated environmental problems. With consumer spending down, there is not likely to be any rejuvenation fueled by business investment unless there is a government-driven push from revamped energy, agriculture, and health care incentives as well as direct government investment.
The use of the term “stimulus” to describe government job creation and the incantation of “timely, targeted, and temporary” to describe a proper “stimulus” are obfuscations. They keep us from confronting the gargantuan task before us.
Creating and Financing and New, Sustainable Economy
On the other hand, the opportunity exists to move forward into a more just and sustainable future – to create jobs that build a new economy. The biggest obstacles are the government debt of $10.7 trillion and the hue and cry from moneyed circles to raise interest rates to fight inflation, even while inflation hovers around 0%. The federal debt comes to about 70% of the U. S. GDP. Further increases in the debt ratio threaten to impede the government’s ability to sell bonds at low interest rates. For this reason, President Obama seems to be rejecting Congressional initiatives toward further job creations:
‘There is no discussion of a package like a second stimulus, but we are working closely with Congress and consulting with outside experts to determine the right policies and the right steps,’ said White House deputy press secretary Jennifer Psaki. (Wall Street Journal, 11/22/09)
In addition, in the same article the Wall Street Journal reports that the White House rebuffs a new source of revenue that not only could raise substantial sums but that could suppress some of the speculative investment and borrowing that fueled the financial crisis.
“House Speaker Nancy Pelosi last week said ideas under discussion in the House included a tax on a variety of financial transactions. Democrats estimate such a tax could raise as much as $150 billion a year, a pool of money that could help offset the cost of a job-growth package.
The White House isn’t keen on that proposal: Treasury Secretary Tim Geithner has said he hasn’t seen a version of that tax that would be appropriate for the U.S.”
The American Recovery and Reinvestment Act represents a rare moment when Congress did the right thing (in part) and used the right vocabulary. However, the first ARRA was not large enough to reduce unemployment or address critical needs, such as:
- Promoting equality and rebuilding the middle class by funding youth jobs and college for all via a new GI bill.
- Building the physical and intellectual/institutional infrastructure for a new economy, including supporting public education, building a truly national fiber optic network, and increasing funding for basic and applied scientific research.
- Repairing and renewing transportation and water/sewer systems.
- Revising land use policies to counter sprawl, building mass transit, and promoting transit-oriented development, including low- and moderate-income housing.
- Limiting carbon emissions by funding energy efficiency projects as well as clean energy research and installation.
- Shifting our orientation more to exporting and less to importing consumer goods.
How can we raise funds for this type of massive reinvestment and how can we muster the political will to implement such a program? Here are a few initial suggestions:
- Since those who still have jobs are more interested in saving than they have been for decades, it is a fortuitous time for the government to initiate a massive marketing campaign to sell government securities to the American public. This worked in World War II and well into the 1960s.
- The financial transactions tax (see above regarding trial balloon floated by Speaker Pelosi) should be implemented both to raise funds for the jobs program and to dampen the kind of financial speculation that created the recent crash. This idea is gaining traction outside the U. S.
- Accept Rep. Barney Frank’s proposal to cut military spending by150 billion per year. Providing health care and jobs programs for workers seems to be constrained by concern about the federal debt and the financial institutions, but war spending seems immune to such considerations. We are spending more on so-called Defense than the rest of the world combined even without the wars in Iraq and Afghanistan. While a significant program to repair worldwide environmental damage is estimated to cost110 billion per year, the nation contemplates spending an additional50 billion per year in Afghanistan on top of the nearly60 billion now committed.
- Cut other wasteful corporate welfare such as ethanol and agribusiness subsidies.
Activists and citizens must begin to build a movement among working people to demand jobs for a sustainable economy. This movement must try to take the momentum away from the finance industry and its lobbyists who are already screaming to fight inflation (i. e., raise interest rates) when inflation is currently at zero.
Such a movement would invoke the tradition of the suffragist, union, and civil rights movements, which rallied millions of people to demand reforms in the face of obvious inequality and injustice. Inequality in our society has been reinforced and magnified over the past quarter century by a strong alliance between right-wing politicians and corporate power. Most Democrats have either given in to the corporations or stood on the sidelines. Only the combined power of millions of people could have brought women the vote, opened industry to unions, and passed the voting and civil rights acts. Today, only a similar mass movement will force job creation in the face of the corporate power of the finance sector.
Charlie Cooper is a social justice activist in Baltimore. He is active in organizations that work on public education, child protection, climate change, and the economy. He is currently Chairperson of the Maryland Education Coalition. The views expressed in this article are his own.
 The decline of the Russian ruble led to the failure of a private U. S. hedge fund – Long-Term Capital Management. The Federal Reserve spent no money, but played a role in organizing a bailout of LTCM to protect its creditors, which included Bear Stearns, Merrill Lynch, and Lehman Brothers.
 http://www.politico.com/news/stories/0709/25164.html. Loans or shares purchased by the government may pay a return; however, the TARP Inspector General believes “it’s unrealistic” to expect the government to get all its money back.
 Piketty and Saez, quoted by Center for Budget and Policy Priorities, http://www.cbpp.org/cms/index.cfm?fa=view&id=2908.
 http://www.bea.gov/scb/pdf/2009/05%20May/0509_indyaccts.pdf, Table E, p. 28.
 Economic Policy Institute, http://www.epi.org/economic_snapshots/entry/snapshot_20090909/. The 4 largest U. S. banks hold about 45% of all banking assets.
 See also http://mwhodges.home.att.net/nat-debt/debt-nat-a.htm.
 Incoming White House Chief of Staff Rahm Emanuel stated that military cost overruns amount to $300 billion annually, January 18, 2009, http://www.msnbc.msn.com/id/28719411/.
 Wall Street Journal, http://industry.bnet.com/financial-services/10005212/why-a-financial-transactions-tax-makes-sense/.