The middle way: reprise

Arianna Huffington got a naked capitalism citation for saying that a middle way reflecting neither all-Republican nor all-Democratic boilerplate positions is gaining ground in Washington (after >3 min I can’t find the link; sorry).

Here’s the problem I have with the libertarians: most of them don’t seem bothered by the financial catastrophe impending upon us (and yes, I will address that in the next “animal spirits” update).  From this I infer that they’re relatively well-off for the most part, traders and other rich folk who’d like to keep their taxes low and who don’t give much of a fig for the suffering of the unemployed.  Even Ron Paul has come out recently saying that it would be irresponsible not to provide health care for these folks.  He suggests paying for it by ending our wars.

Here’s the problem I have with the Keynesians like Paul Krugman:  they don’t look at the aggregate debt problem.  They’re advocating more debt to solve a problem of too much debt.  It will sink us.  It’s not just the ratio of federal debt to GDP; it’s the ratio of all nonfinancial debt to GDP that is at record levels of ~375 percent.  The Blue Dog Democrats share this concern.  My position is that we offer (1) health care and (2) a livable dole to the involuntarily unemployed.  These are the best stimulus dollars we can spend; they will be spent wisely.  Let the economy self-organize at the local level.  It’s going to take a long time to reconfigure the economy toward more saving and investment, away from consumption.  Also, helping people out will make them feel better about being Americans, rather than becoming radicalized.

Here’s the problem I have with the Monetarists:  see the above.  Ben Bernanke thinks that lowering interest rates, stimulating credit expansion, and adding to nonfinancial credit market debt is going to help!  When he and Alan (Not-Potty-Trained) Greenspan worried about deflation, didn’t they wonder why they were worrying about deflation?  Deflation happens when asset values get bid out of range by excessive credit creation, and people stop servicing the debt.  Banks reasonably tighten credit standards, and prices decline.  But no!  Greenspan and Bernanke think more credit creation is the answer.  Meanwhile, by keeping interest rates near zero (especially for well-connected borrowers like Goldman Sachs who not only get near-zero interest rates but FDIC guarantees on their debt) the Fed is creating a carry trade that will further distort asset prices and relative values.

Republicans exist to keep taxes low on rich people.  Democrats exist for much the same reason, because of the way elections are funded, but are willing to go a little higher on marginal tax rates on rich people.  It used to be that Democrats were the proven budget-busters, but after George W. Bush, that label no longer applies.  Most of Obama’s deficit is inherited.

The politicians need to come down off their ideological high horses and start taking care of the people. 

A simple outlines of my plan is here, in a letter I sent to my elected representatives:

Dear -----:

America already has more debt than it can handle.  The deficits will sink
the economy into a debt-deflation.

The stimulus, like the banking bailouts, is likely to go to the richest
Americans.  The government is broken.  The stimulus will not help the
people.  It is pork that will go to the well-connected.

America is a basket case.  Here's what we need:

1.  Health care for all, especially the unemployed, and a livable dole for
the unemployed to see them through the long crisis to come.  They will
spend the money taking care of their families and finding new jobs in time.

2.  Higher (much higher) marginal tax rates on the rich who have
manipulated the system to their advantage for so long.  I suggest 75%
rates on income over $1 million.  The rich need to learn to share, to give
back to the country that has treated them so well.

3.  An aggressive FDIC campaign to recognize and charge off bad debt in
the banking system.  Making rich investors whole on the taxpayers' backs
only exacerbates the debt-deflation, and risks turning America into a
neo-feudal society.  Reverse the banking bailouts.  Make Goldman Sachs pay
up—their profits were made with taxpayer money.

4.  Fiscal discipline.  The deficits need to be brought down under 5% of
GDP immediately, and to balance within 5 years.

America is a rich country.  The problem is not the amount of GDP, it's how
it's distributed.  America is now the greatest debtor country.  The
Keynesianism that worked in the thirties will sink us now. The government
is broken and can not be trusted to spend the public's money wisely.

These recommendations don't fit into either Republican or Democratic
molds.  As I used to tell my students, "make the adjustment."  A far worse
depression awaits us if we don't.

It's time for triage.  America is a basket case.

“Keep It Simple, Stupid” would seem to be a good way to go in the current environment.  So many mistakes were made during the Panic of 2008… and opportunistic Beltway insiders stand ready to spin every event to their own advantage.

Stop the bailouts.  Cut the pork.  Take care of the people.  Let the economy self-organize.