Once you understand how we got into the perilous economic situation we now enjoy you can start to look for ways to get out of it. But to find real solutions you have to approach the situation rationally and not in a desperate panic. Thus far the reaction of Congress and both the Bush administration in passing the TARP bill and the Obama administration in passing the stimulus package, has been one of irrational panic, throwing money at the problem without thinking about the consequences of their deficit spending or more effective and more responsible alternatives.
What we are faced with is a natural cyclic recession which has been intensified and prolonged by government mismanagement, gross financial irresponsibility, misguided economic policy and poorly conceived attempts at inadequate stimulus. Not to let anyone off the hook, as consumers for years we’ve been spending money we don’t have on crap we don’t need. We’ve seen problems with real estate, credit markets and banking before, and we’ve seen the results of government intervention. When the role of government is limited and primarily that of a caretaker and manager it can be a great help. When its response is heavy handed and excessive it can do far more harm than good.
The reality is that the poorly conceived TARP bailout and the equally foolish stimulus plan are working to suppress the economy and prevent recovery by doing all of the wrong things and producing results too slowly. The TARP bailout gave money away to prop up businesses failing because their methods of doing business were unsupportable when it should have shut those businesses down and quarantined their bad debt and sold off their assets to more responsible competitors, even if they needed government loans to make those purchases. By giving more money to companies whose basic business models are flawed and have put them on the brink of failure, they are just encouraging those companies to lose more money, but in this case taxpayer money instead of money from their hapless investors.
About half of the TARP money has been spent, but the current behavior of the stock market and the increasingly unstable status of many lending institutions makes it clear that it is not having any positive effect. The perfect example of this is the situation with AIG which received $80 billion with no strings attached, immediately spent that money to very little positive effect and then came back asking for another $60 billion to keep it solvent. Under what possible scenario would it make sense to give more money to a company which has already proven it couldn’t make use of its previous handout responsibly?
In a bizarre example of doublethink, the advocates of stimulus spending are declaring that we were put in these dire straits because of the uncontrolled spending of the Bush administration, on the basis of which they disqualify all conservatives from having an opinion on the subject. Yet they think that the solution to a problem they admit was contributed to by excessive spending, is to spend enormously more money — more than FDR spent in his first 4 years in 2 months. That just makes no sense at all. The idea that you can spend your way out of recession makes no sense when you’re getting the money you spend by further enlarging the deficit which is helping to cause the recession in the first place.
The current stimulus plan cannot work because it isn’t designed to stimulate the economy directly enough and wastes money on huge numbers of non-stimulative programs and passes too much money through the hands of bureaucracies which will reduce its impact while covering their own expenses. It spends $800 billion to produce the impact of maybe a quarter of that amount of spending. And it remains a basic truth that government cannot create jobs with the efficiency and permanence of the private sector, and this stimulus plan does little to help the private sector and comes with tax increases which will have a crushing effect on small businesses and entrepreneurs who really do create jobs.
We might very well do more good for the economy by nothing at all than engaging in massive deficit spending, but there are things which the government and the private sector could be doing now which would be far more effective than massive, poorly-directed spending.
The most important thing is to restore the government oversight and regulation which was neglected for years in the financial sector. I’m as opposed to intrusive government as anyone, but there really is a legitimate role for government in regulating business practices in the public interest. This basically comes down to protecting the people from fraud and theft, and some of the more “creative” banking practices of the last decade can only be described as fraudulent. Recapitalizing mortgages at 50 times their face value is nothing but fraud. It’s selling an asset based on a false value which the purchaser can never recoup as security for his investment. The same is true for the practice of encouraging the mortgaging of properties held by people who were completely unqualified for the loans they received. By encouraging these lending practices the government became a partner in defrauding the borrowers and the American people who are ultimately left holding the bag for these loans.
The government’s role should not be that of a co-conspirator in massive financial fraud. It should never have been directly involved in the industry. Policies like the Community Reinvestment Act and institutions like Fannie Mae and Freddie Mac politicized the financial market and the mortgage industry and created an inherent conflict of interest which encouraged members of Congress and of several administrations to ignore their regulatory and oversight responsibilities for political reasons.
Before anything else, our first step towards solving all of these problems is to end these kinds of incestuous relationships. Government should never be involved in setting business practices. Political objectives and good business management are rarely compatible, and it erodes the impartiality which is needed to be an effective regulator of business. In the current crisis Government may have to play a very large regulatory role which makes it doubly important that politics be kept out of the process.
The current approach to dealing with insolvent key businesses is clearly not working. It needs to be rethought. Just providing more money to failing corporations who keep coming back for more handouts is irrational. It makes much more sense to let those banks and large businesses fail and go through bankruptcy and reorganization with goverhment oversight. Then their assets can be revalued, sold off or taken over to be used by surviving, more responsible banks and businesses. This would still cost the taxpayers money. Government would have to pay out to cover bank deposits and provide loans to assist in corporate takeovers of failed companies, but that would produce far less liability than the current approach, plus the total cost would be much easier to control.
When dealing with mortgages the situation is somewhat more delicate because of the homeowners who may suffer in the process. Clearly they need to be protected to some degree, but they don’t need to continue to pay mortgages which they cannot afford on properties they never should have bought in the first place. No amount of government assistance is going to change the fact that their incomes are not sufficient to pay for the properties they bought, no matter how radically you renegotiate the mortgage terms.
When the last real estate bubble burst back in the 1980s many banks found themselves holding property they had foreclosed on and could not sell. Some of them went into the rental market as a result and that worked out pretty well for them. Bringing in a rental income on a foreclosed but unsellable property is considerably better than letting it sit unoccupied. The scale is larger today, but this might be the solution to the mortgage problem. Tell overextended home buyers that they have defaulted and no longer own their homes. Then offer to let them stay in the homes as renters at a rate somewhat lower than they were paying for their mortgages, a fair rate set based on the local rental market. This returns the property to the books of the bank as a positive asset, lets the hard working people keep a roof over their head while paying a market-appropriate rent, and maintains the value of the property for future resale in a stronger economy. Then, for those who manage to pay rent responsibly for a couple of years, the banks could offer to apply a portion of the paid rent similar to the amount which would have been applied to principal under a regular mortgage to a future purchase of the house, and those who qualify could be transitioned back into home ownership.
This solution would likely still involve some taxpayer money, because the government would have to provide some sort of rental insurance or guarantee to back up property values and provide an incentive for banks to take on the responsibility of being landlords, but the cost would certainly be less than ongoing bailouts. This plan might also produce some unintended positive consequences because it would create a lot of work for people as rental agents, property managers and as maintenance contractors working for these banks and taking care of these defaulted properties. Given the number of properties involved we could easily be looking at the creation of 500,000 new jobs and quite possibly more.
As for job creation in general, the way to do that remains what it has always been, to grow business and attract new businesses to America. Real tax cuts have been categorically dismissed by the current administration under the theory that the Bush administration tried them and “look where it got us,” but the truth is that Bush mainly cut the income tax and didn’t cut it that much or in a way which would be highly stimulative. Under Bush our corporate taxes became the highest in the world, because while we maintained the high taxes established by previous administrations, other countries around the world lowered their corporate tax rates. The result was that companies found it easy and attractive to move operations and even headquarters overseas, keeping America as a consumer market, but abandoning the US as a base of operations. Something is just very wrong when France has lower corporate taxes than the United States.
That needs to change. The two factors counting against us as an attractive haven for businesses are our high corporate taxes and our high wages. The way to stimulate the economy and create jobs is for wages and corporate taxes both to go down.
Industrial wages which have been artificially inflated by long-term union contracts need to be reset to a market level. Industrial plants operating in non-union states are doing fine while those in unionized areas are failing at an alarming rate. Government should not ever be in the business of wage and price controls — Nixon showed us what a bad idea that was. Yet the stranglehold of unions needs to be broken. Contracts need to be voided and wages in the midwestern states need to be allowed to naturally adjust to something similar to what is being paid in states like Tennessee and Alabama. This is something which only government can do, and it would create jobs while costing very little. It worked for Teddy Roosevelt with his “Square Deal” and it could work for us. With the depressed state of the Michigan economy these days $35 an hour will go pretty far. You can probably even buy back the $150,000 house you abandoned which is now worth something like $18,000.
To bring those jobs back companies need an incentive beyond just more reasonable prices for labor. That means cutting the corporate tax rate so that the US becomes a tax haven where people want to put their business headquarters rather than the country from which they are all fleeing to low tax countries like Ireland. Ideally the corporate tax should be eliminated entirely. It has really never made any sense. It largely just gets passed on to consumers as an increase in prices which makes American made products less competitive in the marketplace. If you want radical solutions, it could be eliminated as part of the implementation of a system like the Fair Tax where tax is charged at the point of consumption and nowhere else in the economy. Switching to that sort of tax system instead of our current multi-tiered system would have an enormous stimulating effect. Read up on the Fair Tax. It’s a pretty viable way to pay for government while putting a lot more cash in the hands of consumers and creating a much friendlier environment for business.
These proposals would all cost less and do more good for the country. Replacing government spending with government regulation, guidance and oversight uses government in ways better suited to its strengths, uses resources more effectively and reduces the overall cost of rebuilding the economy. Implementing any of these ideas is probably unlikely. It would require those in power to put aside political interests and paying off their supporters and special interests and actually try to do what’s best for the country. That just seems unrealistic.
Failing the implementation of these proposals, almost anything would be better than poorly planned and misdirected spending. if you want to go the route of government handouts, then do it in a serious way. First off, a great deal of what is in the “stimulus” package isn’t stimulating. It doesn’t create jobs or help people directly. It’s a bunch of pet projects and spending on programs with very little stimulative value. That’s just a waste of money and time. As for what real aid there is, it’s used inefficiently. Putting the money through the hands of state governments and bureaucrats and hirelings and contractors before it gets to people in the form of welfare and jobs is grossly inefficient. It reduces the amount of aid that gets to actual people and it delays the rate at which that aid gets distributed.
If you accept the dubious idea that spending taxpayer money can create real stimulus in the economy, then the more money you spend and the more directly you get it into the economy the better. If that’s the case then you would be better off taking the $800 billion and just mailing a check for $5000 to every person who filed a tax return last year. The cost would be lower overall and the money would go directly into the economy at a level where much of it will actually be spent. It would have a much more substantial and much more immediate stimulating effect. We’d still pay a big price in inflation down the road, but a large direct stimulus would work in ways which the planned slow and diluted one will not.
To actgually get out of recession you need to cause the GDP to grow. That requires the creation of new wealth, not just redistributing taxpayer money. Creating new wealth is very difficult, especially when you try to do it in an already weak economy. The alternative is to make what we have more valuable rather than less. This means doing the opposite of deficit spending. A combination of the two would be ideal.
Bankrupt and restructure failing businesses. Abandon the idea of cheap home ownership and accept renting as a lifestyle. Get government out of the economy and back to neutral regulation. Eliminate all corporate taxes. Artificially reduce wages while assisting workers to relocate and retrain. Cut back on the money supply. Intentionally cause deflation. Accept the idea of increased unemployment and decreased wages, at least in the short term. We’d be going back to 1990 and starting over again and trying to get it right this time. There would have to be some spending, but we’d likely pay a lot of the price in short-term hardship. This is where we have put ourselves, and real solutions like the ones I suggest here will do more good than all the pie-in-the-sky socialism and deficit spending which are going to drive us deeper into debt and just prolong the recession.