Thursday, October 16, 2014

How to fix the economy

This post, written by Duane and me, was submitted to the Albuquerque Journal in response to an article by two mainstream conservative economists. It doesn't look like the Journal is interested, but we keep trying.

In an article published in the Journal on October 6 Micha Gisser and Kenneth Brown offered five policies they claim could fix the economy. While some of their ideas are on the right track they are really repetitions of old, ineffective, conservative policies. 

Our economic solution takes issue with conservatives and liberals alike. Both Democrats and Republicans are obsessed with deficit reduction. Democrats think the government has a revenue problem, while Republicans think government has a spending problem. They are both wrong. Our real problem is unemployment caused by a lack of demand for consumer goods and services. Until we conquer unemployment by increasing demand our economy will continue to struggle.

Employment ratio is not recovering after recent recession as in the past.

The symptoms of our economic woes are that national production (GDP) has been running approximately $800 billion per year below its potential capacity, and year after year the wealthy gain more of the national income than the workers. To fix this, we need to reduce corporate welfare and initiate policies that put more money into workers’ pockets.

Certainly, we should decrease corporate taxes. They are just production costs passed on to consumers. And, we should simultaneously increase minimum wages so that the money saved from taxes goes to workers, not to corporate executives and stockholders. We should also revive the successful FICA tax holidays on both businesses and workers.

Keeping wages low only works to improve profits for a single company. To think that it works for all companies in the aggregate is a fallacy of composition well known to most economists. If wages are low in the aggregate, it hurts demand, sales and profits for business in general. 

We must invest in the future. Because demand is not growing, businesses in the aggregate are not investing. A recent Bloomberg report says S&P 500 companies are using 95% of profits for share buybacks. That is good for stockholders but not for workers and is a large contributor to the increasing wealth gap. In our credit-driven economy there must be borrowing to invest and expand the economy. If not business, the federal government must invest.

According to the American Society of Civil Engineers we need $3.6 trillion by 2020 to renovate  our infrastructure in energy, water, transportation, and health. Instead of #FixTheDebt we need to #FixTheInfrastructure. Only the federal government can make the necessary investments.

Recently the International Monetary Fund, a hard-nosed enforcer of austerity, has done an about face and recommends government deficit investment in infrastructure for the US and other countries. By including benefits as well as costs, the IMF calculates that 1 dollar invested yields 3 dollars in production. It concludes that infrastructure investment pays for itself.

While making government investments, we should look to the future. Currently, we need fossil fuels for baseline energy complemented with the green-energy alternatives of nuclear, solar and wind. Our investments should reduce our continued dependence on fossil fuels in the future by expanding our technologies in zero-carbon producing energy sources. 

To reduce regulations is to say we don’t care much about health, safety or our environment. We need clean air and water, and infrastructure investment can assure them along with jobs. We don’t need dirty energy for jobs.

While the health-for-profit lobby threatens that healthcare costs will increase from 14% to 20% of the economy, we know that other advanced countries get better care for 10% or less. Also, we know that health care costs are falling, and more people are leading healthier lives as they get health care previously denied. Nevertheless, both political parties have failed to bring healthcare to all at a reasonable cost.

It is appropriate for government to sustain deficits for investment in national security and for investment in our infrastructure. At the same time, it reduces unemployment, which is our biggest problem, and assures that our grandchildren are well positioned to excel in a competitive global market place.

Deficits do not harm our grandchildren. The national debt is the sum of all deficits since the formation of the republic and represents net financial savings of the non-government sector. We pass those savings on to our grandchildren along with the renovated infrastructure.

Both authors are retired PhD physical scientists and follow Modern Money Theory, which describes monetary operations for a sovereign fiat currency.


  1. Short, plausible and sensible suggestions. Will politicians pay any attention? Not likely. I agree with almost every suggestion you make, except that I think taxes should go up on corporations. Also, there should be a tax (very small) on investment transactions, to keep the sharks out of that water, or at least tame them a bit.
    There are some professional economists who agree with you - e.g..Paul Krugman and Robert Reich - and they're in Washington and have credibility. Still, the politicians don't pay attention to them, either.

    1. Thanks for the comment. The problem with corporate taxes is that they are really hidden taxes on consumers. To tax consumption we might as well have a VAT. Politicians and pundits are in a bind. They can't stay in business if they stray too far from conventional wisdom.
      Krugman and Reich are good liberal spokesmen. Unfortunately, neither fully understands our monetary system. Krugman, in particular, does not understand banking, which is why he didn't see the financial crisis coming and still doesn't know what happened. But, he knows a Keynesian response would fix it.