Robert Reich Suggests Massive New Stimulus

Robert Reich has a post up at the Business Insider that sounds the trumpets in a call for an all out attack of the faltering economy. He maintains that we’re not facing a double dip, rather we’re still in the midst of the mother of all dips.

His solution which includes dismissing any and all calls for deficit reduction, going easy on new regulations and considering tax cuts includes the following:

The central problem is lack of demand — and that’s what has to be tackled.

Three of the four sources of demand have stopped working. (1) Consumers can’t and won’t buy because they’re still under a huge debt load, can’t get more credit, are afraid of losing their jobs (or already have), depend on two wage earners at least one of whom is working part-time and pulling in less, or have to save. (2) Businesses won’t invest and spend on creating more jobs if they don’t see consumers willing to buy more. (3) Exports are stalled because the dollar is so high they cost too much, much of the rest of the world is still struggling with recession, and American firms can make things for sale abroad more cheaply abroad.

That leaves only one remaining source of demand — government. We need a giant jobs program to hire people and put money in their pockets that they’ll spend and thereby create more jobs. Put ideology aside and recognize this fact. If it makes you more comfortable call it the National Defense Jobs Act. Call it the WPA. Call it Chopped Liver. Whatever, we have to get the great army of the unemployed and underemployed working again.

Also: Put more money in consumer’s wallets by eliminating payroll taxes on the first $20K of income (and make it up by applying payroll taxes to incomes over $250K.)

Also: Get more hiring by giving the states and locales interest-free loans — so they can rehire all the teachers, fire fighters, police officers, and sanitation workers they’ve fired — to be repaid when their state employment rates hit 5 percent or below.

Also: Get more credit by having the Fed return to “quantitative easing” — expanding the money supply by purchasing mortgage-backed and other types of securities.

The central problem is lack of demand — and that’s what has to be tackled.

Three of the four sources of demand have stopped working. (1) Consumers can’t and won’t buy because they’re still under a huge debt load, can’t get more credit, are afraid of losing their jobs (or already have), depend on two wage earners at least one of whom is working part-time and pulling in less, or have to save. (2) Businesses won’t invest and spend on creating more jobs if they don’t see consumers willing to buy more. (3) Exports are stalled because the dollar is so high they cost too much, much of the rest of the world is still struggling with recession, and American firms can make things for sale abroad more cheaply abroad.

That leaves only one remaining source of demand — government. We need a giant jobs program to hire people and put money in their pockets that they’ll spend and thereby create more jobs. Put ideology aside and recognize this fact. If it makes you more comfortable call it the National Defense Jobs Act. Call it the WPA. Call it Chopped Liver. Whatever, we have to get the great army of the unemployed and underemployed working again.

Also: Put more money in consumer’s wallets by eliminating payroll taxes on the first $20K of income (and make it up by applying payroll taxes to incomes over $250K.)

Also: Get more hiring by giving the states and locales interest-free loans — so they can rehire all the teachers, fire fighters, police officers, and sanitation workers they’ve fired — to be repaid when their state employment rates hit 5 percent or below.

Also: Get more credit by having the Fed return to “quantitative easing” — expanding the money supply by purchasing mortgage-backed and other types of securities.

In other words throw an even bigger kitchen sink at the problem than the one we threw during the past couple of years. Never mind that by his own admission it didn’t work, if we keep tossing things against the wall then sooner or later, I suppose his logic is it has to help us turn the corner.

The idea that we have some long-term structural issues to address doesn’t seem to enter into Reich’s calculation of the issues. His prescription which is to put people to work in any manner necessary, cost apparently not being an issue, would appear to rest on the assumption that once money is placed in pockets demand will reappear and somehow magically we’ll be transported back to 2005. In short, we can go back to where we started this slide and recreate the good times.

Take for instance, his suggestion that money be transferred to the states so they can rehire all of the employees they have terminated. He completely ignores the fact that one of the unexpected benefits of this recession has been the cover it’s created for state and local governments to bring some sanity to their personnel practices. Completely untenable pension plans are being reconsidered and restructured and bloated bureaucracies are being cut, albeit probably not as quickly as they might be.

At least Reich suggests that the states be given money only as interest free loans repayable when their unemployment rate is 5% or less. This probably means that those “loans” will never be repaid. An unemployment rate at that level is associated with nothing less than an all out economic boom and far below what most economists are speculating might be our realistic natural rate of unemployment going forward.

I don’t disagree with Reich’s assessment that we’re still in the middle of a recession that probably should be described by a different word. I just think that by now we should have learned that it’s so different from previous experiences as to be somewhat immune to traditional measures of amelioration. There is an element of muddling through we’re going to have to endure as we discover just exactly what sort of new world we have to learn to cope with and efforts to do so are going to be necessarily different than those employed in past downturns. It’s going to require some unconventional measures to get out of this morass simply because it is different.

The economic world hasn’t moved 180 degrees, we aren’t in some parallel universe but it has shifted. Throwing unrestricted money at a problem we don’t understand isn’t going to get us anyplace except deeper in debt. Government can continue to take the edges off the worst of this downturn and provide humanitarian relief while the market sorts out how we’re going to function going forward. We should know by now that easy answers aren’t going to work this time around.

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