The historic election of Senator Barack Obama has created high expectations of progressive change in the US and around the world. The president-elect has undoubtedly exhibited powerful vision and capacity for organizing in scoring this unprecedented victory. However, after decades of arrogant abuse of political, military and economic power, the US faces an uphill battle to undo the errors of the past and to build a better future for all. I begin this essay with a look at the economic challenges facing us. The good news is that with determination and some good advice, the present crisis can be addressed from a long run perspective of creating a prosperous, sustainable green economy. This transformation can begin with a green public investment program.
It is important to cut out the jargon and describe the current economic situation in plain English. The United States is flirting with a depression, one that may last for years unless the government takes decisive action to overcome the current problems. With effective public policy, conditions could be mitigated to curb the trend towards a massive financial meltdown and economic disaster comparable to the Great Depression. Unless rapid and thoughtful steps are implemented, the looming economic collapse of our time could rival the devastation of the 1930’s.
The unemployment rate has already risen to 6.5 per cent and will keep rising. Many of the major nonfinancial corporations have announced substantial layoffs. The potential consequences, especially for the less affluent and the young, would be severe : a long period of stagnation---perhaps stagflation--with many years of little or no growth and stubbornly high unemployment, punctuated occasionally with a renewed recession.
Depression means that the economy cannot get out of the doldrums through private sector actions alone. Therefore , without public intervention the economy will be unable to begin the much needed process of expansion. Japan, the second-largest economy in the world in the 1980s and 90s, was in this condition for roughly twelve years, following the bursting of its own financial bubble. If the United States falls into a similar long term crisis it will affect not just the domestic economy but the global economy as well. This is at least partly due to the fact that the U.S. market for imports coupled with her huge trade deficits sustains the world economy in this age of globalization. This also exposes the folly of development strategies of countries like China that have neglected the development of a domestic market and focused narrowly on an export-led growth strategy only.
No one can profess with certainty the inevitability of a global economic collapse; but the consequences of denial and hesitation could prove grave. Even if chances are small that the worst will happen---and in this case chances for a bad outcome have been increasing--- it seems reckless to gamble. Taking strong measures now would save both the US and the world economy from a possible meltdown. The summit of 20 nations on Nov. 15 is a step in the right direction; but the US government needs to act on its own as well.
A depression can be read as a "market signal" of a dysfunctional economy that requires fundamental restructuring. Japan learned this the hard way. In the present case, the signal may be indicating the need for deep changes in the economic systems of the US and the world. At this fateful juncture, it is perhaps finally necessary to ask what might be flawed at a deep structural level and how these defects might be addressed before the situation becomes much worse.
It is now widely acknowledged that the Paulson plans from the treasury are not working very well in creating a real economic recovery. For many months, Paulson dismissed the growing anxieties expressed in financial circles and the real sectors of the economy. Moreover, he paid very little attention to the real sectors . Now that we are facing negative growth and a high likelihood of deflation, jumpstarting the real sectors of the economy has become the key issue. The good news, so to speak, is that the Federal Reserve is trying to follow the right course of action. Fed Chairman Ben Bernanke and his colleagues now acknowledge that the gravest danger now is a possible general deflation of prices and contraction of output, and they promise to combat this possibility. But in times of deflation, monetary policy is like pushing on a string; nothing substantial can happen until confidence is restored in the business sector.
But at least the Fed is doing something. To complement this and offer further stimulus, Washington's elected politicians must make the major fiscal effort that is required. A democratic public debate on this subject is imperative. Without a comprehensive and in-depth public airing of the policy issues, there is no way to develop the political foundation for undertaking large and controversial measures. If Washington responds tentatively with cautious half-measures, as Japan's government did for many years, then the results for us may be sadly similar also.
Fortunately, the president-elect and many of the members of the Congress now seem to understand the gravity of the situation. To put it bluntly, there is now a painful retreat from the self-delusion of the 1990s and the first six years of this century .Among other things, excesses such as the hyper-bubble in financial assets and real-estate led many firms to wildly exaggerate their likely future prifitability. The stock-market bubble was what many euphoric investors watched but the problem of wishful overvaluation was much more widespread. In an era of ICT revolution and pervasive herd behavior, business sectors (and their financiers) overinvested hugely on false expectations of future profitability.They generally used borrowed money to do so. In this way, they built too many factories, shopping centers and office buildings creating more productive capacity than even the credit-fueled demand in the US marketplace could possibly absorb. Consumers had also borrowed heavily in the recent past. To be fair, much of the consumption at the lower income groups is necessary; but the luxury consumption and speculative gambles of the rich outweighed by far the total consumption of the lower income groups.
This legacy of accumulated excesses lies across the American economy like a thick miasma. We now have persistent overcapacity in production, still overpriced financial assets and real estate, and unsupportable debt burdens for corporations and households. The predictable result is a deepening reluctance to invest or to consume.
Personal debt now far exceeds disposable income. Manufacturing is operating far below its productive capacity. For producers of most commodities including automobiles, demand is much lower than expected and capacity utilization has fallen to match the lowered expectations of sales and profits.It is then not sosurprizing that there is so little new investment. What firm is going to build new plants and increase capacity when so many existing ones are underutilized? Who would finance these projects even if they existed in the midst of this raging financial crisis? Now that consumers have lost the capacity to borrow and can no longer refinance even their home mortgages with ease, the collapse of aggregate demand has become far worse.
The US economy is unlikely to recover its full vigor until this dead weight is substantially reduced. In the meantime, the competition for market among firms around the world is raging. In the extreme case, this could turn into a beggar-thy-neighbor policy threatening to worsen the looming global depression. One implication of this possible scenario is that the prices of almost all assets in the global marketplace --- from financial investments and real estate to manufactured goods--- and all other commodities can fall precipitously and keep falling. This will be the obverse image of the exaggerated upward price movements during the boom years that many thought would never end. The overvaluations of assets in the United States has provoked global ramifications due to the transmission of the bubbles worldwide via speculative investments-- particularly through the securitization of subprime loans and the subsequent slicing and dicing and marketing of these dubious products.More generally, the development of a largely unregulated derivatives market added more fuel to this destructive conflagration of global finance.
At this time, the US government has the power to intervene on at least three basic policy areas if it wants to improve the economic conditions.First, the Federal Reserve can keep pumping money to reflate the economy and excite what Keynes called the"animal spirits" of business leaders. Rising prices will also ease the debt burdens of borrowers since they can pay back their debts with cheaper dollars. Second, Congress and the White House can simultaneously launch another major stimulus program composed of responsible public spending and quick-acting tax cuts. It will be running up far larger budget deficits than the Bush Administration has engineered; but that may be necessary in the short-run. Designed properly, such a package will create many jobs which people need and will eventually generate sufficient revenue. Finally, the US government in concert with the other countries may have to restructure or liquidate much of the current debt burdens. This, too, has occurred to some extent. But a more systemic effort is necessary at the national and global levels. It may be finally the politically right time to think about a new global financial architecture which many of us have been advocating since the Asian Financial Crisis.
Further negligence and inaction means allowing events to take their own course toward the self-destruction of a complex global economic system. During the tragi-comic episode that went by the name of government policy ,Andrew Mellon advised Herbert Hoover after the 1929 crash:"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate...It will purge the rottenness out of the system."
Such advice today will surely be a counsel of despair. We have learned much since the 1920s although the last 30 years seem to be decades of forgetfulness.As John Maynard Keynes explained in the thirties, in such times of depressed economic activities, only the government can get the money moving again by directly spending or transferring money to those who are sure to spend it.
The Fed can also inject new money into the system. This will result in further spending--- a multiplier effect--- and will stimulate further economic activity. However, it is not clear that the Fed by itself can have large fiscal effects.
Therefore, at present, federal deficits are an essential element of the solution: very large deficits to the tune of 300 to 350 billion dollars if you intend to jump-start a $14.4 trillion economy. True, borrow-and-spend therapy increases the national debt, and more of it is held by people abroad than before, but the alternative of economic chaos world wide is singularly dreadful.
In terms of this three fold crisis management strategy, the Federal Reserve has already shown an awareness of what may be required of it. It is reasonable to expect that the Fed would be prepared to use unorthodox tools to expand the money supply if short-term interest rates (already very low) can be cut no further. Instead of buying only short-term Treasury notes to inject new money into the economy, the central bank may purchase long-term US or foreign bonds. It may accept corporate debt, private bank loans and mortgage securities as collateral for the Fed's direct lending to banks.Also among the broad powers inherited by the Fed during the Great Depression is the ability to make emergency loans to private businesses or state and local governments in crisis.Thus the Fed can do much; but it is still doubtful that its actions alone can pull the economy out of the deep ditch it has fallen into.
We need more effective fiscal policies with a long-term perspective. While the political climate is ripe, forward-looking progressives should be drawing up astute lists of projects to strengthen the economy in the long run. Among these are: repairing the tattered infrastructure, launching innovative public investments in renewable energy and instituting sustainable green community development that will address both our current and future needs.
The good news is that the money spent on green development projects will create more jobs than other public investments. By using a social accounting matrix for the US, I estimated that more than 22 jobs will be created by spending an extra one million dollars on green public investment projects. By contrast, even progressive, non-military projects at best create approximately 15 new jobs per million dollar expenditure. Of course, military-industrial complex creates even fewer jobs; fewer than 10 for every million dollars of added expenditures.
The third avenue for dealing with the crisis--reducing the unsustainable debt burdens on families and businesses--is a challenge. It can lead to and already has led to favoritism. We have seen that rescuing big business while allowing smaller ones to disappear has been the rule in recent decades. This has been true of the recent financial firm bailouts engineered by the treasury and the Fed. Necessary as such bailouts may be at times from the larger perspective of preventing a big crash, a lively political debate about such matters will undoubtedly result in broader remedies. Such remedies can be both equitable and efficient. For example, the US government could create a "resolution trust corporation" for people--an agency that will supervise debt workouts for households, giving them more time to catch up with mortgage and credit card payments and avoid humiliating and life-destroying bankruptcies. Such a "resolution trust corporation" will have the authority to force compliance and improve the situation for all. This would be an institution with a democratic purpose that will work for promoting the genuine common good.
A progressive economic policy package now means facing up to some long-suppressed truths. Several successive US regimes have championed a corporate-led globalization, which has been good for US multinationals but not for the general public in the US and the world. Therefore, the larger reality is that the crisis of the US economy signals the need for a deep restructuring of globalization as well. The globalized system the United States launched and protected now is faced with the dilemma of too many factories and not enough buyers along with many other problems. A cooperative solution for our common good requires that the leading nations must join to launch worldwide stimulative policies. The fundamental solution, however, involves the kind of moderating reforms and building of global and regional institutions advocated by democratic social justice activists worldwide. Among these are: rules to rebalance the system, the genuine promotion of equitable wages and land reforms, and the institution of financial terms that give developing countries more time and space to seek their own distinctive economic strategies. Needed also are new institutions of global governance that are truly equitable and democratic rather than geared to the narrow short term interests of giant corporations and their supporters within the governments of their respective home countries and venal officials of the host countries. That's a very tall order for statesmanship in a world presently governed by mostly short-sighted politicians.
Clearly, the economic dysfunction in the current system involves many other contentious questions including the overbearing scale and power of certain dominant enterprises. The accumulating evidence also suggests that the mass-consumption economy that has flourished since World War II may need fundamental restructuring as well. Solving this difficult problem does have an additional silver lining: it will also launch us on the path of sustainable development.
The present condition is, of course, related to the gross and augmenting disparity of income and wealth over the past few decades. The average employee in the private sector earned a little over 40,000 dollars in 2006. During the same year the top 25 hedge fund managers earned an average of 570 million dollars with the top three earning over one billion dollars each. Such disparities inevitably lead to underconsumption by the masses and luxury consumption and speculation by the wealthy.
An even more vexing issue is that the long-term investment demand for many commodities may be absent when we have already built too many shopping centers selling cheap imports from China and other low cost production centers. We have also built too many jails, big houses for the rich and golf courses.
Now is the time to start investing in solutions to the problems the country has long neglected. With a properly designed economic strategy, many new economic opportunities can be created. For example, we can invest in the energy technologies and industrial transformations required for the post-hydrocarbons age of ecologically sustainable prosperity and sane living. We can invest in decent healthcare for all. We can build better transportation and production systems to deliver safe, healthy food and other necessities. We can invest in the smaller, more creative firms that run on cooperative stakeholder governance and thus are prepared to do things differently. We can and must invest in people: the human development that must begin with children and continue with good schooling for all at every level of education. These and other investment opportunities are where future jobs and higher social returns will be seen if we have the imagination and the courage to act before it is too late.
Those focused on maintaining vested interests and privileges will naturally resist such shifts in purpose and deploy their political muscle to block any promising policy moves. But a fundamental rethinking of our priorities at least would open the way to start towards the creation of a new world. The old world is dying and if we wait too long, we will die with it. Now that Obama has achieved the “impossible dream” of becoming the first interracial president of the US, it is time to dream anew, to strive for a different kind of politics, to take the first important step of green public investment programs, to revitalize the economy and galvanize all good citizens for the arduous climb towards an economy which will truly serve all the people. That is the kind of change that we the people and our new president must now fight for.