by Robert M. Solow Info
Robert Solow, an emeritus professor at MIT and former senior economist for the Council of Economic Advisers, won the 1987 Nobel Prize in economics, for his analysis of economic growth.
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Shoppers at a Wal-Mart in Reno, Nev. (Scott Sady, File / AP Photo) The Federal Reserve’s decision Tuesday to buy up long-term government debt won’t solve our economic woes, says Nobel Prize-winning economist Robert M. Solow. Instead, we need more stimulus spending and tax cuts, as called for by economists and historians in The Daily Beast manifesto.
In a market economy, stuff gets produced, capacity grows, and people are employed when businesses see a decent chance to make strong sales and good profits. Right now, they see no such thing. Our economy is limping along, growing slowly—too slowly to make up much of the ground lost in the long, grinding recession. The members of the Federal Reserve Board expect that the unemployment rate will still be above 7 percent in 2012. (It was 4.6 percent in 2006 and 2007.) We are wasting productive capacity, eroding skills, and damaging families.
To coin a phrase, we need to get our economy moving again, and soon. It would be foolhardy to sit and wait for a spontaneous burst of consumer spending or business investment in a sluggish economy with high unemployment and with capacity utilization still only halfway back to its pre-recession level. Not much more can be expected of monetary policy. It has done what it conventionally does, and continues to keep interest rates low. Lending by commercial banks is still falling slowly, as banks try to rebuild their capital positions, and have a hard time finding promising borrowers anyway. The Fed is pursuing some less-conventional devices for giving the economy a push, but in present circumstances it is pushing on a string.
That leaves a choice between prayer and fiscal policy. The federal government could give the economy a starting push either directly through increased public spending or indirectly through carefully targeted tax reductions. The early 2009 “stimulus package” amounted to much less than its price tag. It was too small for the oversize demand deficiency it was supposed to cure, and it was very badly composed. For example, the evidence tells us that universal one-time tax rebates tend to be used for debt reduction or otherwise saved. And many of the spending items, even if devoted to some worthy object, had little job content and played out over much too long a time, when what was needed was a strong, front-loaded but steady push.
There is still time and need for further stimulus, of serious magnitude, and this time directed in a way that will lead reliably and quickly to spending on goods and services. Spending is what business needs to see. An obvious candidate is financial assistance to state and local governments. Their revenue has been decimated by the recession, they have limited borrowing capacity, and as a result their spending is now lower than it was three years ago. Federal aid would be spent promptly on established services and transfers to the needy. A determined search would find other opportunities. This time, any tax reductions should go to those who can be counted on to spend the proceeds: mainly the unemployed and the working poor.
A functioning democracy has to understand that sometimes the short-run and long-run needs are different. Today, in a depressed economy, we need more spending.
• Read The Daily Beast ManifestoOf course further stimulus will increase a federal budget deficit that is already very large and will persist for years. It will persist even longer if the economy remains weak. That is cause for thought, not for paralysis. In the longer run, the build-up of Treasury debt displaces corporate securities from portfolios and raises the cost of borrowing to active businesses. But right now it is not borrowing costs that deter productive investment; it is the lack of demand for the products of those businesses. A functioning democracy has to understand that sometimes the short-run and long-run needs are different. Today, in a depressed economy, we need more spending. When prosperity returns, we may need more saving to finance domestic investment. The right response is stimulus now plus a credible plan to decrease the debt/GDP ratio when unemployment and idle capacity have been reduced to acceptable levels. Unfortunately the federal government doesn’t have much credibility these days. An intelligent, non-suicidal recovery plan might actually help.
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First, get rid of California's Prop 13. It creates an aristocracy based on when a person moved to a place not on economic conditions of the time. Prop 13 represents everything the constitution is against and what the spirit of the Revolutionary War was about. It creates an aristocracy. It has turned California into a real estate anomaly where some have vast privileges and economic leverage which contributed to California's property investments in other states and over building as so many people became real estate tycoons in the 80's and 90's thanks to their unfair, and unconstitutional government handouts thanks to prop 13. Any one not paying tax for what their house is worth compared to a new person who is paying a higher tax for the same worth of property is receiving a government handout and not based on need but aristocracy. America was founded to end just this. We don't need welfare of the privileged. This caused property values in Arizona to get out of wake. Neighboring States should also so California for the damage caused and the creation of this housing bubble. Blame prop 13 for ruining the lives of millions of people.
What's second?
Ironic how the left considers not allowing the government to steal more of one's personal property a handout. The liberal mind is a terrible thing to waste.
It is a handout based on a pyramid scheme of when one bought their house. It is a government subsidized pyramid scheme. It effects other states because it is so abnormal and puts people who move to California in a lesser position than for Californians who move out of state - thus effecting the interstate commerce of workers. It is blatantly unconstitutional on several levels besides being illegal..
Why refer to it as a 'Stimulus' when it was never designed to stimulate anything but votes for the Dems? It was designed to preserve government jobs in the face of evaporated tax bases: people without jobs or homes don't pay taxes. 91% of the so-called stimulus went to preserving and growing government: the rest went to pork. When each revenue-consuming government job costs 8 revenue-producing private sector jobs, maintaining them is counter-productive to restoring the economy. When this Congress repeatedly passes 2000 page, lobbyist-crafted legislation bombs, with no idea what they include and enough open-ended undefined mandates to choke a healthy economy, why would any business risk expanding? Only increased productivity (not wasteful pork spending) can restore our economy, and the government doesn't do "productivity". Everything this administration does interferes with productivity as they promulgate new bureaucracies faster than we can count them. President Obama threatened bankers that if they made "risky investments" he would "punish" them because he needed them to buy Treasuries to monetize his debt. So, they get worthless script from the Fed at near zero interest and convert it to Treasuries at 3~4% free interest. That's why small business can't get loans to exist or expand. To suggest that government continue it's runaway spending; and to maintain it's bloated headcount and bloated pay rates is idiocy of the first order because it makes any productivity improvement impossible. Repeal the 16th Amendment and implement the Fair Tax as is, and our exports become 23% cheaper over night; we stop taxing productivity and we put 23% plus the prebate in the pockets of consumers. Obviously too sensible to be considered by the DC Marxists.
We have a debt crisis at the national federal level. The crisis is due to the fact that the federal government is growing and the economy is shrinking. To solve the crisis you reverse this condition: grow the economy, shrink the government. Thank you for your attention.
to russellc...... You hit the nail right on the head....... Obama is funneling money to government employees and unions that can not grow the economy.....nor will his policies increase moneys coming in to the government coffers...... The left however is up in arms now, but not for the same reason the right is. One has only to look at comments coming out of the White House to understand. Robert Gibbs, emphasized the unsatisfied temperament on the left when in a recent remark he said, "they wouldn't be happy with Dennis Kucinich as president." How can that be true? Democrats in Washington control just about every thing right now. From the big cities, to the schools, to the unions, to the auto companies, to college loans... and soon how I will live and die. With all that control, yet they've still failed to right this economy....... Sounds like incompetence to me.
As usual the unanswered question that big spenders conveniently ignore is how are we going to pay back the debt? Past Keynesian deficits, whether or not successful is debatable, were repaid with the USA's trade surpluses. However our current trade deficit is running at $50B per month so that is no longer an option. The Democrats have proven they cannot be trusted to construct an effective stimulus program as we just witnessed $1T flushed down the toilet in rewarding liberal special interest groups. State and local governments are going broke due to the influence of public sector unions who in partnership with Democratic politicians are fiscally raping taxpayers with excessive wage and benefit demands. The money being set aside to meet the pension demands of these unions does not add one penny to our current aggregate demand. Illegal aliens are stealing American jobs and draining our public resources. The Obama tax increase scheduled for January 1, 2010 will be the largest in history and has scared taxpayers into hoarding their cash and small employers from hiring. The answers to the problem are simple but do we have the national will to implement them: 1) Enforce current immigration law. Cut the currency flow of money outside our borders by restricting international fund transfers to people who are here legally. End the concept of anchor babies. 2) Outlaw public sector unions. Raise the public sector retirement age to 65. End the funding of public sector guaranteed pension benefits and introduce the 401K model as the private sector has. Make public sector union members contribute to their health care costs at the same rate as the private sector average. 3) Eliminate all federal taxes and replace them the Fair Tax. 4) Implement a graduated increase in the SS retirement age. 5) Kill Obama Care. 6) Pass Constitutional amendments to allow term limits and the Presidential line item veto. 7) Pass a Constitutional amendment to outlaw all non-personal campaign contributions. No limits on what an individual can personally contribute. 8) Implement simple tort reform. If you sue and lose you pay all court costs.
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Former Gov. Cuomo of NY often said he didn't care whether the government was too big or too little, so long as it was big enough to do the job of protecting the people and providing justice so we could have a decent society. The Republicans have shown that their idea of "shrinking government" is to pass off many of it's functions to private companies at far greater costs to the taxpayers, and with far less effectiveness. If you doubt this, check the record of Blackwater, Halliburton and Koch Industries and the numerous criminal convictions these companies have had for murder, negligence and misrepresentation. The problem isn't the size of government. This is a right-wing ruse. The real issue is how can we as a society provide education, health, wealth and opportunity to all of our citizens? The Scandinavian countries, Japan and Germany all have answered this question by having rigorous government regulation of corporations, union participation at the board level of these corporations, and insuring that their education systems are succeeding. America has succumbed to the right-wing myths of a "free market," which allows rich corporations to evade taxes, pollute the environment, abuse or kill their workers, and overpay the executives by a factor of 500 or 1000 times. Not a good record.
@periscope, Dear Idiot, Japan has been in a recesssion for 15 years and Germany is currently pursuing austerity measures unlike President Potato Head who is just flushing taxpayer money down the leftist special interest sewer. Plus all the countries you mention has rigorous immigration controls to prevent illegal hordes from plundering both their public social programs and job markets. If you agree to implement immigration measure that these nations have, i.e. no anchor babies, strict border control, etc... then maybe we could have an intelligent discussion.
@dalelama, most endearing moron, what leftist special interests is obama supporting? health insurance companies? wall street? those are the two biggest reforms we've had, and their profits are up. and if you think the immigrants are plundering our social programs, wait until you see what the hordes of baby boomers will do to us over the next few decades.
Your self-destructive delusions blind you to the fact that the very ideology and policies you recommend have already caused the Great Recession of 2008 and the very Republican frauds and fools that brought it to us, are obstructing and delaying any remedial legislation that can be enacted. Go take your doctrinaire stupidities to a Tea-Bag Party where people care dumbass!
@enkidusshade, public sector unions, private sector unions, big Wall Street banks, trial lawyers, illegal immigrants, and the 47% of the population who pay not a penny of federal income tax just to name a few...
@enkidusshade, one simple difference dimwit is that the baby boomers have paid into the system illegals do not...I know that is a hard concept to grasp but if you think about it hard enough the light bulb might go off.....
There were some great posts on here hitting upon the many reasons for the prolonged recession and reasons that the so-called "stimulas" hasn't stimulated jack other than friends of dems. Then ofcourse up pops periscope with the goverment is good - people are bad arguement.... sad. From multiple sources, the average goverment worker (not including the arm forces) makes with bennies 123k a year, the average private sector worker makes 61k a year. Federal compensation has grown 36.9% since 2000 after adjusting for inflation, compared with 8.8% for private workers. Since the start of this recession in December 2007, private sector employment has fallen by 6.8 percent while federal government employment has actually increased by 10 percent. Even after factoring in state and local government job losses, governments, on net, have added 64,000 jobs during this recession while the private sector has lost 7.8 million jobs. Yet job productivity is far greater among the private sector. I think we all need fed jobs but who'd be left to pay our bloated salaries.
@dalelama, o benighted lama, what has obama done for the unions, private or public? just saying their name with his three times in a mirror doesn't make a connection. same for trial lawyers and illegal immigrants (whom obama is deporting at a higher rate than the previous president). and the 47% who pay no income tax? well dale (or ms. evans if you prefer), those people don't pay income tax, because they don't make enough money. instead they pay payroll taxes, which go towards social security and medicare. this also includes the illegals, who pay billions into the system (http://www.nytimes.com/2005/04/05/business/05immigration.html).
@dalelama, and i'm sure the baby boomers made sure to pay enough into the system while screaming for more tax cuts. that must be why deep thinkers like you want to raise the retirement age. everyone working right now knows how productive workers at age 63 can be, as they wait out the clock until they hit 65.
aurora1925 Any solutions suggested for this economic debacle are irrelevant UNLESS they include an opinion and discussion on re-evaluating U.S. trade policy. If membership in the WTO, and continuation of trade agreements like NAFTA and CAFTA, etcetera etcetera are NOT part of the economic dialog, then there really IS no dialog. Name ONE country with whom we have a so-called "free trade agreement" where the U.S. doesn't have a deficit? Far as I know, only countries where the balance is even remotely "balanced" are Canada and Germany. As long as we have humongous trade deficits there never will be a solution for this country.
Why can't we get the Fed to set up a national investment bank and put money into the real economy--no matter how much it takes? It does need to fund state and local governments as well, but the main thing is providing grants and zero-interest loans for national investment, in whatever projects we can think of.
We shouldn't fund states who piss their money away by over compensating public sector unions with ridiculous pay, benefit, and pension packages just so they can become part of the Socialist machine specializing in stealing other People's money. The term "national investment bank" is just a synonym for wasting tax payer money on projects that reward labor unions and will continually need future subsidies ala the Post Office and Amtrak.
To read this elitist bunch of nonsense is to think we are in a time warp from the British Communist Party Conference. This madness that Obamabots and the Leftist Progressive Socialists want is bankuptcy. It is a horror. It funds teacher union thugs for a Nov. voter base. It puts debts, deficits and a Trotskyite type of regime federalization in place of liberty, freedom and enteprise. They try to rescue people who should never have a house that they can't pay for. They bail out companies which are corrupt. They bail our 13 Blue States for votes in Nov. This guy is a dunce. Period. No wonder no one wants so called elitist liberals running any business. Good Lord, to listen or read such balderdash puts one in a mood to vote every liberal Dem out locally, state legislative and guv races plus all Congressional races. A win for these Dem leftists would make us look like Greece or Venezuela. Enough.
What the economy needs assurances to the corporate world that they are not going to be taxed into bankruptcy after Jan 2011 by this administration so that they can invest in capital and the workforce. As of right now the corporate world is facing billions of lost revenue in order to pay for Obama/Pelosi's social experiment that has already been proven a failure in Europe. No responsible corporation or even single individual is dumb enough to spend money that they don't know they will have.
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