Let's Call Off the Recession
With all the talk of a financial meltdown, most economists are predicting that America is either in, or headed for, a nasty recession. With all due respect, I think we should call the whole thing off.
A recession consists of falling GDP and rising unemployment. It would mean idling workers and producing less than we are producing now. If you look at the economy in purely physical terms, there is no reason for a recession. No bombs have hit American factories. There isn’t a drought. In fact, we have more workers, more equipment, and more ideas than ever. There is also no benefit to having a recession. There is no economic problem that will be helped by producing less, having American workers earn less, and having government collect less in taxes.
Recessions are staggeringly expensive. Let’s look at a case where the looming recession reduces 2008 GDP growth from an average of 2.0% to 1.0%, causes the economy to contract by 1.0% in 2009 rather than growing by 2.6%, and then has no affect in 2010 and beyond. On a “present value to the infinite horizon” basis, which is the method used by the Social Security Trustees, this recession would cost the economy $49.4 trillion in lost GDP. The Federal Government’s share of this cost, in the form of lower tax revenues, would be $9.1 trillion. As a point of reference, $9.1 trillion is 55% larger than the entire national debt, which currently stands at $5.9 trillion.
So, if a recession is unnecessary, pointless, and expensive, why have one? People are saying that the current problems in the financial markets will cause a recession no matter what we do. This is not true. Government mistakes caused this problem and strong corrective action—taken immediately—can head off the recession and its economic and social costs.
The root cause of this whole mess is the unstable U.S. dollar. The Federal Reserve has put our economy through two boom-bust cycles in the past ten years. During the first cycle, the excess money created by the Fed was used to bid up the price of tech stocks. During the second, it was used to bid up the price of housing. Both booms were inevitably followed by busts.
There is no point in blaming Silicon Valley, Wall Street, Main Street, or “greed” for these asset boom-bust cycles. If the Fed puts too much liquidity into the system, it has to express itself somewhere. The only way to stop these damaging oscillations is to stabilize the dollar.
To have a stable economy, we must have a stable dollar. Under the Constitution, it is Congress—not the Federal Reserve—that is responsible for regulating the value of our money. On July 31, “Judge” Ted Poe (TX-02) introduced a bill, H.R. 6690, that would require the Fed to stabilize the value of the dollar by making it equal to that of 1/500th of an ounce of gold. This bill would require the Fed to do this directly, by using their Open Market operations to target the COMEX price of gold, rather than indirectly, by manipulating interest rates.
So, the first step in aborting the oncoming recession is to pass H.R. 6690, or for the Fed to implement its provisions without being ordered to do so by Congress.
Making the dollar “as good as gold” would restore confidence in our money and respect for our country. It would put an end to boom-bust cycles in asset prices and allow sanity to return to the financial markets. It would cause interest rates to fall and capital investment to rise. It would make the dollar the de facto world currency and ignite a massive market demand for U.S. dollars.
Simply stabilizing the dollar would have been enough if we had done it in 1998. However, we are now so far down the road to recession that more must be done. Our economy needs stimulus—real stimulus, not phony stimulus like the bill enacted earlier this year.
The January “stimulus” bill was based upon economic superstition. I predicted at the time that the rebate checks would do nothing, and nothing is exactly what they did. In the real world, government rebates don’t stimulate anything other than the Federal deficit.
What can—and must—be stimulated is private business investment. It is investment that directly creates both employment and output. I described the mechanisms in detail here.
If we allow this crisis to depress private business investment, the unemployment rate could quickly soar to more than 10%. As it happens, H.R. 6690 also contains the most potent form of economic stimulus possible, short of repealing the corporate income tax. This bill would allow everyone to write off 100% of their capital investments for tax purposes in the year they were made. This would provide businesses with both more incentive to invest and more money to invest. It would quickly turn an investment bust into an investment boom.
The stimulus provided by H.R. 6690 would increase the present value of Federal tax revenues. This is because: 1) higher investment would lead to higher taxable profits; and, 2) “first year expensing” represents a deferral of, not a reduction in, taxes owed.
Still more must be done, however. The financial crisis has been allowed to progress to the point where businesses are worried about the safety of the money in their payroll accounts. There have been runs on banks. This must be stopped. Deposit insurance must be extended to all accounts in all financial institutions. Ireland and Germany have already done this. It is bizarre that the “Bailout” bill passed by Congress last week did not provide for this.
The Fed’s first boom-bust cycle led to Enron, which led to the ill-conceived Sarbanes-Oxley reform law. One provision of this law forces financial institutions to revalue all of their assets at “market” every day. Because of the financial panic, there is no functioning market for many mortgage-backed securities. Under these circumstances, the “mark to market” regulations can force a firm to take massive write-downs on assets, even if none of the underlying mortgages are in default. This, in turn, can drive the firm bankrupt—on what amounts to a technicality. These “mark to market every day” regulations must be suspended—now. Again, it is bizarre that Congress passed a “Bailout” bill that did not simply order the S.E.C. to suspend “mark to market”.
If H.R. 6690 were passed, all deposits were insured, and “mark to market” accounting were suspended, it is not clear that there would be any need to use government money to buy so-called “toxic securities”. However, if there were, the $700 billion provided in the “Bailout” bill should be more than enough to handle the problem.
There is nothing to be gained at this point from having a recession. Let’s bring Congress back into session and call the whole thing off.