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What Economic Change We Can Believe In Would Look Like

Money by TW Collins

Money by TW Collins

The election is over. The partisan battles, never dead, have quieted to a dull roar as opposing sides regroup for future battle. Meanwhile, in America, the economy is sinking into what will probably be judged the worst post-war recession. So let’s take a look at what America’s economic problems are, and what real change would look at.

For today let’s discuss two of the economy’s main long term problems an oil bottleneck and massive maldistribution of resources. We’ll talk about other issues, like trade, another time.

The Oil Bottleneck

This is probably the easiest problem to solve, for all that many suggest it’s the largest problem the US has. The problem is just this: you can’t really substitute away from oil. The world is very close to using all the oil around. Whenever the world economy is doing even reasonably well, the price of oil will soar. This is not precisely because of supply and demand, supply and demand only makes it possible. But when the economy revs up and supply and demand tightens, speculators pour into oil. They act in an amplifying manner, raising the price significantly. And at about $150/barrel, or $4/gallon for gas the US economy starts to rattle apart.

What’s most likely to happen over the next half year or so will make it look as if the oil bottleneck is not a problem. A combination of a worldwide recession damping down demand, and a strong dollar policy intended to cause an overseas dollar drought (the fundamental Rubin/Clinton play of the 90s) will push the price of oil down. Within a couple years I wouldn’t be surprised to see it drop as low as $30/barrel.

The supply of oil, over the long term, is simply not growing as fast as the demand for oil, and that isn’t going to change. Any time the US economy and the other major economies like China and India are performing even reasonably well, oil prices will increase. If the US economy were to really take off in a genuine boom, oil prices would rush back towards the stratosphere. What will probably happen over the next two years is a crash of oil to around 30, then monetary authorities will loosen the money spigot, and oil will crawl its way back up to about $70. Which is fine, the world and American economies can stand that. But if the US economy really booms, and the rest of the world is allowed to boom along with it, it will then pass that and make its ascent to $150.

So, you can have a sort of ok economy, and moderately priced oil, sort of. But you can’t have a really good economy for long, or oil price increases will shake it apart.

This limit on how good an economy the US can have has to be broken. The methods to do it are simple enough. First the US needs to increase CAFE standards. This can be done as part of the auto bailout. Carmakers need to be directed to stop making and selling so many trucks and SUVs. The worst performing vehicles on the road need to be taken off the road, which can be done by simply having the government buy them, scrap them, and give the sellers a credit towards a fuel efficient car.

Second, the US needs to heavily encourage telecommuting. Jobs that don’t need to be done in an office, shouldn’t be done in an office. This means a large broadband buildout. It can be done through fiber, or it can be done through the spectrum which the FEC has recently released. While doing so, forcing the major cable and phone companies to allow anyone access to their networks to sell broadband time will also be required. It’s that rule which made early internet access in the 90s so plentiful and cheap, and it’s that rule that has allowed Japan, for example, to have far faster broadband than the US for far cheaper. To make the broadband truly useful the telecom networks will also have to be forced to allow any device which meets basic engineering rules to connect to the internet, rather than having them refuse to allow features which won’t make them money to be enabled. (European phones, for example, have to be dumbed down to be used on American networks, with multiple features disabled by the telecoms.)

There are also some significant short term measures which can be taken, the simplest of which is to enforce a 55 mile an hour limit for a year or so. The second would be to move to having companies allow workers to work 9 hours for 9 days, and take a long weekend every second week. Most employees certainly wouldn’t mind.

Next you would energize America’s building stock. Although much of the energy used to warm and cool buildings is not produced by oil, peak power is often generated through oil powered turbines, and for other reasons such as global warming, moving off coal is a good idea in any case. Have builders refit homes and office buildings for passive solar, active solar, geothermal and so on. The government pays them for doing so after a government inspector inspects the work. The homeowner gets, in exchange, a much lower power bill or even the ability to sell power to the local utility. This puts the nations builders back to work during a time when there will be little building for them to do, and trains them to make buildings which are not just energy efficient, but energy producers. To make this work you will have to put meters in every house which allow people to see the cost of power hour to hour and to sell power to the local utilities, all of whom will be required to allow microproduction of energy.

Doing this rebuild is expensive, sure, but it’s no more expensive than the bailout. And it will have much more lasting, long term benefits. It is an excellent way to do a stimulus, and puts people to work doing useful things.

Maldistribution of Resources

The second problem is that the US has been using its resources for things which have very little economic gain, or which are inefficient or unproductive.

See what happened to Canadian costs?

See what happened to Canadian costs?

The easiest and simplest gain here is single payor universal healthcare. About 5% of the US’s GDP can be repurposed by moving to universal health care, which in every country which has it, reduces costs by about 1/3. Politically this is now much more possible than it has every been. Not only do many more people want it, but while all this money is being thrown around, health insurance company objections are most simply met by buying out their insurance books and telling them to wind the business down. It’ll cost hundreds of billions, but a country which has spent 5 trillion in the last year and a half on the financial crisis can find the money. And in the not very long run it will pay back.

Comparative Military Spending

Comparative Military Spending

The next step is to take a very serious look at the military. I would suggest not so much cutting the military budget (though some of that is needed) as repurposing it. Get rid of many of the most expensive equipment projects and tell the firms which are connected to the military industrial teat that you will support them for a couple years while they retool for things the US actually needs, such as solar power, geothermal, telecomunications networking, civilian aviation and so on. Meanwhile retrain a significant part of the US military for nation building, and set them to work rebuilding America by fixing roads and bridges, building and repairing schools, setting up power networks and so on. This stuff really is fundamental to the sort of wars the US fights these days, and as with GI training in WWII, the soldiers trained in these skills will eventually go into a civilian economy with skills which are in high demand.

Money also needs to be shifted away from the financial sector. In recent years, depending on how you count it, the US financial sector has gone from producing 10% of the nation’s profits in the 60s to producing between 30 to 40%. Returns in good years have often exceeded 15%. Since the US economy, even by the most generous definitions, was not growing by 15% a year, that meant that all that was happening is profits were being shifted from the real economy to an industry whose job is just supposed to be to get resources where they’ll do the most good. And, in fact, the financial sector didn’t actually produce profits. By the time the full bill for cleaning up their mess is totalled, it will be clear that all their declared profits have been used up and then some.

World Derivatives to 2007

World Derivatives to 2007

So, while a financial sector is necessary, the current organization of the financial sector can’t be allowed to continue. By whatever means they have to be reduced back down to 10% or so. The simplest means to do this would be a financial transactions tax on every single transaction. Even a 1% fee will slow the sector down significantly. This will require the cooperation of other major economies, but there’s every reason to believe that if the US pushes this Europe, Japan, Canada and China will probably be willing to go along. Add in some currency exchange controls for flows from outside the area where there is such taxation and this will dry up many of the financial games. Add in rules limiting leverage, regulations against allowing leveraged instruments to be used as collateral, and a variety of other tightenings of regulation, and you’ll reduce profits a lot.

This is important because money in the US has been going into the wrong things. The private sector, thinking it could get 15% plus returns by playing financial games, did so, and didn’t spend money on real businesses which only earn 5% or even an astounding 10%. This needs to be brought to an end. In large part this will be done by making sure the financial sector is not as profitable as it used to be, but however it is done, it must be done, or there will be more financial bubbles and the real economy will never get the investment it needs.

Wages of the top 1%

Wages of the top 1%

The next way that resources have been maldistributed in the US is in terms of income. The rich have become too rich, and the middle class has taken on too much debt, mainly because it hasn’t had a raise in about 30 years if you look at individual incomes (family incomes have gone up because more and more families are now two-earner.) The price of health care and university has likewise gone up. This is a problem because it has led to a debt society where the savings rate has actually at times gone below zero, meaning the US has to borrow too much money from overseas. This need to have paper to sell in exchange for money was at the heart of both the dotcom bubble of the 90s and the housing bubble which we’re seeing collapse right now. Likewise, a healthy middle class increases demand and provides a better workforce.

productivity-and-wages.jpgThis is simple enough to solve, you simply go back to progressive taxation, with incomes over $500,000 taxed at 80% for every dollar over half a million, incomes over 1 million taxed at 90%, and incomes over 5 million taxed at 95%. Loopholes must be closed, corporate tax loopholes must be closed as well (probably by making it so that if you declare a profit to shareholders you have to pay tax on that profit), and capital gains and other forms of unearned income must be taxed at the same rate as earned income. Contrary to screams by the conservtive ideologues who told us that low capital gains taxes would mean "trickle down" good times for ordinary folks, this will not destroy investment.

Foreign Debt Holdings

Foreign Debt Holdings

The next thing to do is to stop stealing from the future to live well today by selling that future to foreigners. Nothing epitomizes this better than California proposition 13, which sharply limited tax increases. At one time California schools, roads, universities… and economy, were the wonder of the United States. Then Californians decided they didn’t want to pay for all that. The end result has been crumbling schools, repeated debt crises, and a sickly economy. But this hasn’t been limited to the US. For decades now the US has simply not reinvested in the basics. Infrastructure has run down, the school system has gotten worse and worse, university costs have soared to the point where most lower class kids don’t make it through any more and basic research has been all but abandoned.

The savings rate has dipped to essentially zero, even dipping below zero, and foreigners have financed both consumer consumption and US government debts. The cost of that dependence on foreign money has been reinvestment at home and loss of effective sovereignty (as with the decision to allow foreign banks to get bailout money, done because they threatened to dump their dollar denominated assets if they didn’t get it). Money has been found to allow people to continue to live beyond their means by selling America’s future (that’s what debt is, a promise to give future money) and its assets to foreigners.

This did allow Americans, or rather the America’s rich, to live beyond America’s means for a few decades. The best description of it was the "death bet". If you died before the bill came due, well, you won the bet. But if you’re alive now, you didn’t win the bet.

Now this doesn’t mean "don’t run deficits", but what it does mean is "don’t run deficits to fuel consumption spending or to pay salaries and maintanence." If you’re really rebuilding infrastructure, building new schools, making the housing stock more energy efficient—if you’re really doing things which will lead to more income later, that are an investment in the future, then deficit spend. The future will get the benefit as much as the present, or more, and it’s fine for the future to pay. But it’s not fine for the future to pay for salaries today, or for basic maintenance today.

In order to stop this you change how you do accounting. You go to a balanced budget for things like salaries, you allow deficit spending for activities which will help the future. You allow exceptions only during recessions, for stimulus spending on items that aren’t long term, like unemployment insurance extensions, aid to the states, food stamps, and so on. But if that spending becomes regular, it goes into the regular budget and revenue must be found to pay for it.

Another way the resources have been maldistributed is in housing and education. I list these two things together, because in America they are intimately intertwined. Since property taxes pay for schools, good schools tend to cluster in areas with high property values. However high property values are maintained in many areas by good schools. Folks with children move to districts with good schools deliberately to give their kids a better chance. Those who can’t afford to move into a good neighborhood simply suffer with bad schools. This housing/education link needs to be broken, it has led to far too many people just not receiving a good education, and not having a fair shot and the fact that so many Americans are badly educated, or even functionally illiterate is a huge drag on the US economy.

The way to fix it is to simply have the federal government start topping off school district budgets. Sure, right wingers will scream, but really, should how good your education is be dependent on where you live? Really? There will have to be controls on the money, and standards that have to be met and which if not met will allow the feds to take over the district and fix it. There would need to be some agreements between districts not to get into bidding wars—once you’re taking the federal money, you can’t take it and also spend huge amounts of additional money. And yes, it will cost a fair bit. But the price of not doing it is higher.

It’s also necessary to end using houses as retirement accounts, which is what happens amongst far too many Americans. They have a house and a job in an economically active area of the country, and the house appreciates far beyond the growth in incomes Americans are experiencing. When they retire they sell it, move down south into an economically depressed area of America and pay people without much education to take care of them in houses that are a lot cheaper. Or they use the money to pay for care in a seniors home.

Seems like a good way to do it, but it’s not, because it relies on housing prices increasing faster than wages or general inflation. Even when that doesn’t lead to a bubble it does lead to making it less and less possible for younger people to buy a house until later in life. More importantly, it makes mobility in the economy, the ability to quickly buy and sell houses and move from location to location where the new job is, difficult. An economy which is inflexible in this way, which does not allow geographic mobility of people, is not operating at as high a level as it could.

Home prices vs. median income

Home prices vs. median income

Likewise the more people are spending on housing, the less disposable income they have and the less they are saving for the future. Since household savings are the best source of investment for the US economy, low savings rates, caused in part by high mortgage payments occasioned by too high house prices decrease both saving and consumption. The simplest way to fix this is to either allow the housing bubble to collapse properly, or to buy up and reset mortgages at a much lower effective amount based on reasonable housing evaluations. Once the prices have dropped, credits for buying houses in the tax system should all be ended. There should be no preference between buying a house and renting, in law. We do not actually care much if people own or lend, what we should care about is that either way it’s relatively cheap to do so.

This is also important because housing amounts to a protected sector in the economy. If real-estate returns much better than export industries (and it has) then money tends to flood into it and rather into those export industries. And the US desperately needs to export more. To make that happen, you have to make it so that staying in protected sectors doesn’t make more money than being in export industries.

Concluding Remarks

Some of the suggested policies may seem to be fairly sweeping, and they are. But the US is in serious trouble, and while the immediate culprits can be summed up as energy, financial excess and housing bubble, the deeper problems include the ones I’ve listed. Really getting the US economy working again requires a fundamental overhaul of how it functions. Without that overhaul, even once the immediate crisis is over, the middle class still won’t see any pay increases. In fact, what will happen is that the stagnation will turn into an outright, undeniable, decline in the standard of living as the US lurches towards meeting Chinese and Indian standards somewhere in the middle. But the middle is a long ways down for most Americans and getting there will be very very painful.

The economy needs to be made to work for everyone again by taking away bottlenecks to growth, moving investment to where it can create real growth, by providing services like healthcare much more efficiently and by making sure that the productivity of the US is spread amongst the entire population, rather than pushed towards the top. Do this, and the good days will come back. Fail to do it and they most definitely won’t. The best you’ll get is a couple years of sort-of good times, followed by really substandard years, as has been the pattern for the better part of thirty years.

This is a choice Americans and their elites can make. America has the ability to change its path and choose prosperity and vitality again. The question is just, is this the change you want?

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Ian Welsh

Ian Welsh

Ian Welsh was the Managing Editor of FireDogLake and the Agonist. His work has also appeared at Huffington Post, Alternet, and Truthout, as well as the now defunct Blogging of the President (BOPNews). In Canada his work has appeared in and BlogsCanada. He is also a social media strategy consultant and currently lives in Toronto.

His homeblog is at