How to Avoid Another Great Depression

...economy have made it susceptible to a permanent semi-slump...

...but in abolishing slumps and keeping us permanently in a quasi-boom...

...2) an alteration of the withholding tax tables to give wage earners some immediate additional take-home pay?without lowering the individual's tax liability for the year...

...A permanent semi-slump assures a more compliant labor force, willing to work for almost frozen wages to meet mortgage payments and rents and keep food on the table...

...Earlier recessions were usually associated with inventory cycles...

...The problem today?as it has been for the last 19 months of recession (not to mention the last 19 years of anemic real growth)—is the failure of the U.S...

...By the stroke of the legislative pen, ventures that had provided high paying jobs for millions were converted into millstones around investors' necks...

...For example, on February 25, 1991, the New York Times ran an article by reporter Louis Uchitelle entitled "The Ground War and the American Economy...

...Meanwhile, states and municipalities are being forced to retrench as the recession eats away at tax revenues...

...Business firms that deal with the states and cities have of course been affected as well...

...Reviving an economic system where everyone who is willing to work can have a meaningful, productive job would reinstate the revenue base for government...

...The best defense against welfare-dependence is a full employment economy...

...A temporary tightening of monetary policies (sometimes accompanied by less expansionary fiscal policies, e.g., 1969-70, 1978-79) deliberately sought to hold demand growth below production potential to counter inflationary tendencies...

...Massive action by Washington is necessary if we are to avoid reliving the gruesome experiences of the Great Depression...

...Owner-occupied real estate values declined by $ 141 billion, the first nationwide drop since 1946...

...economy to provide enough meaningful, productive jobs to assure gainful employment to anyone who is willing to work for a living...

...His proposal would immediately end the recession as well as make available public sector investments to improve the long-run growth prospects...

...Until the RTC changes its policies and retains vacant real estate as a buffer stock to insulate the system against a future surge in real estate prices, its actions will add downward pressures on the market...

...would spend more," they went on, and "lower oil prices would give them more to spend...

...Therefore, money saved from lower military expenditures should not be used to spur employment...

...That could alter the distribution of income among the well-off, depending on whether they receive income in the form of salaries or capital gains...

...It will not create jobs...

...The construction industry sagged...

...This has diverted attention from his uncomplicated?and, I would say, undeniable—message: We will only have a prosperous America when the government accepts the responsibility for creating an environment where all who want to work can find decent jobs for which they are qualified...

...So he has tried to disarm his critics with some fancy statistical and semantic pyrotechnics that transform reported government deficits into budget surpluses...

...A more truthful response might have gone as follows: No one can guarantee Congress what the economic future will hold in terms of continued recession vs...

...Instead, the "peace dividend" should be devoted to reducing the deficit...

...once the ignition is shut off the motor will die again, unless the battery has been permanently charged to keep the economy going?and in a growing economy, accelerating...

...The usual gang of "economic experts" that the media and Congress round up to evaluate such proposals divides into five distinct categories: 1. The fiscally responsible do-nothing neoliberals...

...Now, Central Banker Greenspan finds he cannot stimulate the American consumer to spend us out of recession, despite all the interest rate reductions...

...A jump start will turn over the economic motor...

...Today they cannot maintain existing inadequate services because of the recession-induced loss of revenues...

...It is again time to revitalize the economy with a permanent responsibility on the part of government to spend as much as necessary to guarantee a level of aggregate demand that ensures every American who wishes to work a job...

...In the 1983 through '85 recovery, though, real estate construction, rather than inventory rebuilding, was the heart of the investment boom...

...Changes in the U.S...

...The primary responsibility for developing these components of our system is in the hands of the state and local governments...

...Politicians eventually institutionalized that fiscal stance with the 1985 Gramm-Rudman Act, the 1986 Tax Reform Act, and the 1990 Budget Agreement...

...In a rising market, too, the sale of RTC properties would moderate housing price increases to what the economy could afford while discouraging speculative excesses...

...Depressed housing prices depress the confidence of the American homeowner cum consumer...

...As long as these are held, their carrying costs help to swell the Federal deficit...

...Not only was there little new building...

...Finally, late last December, after 17 months of recession, the White House conceded that the economy might need a lift...

...These neoliberals argue that any fiscal stimulus in the form of tax cuts or greater government spending will merely increase the Federal deficit and lead to inflationary problems in the long run...

...For all of their toil, they are worse off each day the recession lingers...

...As soon as they were reduced and policies eased, a rapid recovery period occurred as firms rushed to replenish their stocks...

...THE CURSE OF UNEMPLOYMENT How to Avoid Another Great Depression BY PAUL DAVIDSON In the late summer of 1990, President George Bush stated dogmatically that there would not be a recession in the United States...

...Eisner also knows his proposals, like Roosevelt's New Deal, will significantly increase the Federal government's total monetary debt...

...and (5) repeal of the luxury tax on yachts and airplanes...

...We must actively promote prosperity...

...For the first time since the end of World War II, the net worth of American households has declined...

...Those Congressional actions, endorsed by the White House, virtually guaranteed that the next recession would be more enduring than previous postwar slowdowns, and that restoring prosperity would be more difficult and costly than in the past...

...At the beginning of the Great Depression, some economists developed a similar scheme, maintaining that government simply had to "prime the pump...

...Will the Bush program significantly improve our recent dismal economic performance...

...Any action, including taking no action, involves the possibility of making mistakes...

...Still, just as Herbert Hoover had done some 60 years earlier, Bush promised the American people that prosperity was just around the comer...

...Without strong and growing demand in the consumer goods market, investment in entrepreneurial capital is unlikely to be profitable no matter how low interest rates are driven...

...The success of former Federal Reserve Chairman Paul Volcker's planned 1979-81 recession in reducing inflation (at a cost of double digit unemployment) has moved Washington to an almost mystical belief in the Fed's strategy of depressing the economy in order to save it...

...Moreover, beginning in the 1970s the goal of a balanced Federal budget was given precedence over full employment on the public agenda...

...A decade ago, supply-side conservatives provided the Reagan Administration with a rationale for justifying large personal income tax reductions...

...Because a family home is the largest single investment of almost all consumers, it is no wonder consumer confidence has not revived—even after 14 interest rate cuts by the Federal Reserve...

...The temporary measures would end after 15-18 months, so as not to permanently increase the deficit...

...The resulting increase in home demand would help restore the value of household equity...

...The main chords in Bush's supporting State of the Union medley for stimulating the economy consist of: (1) tax credits for first-time home buyers and investment tax allowances for business purchases, with both to end by next January...

...But he recognizes that the deficit-phobia promoted by Presidents Reagan and Bush, and other Republicans who have successfully tarred the Democrats as "budget breakers" and "big spenders," has produced political paralysis...

...So is the continuing pressure caused by the huge overhang of buildings the RTC is trying to unload, which will keep the construction industry depressed...

...That experience should warn us that today's jump start approach is a delusion that obscures the need to develop the long-term policies an entrepreneurial society requires...

...See my "Why Deficits Hardly Matter," NL, August 20,1984...

...They might even give the economy a temporary lift before the balloting, but a letdown (similar to Roosevelt's 1937 experience) is sure to follow when they expire in January 1993...

...The economy, in short, cannot pull itself up by its own bootstraps...

...In the two generations from 1946 to '86, household net worth rose continuously at an average annual rate of more than 8 per cent...

...Paui Davidson, a past NL contributor, holds the Holly Chair of Excellence in Political Economy at the University of Tennessee, Knoxville, and is editor of the Journal of Post Keynesian Economics...

...It quoted many of the do-nothing doyens as saying an early victory in the Persian Gulf would induce a rise in consumer confidence...

...Over a half-century ago, Keynes wrote: "The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump...

...That means the government must expand market demand by either increasing its purchases or cutting taxes to encourage private spending whenever the cost of normal government services plus the private sector's expenditures do not create sufficient profit opportunities to induce businesses to hire everyone seeking employment...

...Eisner would have the Federal government increase spending for those projects either directly or through major grants to the state and local governments on a long-run basis—without raising tax rates...

...many investors tried to bail out—to unload properties before the crowd did—precipitating a drop in real estate values...

...He embraced their view that the economy would recover by itself...

...4) a permanent additional tax deduction, to begin October 1,1992, for each child in families whose income is less than $157,000...

...It took only nine months for the GNP to collapse back to its 1933 level...

...But no matter how low interest rates go, businessmen will not increase borrowing to invest in new facilities in a community so long as the population is poorly educated, the infrastructure is crumbling, and the markets for their products are slack because the incomes of their potential customers are stagnating or falling...

...3. The fiscally responsible do-something liberals...

...Throughout 1991, the do-nothing neoliberals supplied the rationale for President Bush's unwillingness to combat the recession...

...Obviously Federal Reserve Board Chairman Alan Greenspan and his fellow Fed diagnosticians believed that if 13 previous doses of medicine didn't cure the patient, a 14th megadose would...

...The main effect of such proposals would be a progressive redistribution of after-tax income and a reallocation of government spending that did not add to the Federal deficit...

...Each expert responded by reiterating his position as the correct one and suggesting that the others were dangerously wrong...

...the Federal Reserve would simply reduce the interest rate one more time...

...And the lack of consumer confidence is usually cited as a major reason why the economy remains mired in recession...

...Then came the passage of the 1986 Tax Reform Act, making a crash in the real estate market practically inevitable...

...President Bush's State of the Union economic program reflects a mix of the do-nothing neoliberal and the conservative supply-side philosophies...

...The media continue to present this as the conventional wisdom, thereby effectively silencing any true liberal Democratic opposition in Congress...

...Re-establishing a full employment environment would enable middle class America to earn enough to pay for what our economy is capable of producing...

...Throughout the rest of his Administration the government spent more than it took in, and prosperity was firmly reinstituted...

...Today's supply-siders realize that a permanent fiscal economic boost is necessary...

...That, in turn, aggravated the financial problems of the savings and loan institutions (S&Ls), leading to their ultimate collapse...

...These experts are concerned about reversing the redistribution of income toward the rich and the anti-labor policies initiated during Ronald Reagan's reign...

...In 1989 the Resolution Trust Corporation (RTC), a newly formed government agency, was given the responsibility of taking title to the unprofitable properties of the failed S&Ls...

...To lower the political heat, he has already reduced the payroll tax withholding tables...

...Even if they are still employed, they have seen the equity in their homes decline (and in some cases completely disappear or become negative...

...The curbed demand created "excess inventories" that had to be worked off...

...The result has been the longest recession since the Great Depression...

...It promotes taxpayer revolts against additional taxes even if the new expenditures are targeted to education and other programs whose benefits will mainly accrue to the average working family...

...Here the drastic fall in the price of existing housing in the wake of the 1986 Tax Reform Act is a critical factor...

...2. The do-something temporarily, do-nothing permanently neoliberals...

...In essence, Eisner has put forward a scaled-down New Deal...

...With Presidential and Congressional elections rather than prosperity just around the corner, politicians and the public are looking to economists for advice...

...Accordingly, if Congress is going to err in taking economic advice, it would be wisest to err on the side of promoting jobs now—and resurrecting the equity the American family has in its one major investment, its home...

...Toward the end of a recent session of the House Ways and Means Committee, a confused Congressman asked a panel that had representatives of all the aforementioned classes of economic experts: "Given the conflicting testimony of such learned men and women, which one should Congress listen to...

...But in moments of unguarded candor the advocates of revenue neutral redistributive proposals will admit that since their program does not substantially increase aggregate spending, it will not do much to stimulate the economy...

...It inclines workers to support tax rate cuts even if the main beneficiaries are upper income recipients, in the hopes that some crumbs from the tax cut table will fall on the worker's plate and help him pay the bills...

...There is abetter way...

...The 1982-85 period, when Reagan's massive income tax cuts were being phased in, proves that any tax cuts that encourage additional private sector spending, without reducing government spending, will reduce unemployment and give the economy a boost...

...Despite their apparent liberal credentials (many are associated with the Brookings Institution), they are the "laissez faire" economists of the last days of the 20th century...

...Lower tax rates would pull the economy out of the 1979-81 recession, they said, and would balance the Federal budget by creating incentives for productivity improvements certain to trigger rapid economic and tax revenue growth...

...Being conservatives, they prefer fewer taxes to more government spending...

...Liquidations at bargain basement prices also lead to more banking failures, forcing the RTC to take on additional unprofitable properties almost as quickly as it sells off its earlier holdings...

...Robert Eisner, former President of the American Economic Association, has advocated quick, large-scale government expenditures to upgrade the nation's infrastructure and public education system...

...Until these local governments obtain a massive infusion of additional funds, significant growth in productivity—the key to providing jobs with high real wages—will not be realized...

...If we do not learn from our experience, we are likely to repeat past errors of judgment...

...Unfortunately, to both politicians and the public Eisner's argument appears to be mere sophistry...

...4. The supply-side conservatives...

...In an attempt to end pump priming and balance the budget, Franklin D. Roosevelt cut government expenditures drastically in early 1937...

...The law severely reduced expected after-tax money income flows from real estate by abruptly abolishing tax sheltering of income through investment in structures...

...More confident consumers...

...5. The single unabashed "Keynesian...

...prosperity...

...In 1990 it fell by $181 billion...

...Consequently, these experts advocate a temporary tax cut and/or a temporary 10 per cent hike in Federal grants to local governments to "jump start" the economy...

...Do-nothing neoliberals assume the economy will recover on its own...

...We cannot afford to wait for the prosperity that is always just around the corner...

...To cover any resulting loss in revenues, military spending would be trimmed an additional $50 billion over five years, 250 Federal programs would be eliminated, and government employment and discretionary spending would be frozen at current levels...

...The supply-side aspect of Bush's program, the capital gains cut, is unlikely to pass a Democratically controlled Congress without an offsetting increase in the tax rate for the upper brackets...

...Yet the Federal government remains committed to no more than temporary stimulative policies...

...His temporary tax breaks for first time home buyers and business investment should easily pass a Congress eager to play Santa Claus in an election year...

...The pain inflicted on the middle class by the recession has provided the fiscally responsible liberals with a justification for urging tax cuts and even government expenditures geared to assist middle and lower income families...

...By February 1991, he admitted the economy had slowed down...

...Productivity growth requires better education, better transportation, better health and sanitation...

...remains enmeshed in a stagnating economy...

...Nevertheless, such tax cuts tend to be associated with large permanent deficits—and usually a regressive redistribution of after-tax income...

...For many white- and blue-collar middle class workers—the industrious population that is the backbone of the American system—the lengthy recession has ended the American dream...

...Less educational and infrastructure rebuilding would have to be indefinitely postponed because of the government's inability or unwillingness to invest in America's future...

...The consequent increase in demand for goods and services would prompt private enterprise to increase investments to take advantage of profit opportunities...

...A money wage loss of that magnitude for the most middle-class of middle class American workers will only exacerbate the deflationary pressures already in the system...

...During the 1983-1985 recovery, private citizen Alan Greenspan repeatedly expressed a fear that the ongoing prosperity was being financed through equity loans collateralized by the growing nominal equity American households had in their homes...

...The President asked the public to be patient five more weeks while he developed an economic plan for his January State of the Union Message...

...Roosevelt quickly reversed course...

...Under the present circumstances, money wages in construction will have to be forced down by at least another 25-35 per cent for new construction costs to compete with the lowered prices of existing facilities...

...This has made it necessary to eliminate vital local government jobs and services...

...Never mind that the Bush Administration has racked up the highest annual deficits in our history, with the Reagan Administration a close second...

...Bush's desire to be known as the education, environmental and transportation President notwithstanding, his State of the Union proposals do nothing to restore and enhance the financial position of our cities and states...

...What is needed, in other words, is a long-term commitment by our government to establish a productive environment in which everyone can participate, whether or not the budget might be unbalanced...

...The President projects that his package would stay within the Budget Agreement of 1990 at least through what he hopes will be his second term...

...This would make the American dream achievable once more...

...Thus the RTC is under great pressure to unload them, further depressing prices in residential and commercial real estate...

...But history has shown that pump priming was a non-serious response to the serious- Great Depression, because it failed to sustain aggregate demand...

...Although supply-side conservatives no longer repeat the false budget balancing claim, they still assert that reductions in the capital gains tax rate and investment tax credits or allowances will end the recession, make the economy more productive, and thus improve tax revenues...

...3) a permanent decrease in the capital gains tax...

...If, however, the President cannot take the political heat of doing nothing in an election year, tax cuts should be designed solely to make the members of the electorate feel better until they exit the voting booth—that is, they should expire by January 1993...

...Eager to avoid looking like wild-eyed radicals clamoring for income equality, they would use the peace dividend plus a surtax on the rich to finance their middle income tax cuts...

...Doing nothing because prosperity is just around the corner perpetuates the status quo at best, and may actually further weaken the economy...

...The hidden agenda in the conventional wisdom developed in the 1970s and '80s was to use persistent unemployment as a lever to keep labor in its place and prevent wage demands from exacerbating any inflationary tendencies...

...The common sense of this minority subgroup keeps getting in the way of its laissez-faire logic as it recognizes the painfulness of long-term unemployment for America's middle class...

...Consumer confidence would be regained...

...Congress did not even have to extend unemployment benefits...

...A year after we had that quick victory in the ground war, with oil prices way down, the U.S...

...Almost simultaneously the Federal Reserve, which had already reduced interest rates fractionally 13 times between July 1990 and early December '91, cut the rate another whopping 1 per cent...