Thursday, June 9, 2011

An Economic Recovery Plan For America

Kenneth M. O’Brien

More than fifteen million Americans are suffering the dire consequences of unemployment.

In the midst of this crisis, we are held hostage to a battle of political ideologies.

The political right repeatedly tells us that we must reduce our budget deficit. Their mantra is that we don’t have a revenue problem, we have a spending problem.

The political left repeatedly tells us that the Republicans caused this problem by profligate tax cuts and spending during the Bush Administration.

To some extent both sides are right and both sides are wrong.

I won’t repeat the well-known facts that George W. Bush entered office with a budget surplus and left with a massive deficit and an economy teetering on the brink of total collapse.

Nor will I repeat the Obama Administration claims that they saved us from another great depression and that we are on the right trajectory.

“The definition of insanity is to do the same thing over and over and expect different results”. -  Rita Mae Brown. Sudden Death, Bantam Books, New York, 1983, p. 68

As with anything else, extreme adherence to any singular ideology leads to excess and dire consequences. In this case, it has led to our current economic crisis.
In the most dire situations, monetary policy can cease to have traction, when banks are so shell shocked that they are unwilling or unable to make new loans even if a central bank provides the money with no interest charges at all. The United States (indeed most of the world) has been in such a "liquidity trap'' since the fall of 2008, as the credit crisis that followed Wall Street's implosion barely eased even as the Fed reduced its rates to virtually zero.

Nevertheless, those with a vested interest in 28 years of obviously failed policies (i.e. the Republicans) are loath to surrender their influence.

One argument that we keep hearing is that spending to stimulate the economy did not work during the great depression. Rather, the depression ended as a result of World War II. If spending stimuli didn’t work then, they won’t work now. Much is made of comments made in 1939 by Roosevelt’s Secretary of the Treasury, Henry Morgenthau, Jr. that we tried spending and it failed. It is overlooked by those who quote Morgenthau that reported unemployment in 1938 ignored employment figures that included government jobs created by the New Deal programs. His figure echoed BLS figures pegging the unemployment rate for 1938 at 19 percent. After World War II, BLS ceased counting those in work-relief programs as unemployed, as noted by economist Gene Smiley in a 1983 Journal of Economic History article

Thus, this argument is flat out untrue. While the government pursued Keynesian spending policies, GNP increased and unemployment fell. Starting in late 1935, however, the Roosevelt administration reversed policies. Fearing the consequences of rising budget deficits during an election year, they returned to the traditional pattern of attempting to balance the budget. However, the resulting increase in unemployment and decline in GNP caused the administration to again reverse course and return to its earlier stimulative spending policies.

The following charts illustrate the consequences of these two alternative policies during the period from the start of the great depression to the start of World War

Just as Roosevelt faced a rebellion in 1935 that government spending was not restoring employment, so today we are facing the same argument.

There are, however, two substantial differences.

First, The American Reinvestment and Recovery Act of 2008 (i.e. “the stimulus bill”) fit the classic definition that a camel is a horse designed by a committee.

After the White House submitted its plan to House Speaker Nancy Pelosi, she informed Lawrence Summers, then Obama’s chief economic advisor, that the House Democratic delegation would write its own plan.

The resulting product was a hodgepodge of  pork with little more in common with Roosevelt’s National Recovery Administration than the ability to be deceptively labeled by supporters and detractors alike as “Keynesian”.

The fact is that what is needed is another “stimulus plan” that is aggressively focused on infrastructure modernization in transportation, energy and education.

Aye, but there’s the rub.

Unlike the situation that existed under Roosevelt, America is confronted with an enormous debt burden that seems to preclude any such massive expenditure program.

Here is where the Republican mantra is faulty.

We do have a revenue problem.

We need the money to finance government spending that will provide employment that will create the incentives for business investment through increased consumer spending and demand.

Repealing the Bush tax cuts on incomes over $250,000 will not suffice to provide those resources while reducing the national debt.

What is needed is an additional revenue source, with a sunset provision, that will be irrevocably mandated to solely financing the national debt.

Representative Chaka Fattah of Pennsylvania has proposed such a plan.

It is a “transaction tax”.

Simply put, it would provide a one-cent per dollar tax on all financial transactions except personal bank accounts and financial stock transactions. The tax would be mandated to expire within ten years.

According to Rep. Fattah, “Based on the latest data available from the Federal Reserve, the annual volume of transactions, excluding stock transactions, in the U.S. economy is valued at approximately $445 trillion.”

This is not a sales tax. It is not a value added tax. It is not a flat tax.

It is a tax with one dedicated purpose – the reducation of the Federal debt burden within ten years. In that respect, it is little different than the phone tax that was imposed in the 1960’s under the Johnson Administration to finance the Vietnam War.

But it would be mandated to expire in ten years (as the Bush tax cuts were supposed to).

As Fattah noted, “The funds will generate sufficient revenue over the next decade to reduce the debt with minimal impact to the average taxpayer.”

Isn't this worthy as a basis for discussion?


Unbekownst to me at the time I wrote this, Gene Lyons published a related article on about 16 hours earlier.


  1. What you fail to get, Ken, is that if our Southbridge brain trust of pseudo-Republicans (Clemence, Nikkola, Regis, and Living-god) ran the country, we'd be in great shape, just like our town!

    There's NEVER been a better time to move away from Southbridge.

    Chopper one, this is Adam Silva. Can you fly me to Boston, Denise, and I won't write anything bad about you and your gang?

    I'm still giddy.

  2. A transaction tax is a tax...

    If you're buying something, call it a transaction, but it's a sale.

    What about the responsibility of the government that got us into this mess?

    What about THEIR responsibility?

    Ten years will become forever.

    Politicians will never rescind a tax like this.


    Why not another penny on gas?

    Until the sheeple rise up and demand change, nothing will change.

    The deficit will continue to climb as spending is not curbed.

    What do we do about the new debt?

  3. Where is the investigation into leaky councilor or rave-gate?

    Did Danny ever get the drug test back? Can you find out?

    Maybe miss smarty pants Clemence could enllighten us, since she thinks she knows it all?

    Maybe she can fly a banner for us little people from the back of her helicopter?

    Doesn't EVERYONE own one of those?


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