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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

fixing the economy

Posted by WARREN MOSLER on December 24th, 2009


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I was asked by a reporter to state how I’d fix the economy in 500 words and replied:

Fixing the Economy

1. A full ‘payroll tax holiday’ where the US Treasury makes all FICA payments for us (15.3%). This will restore ‘spending power’ allowing households to make their mortgage payments, which ‘fixes the banks’ from the ‘bottom up.’ It also helps keep prices down as competitive pressures will cause many businesses to lower prices due to the tax savings even as sales increase.

2. A $500 per capita Federal distribution to all the States to sustain employment in essential services, service debt, and reduce the need for State tax hikes. This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP are restored.

3. A Federally funded $8/hr job for anyone willing and able to work that includes healthcare. The economy will improve rapidly with my first two proposals and the private sector far more readily hires people already working vs people idle and unemployed.
In 2001 Argentina, population 34 million, implemented this proposal, putting to work 2 million people who had never held a ‘real’ job. Within 2 years 750,000 were employed by the private sector.

4. Returning banking to public purpose. The following are disruptive and do not serve no public purpose:
a. No secondary market transactions
b. No proprietary trading
c. No lending vs financial assets
d. No business activities beyond approved lending and providing banking accounts and related services.
e. No contracting in LIBOR, only fed funds.
f. No subsidiaries of any kind.
g. No offshore lending.
h. No contracting in credit default insurance.
5. Federal Reserve- The liability side of banking is not the place for market discipline. The Fed should lend in the fed funds
market to all member banks to ensure permanent liquidity. Demanding collateral from banks is disruptive and redundant, as
the FDIC already regulates and supervises all bank assets.
6. The Treasury should issue nothing longer than 3 month bills. Longer term securities serve to keep long term rates higher than
otherwise.
7. FDIC
a. Remove the $250,000 cap on deposit insurance. Liquidity is no longer an issue when fed funds are available from the Fed.
b. Don’t tax the good banks for losses by bad banks. All that does is raise interest rates.
8. The Treasury should directly fund the housing agencies to eliminate hedging needs and directly target mortgage rates at
desired levels.
9. Homeowners being foreclosed should have the option to stay in their homes at fair market rents with ownership going to the
government at the lower of the mortgage balance or fair market value of the home.
10. Remove the ‘self imposed constraints’ that are disruptive to operations and serve no public purpose.
a. Treasury debt ceiling- Congress already voted for the spending and taxes
b. Allow Treasury ‘overdrafts’ at the Fed. This is left over from the gold standard days and is currently inapplicable.
11. Federal taxes function to regulate aggregate demand, not to raise revenue per se, and therefore should be increased only
to cool down an overheating economy, and not to ‘pay for’ anything.


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7 Responses to “fixing the economy”

  1. Tom Hickey Says:

    Good one. (So that was you over at Barry’s place. Glad to see that this is getting a voice.)

    I do have a couple of questions/comments:

    1. How would the employment be handled to make sure that this becomes gainful employment instead of make work (dig a hole and fill it in) as a substitute for direct transfer payments? What about a permanent job guarantee for achieving full employment with price stability?

    2. What about TBTF? This is becoming a major political issue now, and it is also a pressing economic one as the financial industry becomes more consolidated, the oligarchs more powerful, and moral hazard multiplies.

    2. a. Agree with stated reforms, but no specific mention of separating commercial and investment banking, and investment banking and hedge fund activity, e.g., return to and strengthening of G-S?

    3. What about basic reform, including insuring effective regulation and oversight, following upon the huge failure in this regard by Fed, SEC, and FDIC.

    4. Protection of economy, e.g., from financial manipulation, excessive rent-seeking, unreasonable compensation, and consumer predation, all of which result in a dangerous level of economic instability and income inequality.

    These are all pretty hot political issues now, in addition to being economic problems.

    Reply

  2. Jim Baird Says:

    Who’s Barry?

    Reply

    Tom Hickey Reply:

    Jim, check out:

    Barry Ritholtz – The Big Picture

    http://www.ritholtz.com/blog/2009/12/fixing-the-economy/

    Reply

  3. Richard Benson Says:

    Tom http://www.nakedcapitalism.com just had an excellent post on the kleptocratic government. Here are a few ideas – old and new for fixing the unfair representation that congress is not serving its people.

    http://www.tcsdaily.com/article.aspx?id=081505A

    It is always costly to ensure that agents [government officials] act on behalf of the citizens and that they do not use their power to extract rents from their constituents…

    The costs of monitoring agents increase not only with the geographic size of the collective but also with the number of people in the collective. This is because in a larger collective each member captures a smaller share of the rents created by collective enforcement and therefore has less incentive to monitor the agent…With the stake in the collective inversely related to group size, we can expect less monitoring and more rent seeking and rent extraction as group size increases.”
    – Terry L. Anderson and Peter J. Hill, The not so Wild, Wild West, p. 30

    (article continues)

    Terry Anderson and Peter Hill make an argument that suggests that democracy does not scale well. As the size of the constituency group gets large, the politician becomes less accountable. Politicians find it easier to extract rents and abuse powers.

    The end-of-session legislative victories for President Bush and the GOP illustrate the problem. CAFTA passed, but with large concessions to special interests that threaten to undermine the trade benefits. The energy bill was an exercise in pork, as was the transportation bill. To anyone outside of the political/lobbyist complex, it was an all-too-typically dismal legislative performance.

    I think that Anderson and Hill offer a clue. The sheer size of modern electoral constituencies makes politics a matter of financial muscle and mass marketing. Only with smaller electoral constituencies would the incentive structure change to reduce the arrogance and rent-seeking of elected officials and powerful interest groups.

    We Need 250 States

    In 1790, the largest state in the union, Virginia, had a population of under 700,000. Today, Montgomery County has a population of over 900,000. Our nine-member County Council answers to about the same number of registered voters as the entire House of Representatives of the United States at the time of the founding of the Republic.

    We cannot have an accountable democracy with such large political units. We need to break the political entities in the United States down to a manageable size.

    Here is what the founding fathers said about a too small congress:

    http://www.progress.org/2009/house.htm

    The chief complaints, according to Madison, were that, under the proposed system, Congress would be so small that it would become an “unsafe depository of the public interests”; that the districts would be too large and diverse for any politician to “possess a proper knowledge of the local circumstances of their numerous constituents”; and that such a tiny House would have the net result of attracting the more elitist types whose aim would be the “permanent elevation of the few on the depression of the many.”

    Reply

    Tom Hickey Reply:

    Richard,

    Thanks for the info and links. Being a Jeffersonian rather than a Hamiltonian, I am for a decentralized system of government, in accordance with the principle of subsidiarity, which states that political decision-making should be made as close as possible to the people affected. The unfortunate fact is that most political decision-making has been centralized and is in the hands of a well-defined political class that perpetuates itself in the halls of wealth and power through legalized bribery and the revolving door. Until there is effective campaign finance reform and the revolving door is closed, that will not happen, and it is unlikely to be voted in by a political class that views this as contrary to its interests.

    I think that the larger point is that human systems become increasingly inefficient the larger they get, until at a certain point they become ungovernable and break down. I am afraid that the US is approaching that limit. One person, the president, is simply not capable of handling the amount of information necessary to make timely decisions that are systematically efficient as well as effective at accomplishing the public purpose. Moreover, the advisory and supervisory systems on which the president relies as chief executive as hopelessly biased. In addition, wealth and power continue to consolidate at the top, and this trend even seems to be picking up speed.

    I have grave doubts that this can be corrected before the system peaks and falls into decline. I see this on the horizon, given the challenges that the US and world now face. The ship is steaming full speed toward an iceberg, and it may be too late to turn in time even if we tried valiantly right away, given the momentum. But so far, no one in the wheel room is even talking about changing course, except in the wrong direction.

    Reply

    Richard Benson Reply:

    “I have grave doubts that this can be corrected before the system peaks and falls into decline. I see this on the horizon, given the challenges that the US and world now face”

    This is a great worry of mine as well, which is why I want to do all I can to help Warren and others get thier ideas across and bring change. Many bright minds from many circles of academics recognize we have some very “confused” people running the ship. We must stop this encroachment of barbarism and ignorance. I agree there will be a fracturing of our massive populations and society, we can try to guide this down a more orderly path or be consumed by total anarchy of the breakup.

    I do believe we should give a valiant effort even if it seems hopeless, we just might get very lucky. Even if Warren does not capture the presidency, I am hoping his “tea party” efforts and others can be the birth of new political parties that will fracture the 2 party system we have now. There are others like Dr. Paul working in this direction too and even though I do not agree with all the other movements, that they will help the primary goal of breaking the current political morass, I think they are to be supported as well.

    More bad news how the kleptocracy is hurting our great nation.

    http://www.examiner.com/x-3629-Philadelphia-Progressive-Examiner~y2009m12d23-Time-for-Progressives-to-join-the-Tea-Party?cid=channel-rss-Politics

    Reply

  4. warren mosler Says:

    It would help a lot if the President knew how the monetary system worked. Or at least had advisors who knew.

    Also, even today’s somewhat smaller nations are probably larger than the entire world population in 1776?

    Reply

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