(Editorial) This content might be read as an open letter to our policymakers, who are the victims of receiving only self-serving advice from lobbyists and so-called independent policy experts. Whereas advice from policy research institutes and other ostensibly non-lobbying sources should serve as a guide for policymakers when judging policies lobbied for by big-pocketed special interests, these policy “experts” themselves are unfortunately oftentimes beholden to the same big-pocketed special interests that fund the lobbyists, serving to generate merely an echo of the policies lobbied for by special interests. Hence the observation that politics in both Washington and Albany are conducted in a “bubble”.
So what’s a well-meaning politician / government administrator to do when confronted by a complicated economic situation and only a narrow stream of self-serving policy recommendations? Read on, well-meaning policymaker – if indeed such a fantastic creature truly exists in our democracy today – and you will get some free advice that is not beholden to deep-pocketed special interests.
Before you can begin to prescribe a series of policies appropriate for our economy today, you first need to observe the symptoms from which our economy currently suffers. These are unemployment (and underemployment) of both labor and capital – they are lying fallow, so to speak. Measures showing labor’s underutilization are the headline unemployment rate, a broader measure of labor’s unemployment/underemployment, and the labor-force participation rate. Measures demonstrating underutilization of capital include the capacity utilization rate, an index of industrial production that is still below pre-recession levels, and a depressed ratio of business investment to potential GDP – at a time corporations report to be awash in cash. All these measures of underutilization are way too depressed, and they demonstrate an economy performing far below its potential (see chart above left).
What we have here is a failure by the private sector to employ our country’s factors of production – both labor and capital – in an efficient way, in order to reach our economy’s potential. This diagnosis of market failure is not easy for many to hear, because of either their narrow special interests or their ideology. For years, the winners in our economy – the 1%, so to speak – with almost unlimited resources, have funded research supporting the notion that markets are infallible. Rational expectations theory, and its correlate the efficient-market hypothesis, have been used by special interests very effectively to support self-serving policies that brought about today’s economic disaster. These special interests remain unconcerned by the real damage they have done, because their vast income and wealth incubates them from the harsh economic environment that they delivered.
Unfortunately today, many who are not part of our economy’s super-rich elite are beholden to an ideology that is buttressed by the research efforts described above. This makes supporting policies contrary to narrow, deep-pocketed special interests extremely difficult for our elected officials, who want to be reelected. It does not relieve them from the responsibility to support policies that serve their constituents’ best interests, however.
You might now be asking: what kinds of policies can repair our economy? Here are only a few:
1) Inflation. Our economy is suffering from debt overhang. Inflation will serve to lessen our debt burden, allowing consumption to resume. Any movement of prices back to a level prevalent before the housing bubble burst will serve to generate conditions more closely proximate to those under which consumers spent enough to effectively demand our economy’s potential output. To achieve inflation under current conditions, what economists call “helicopter” money is necessary, because traditional monetary policy and quantitative easing are merely causing banks to hold excess reserves.
2) Discretionary fiscal stimulus. Even traditional proponents of austere government budgeting now acknowledge that for every dollar our government spends that it does not receive in taxes – especially for expenditure on investment and consumption – will result in more than one dollar added to our economy’s output. As counterintuitive as it may seem, our government needs to run larger deficits right now, in order to support the weak and failing private sector. This should be financed by helicopter money (see #1), serving to increase further its stimulative effect on our economy.
3) Reform the financial sector. These companies destroyed a functioning economy. They should never be allowed to do this again. The big banks should be broken up, the Volcker rule should be implemented, and much lower leverage ratios should be required to reduce risks.
4) Raise marginal tax rates on high incomes. There is too much power in the hands of far too few. This is a danger to our democracy. If Eisenhower Republicans could support the marginal tax rates that they did, then raising the top marginal rates to 50% should not be anathema to today’s Republican politics.
5) Enforce labor’s right to bargain collectively. The overpowering wealth that is currently in the hands of our economic elite requires balance from labor unions. Individual workers cannot bargain fairly with such an advantage by capital.
These five simple suggestions to policymakers are more than a start – they could ultimately be sufficient to restore our economy to its potential, and restore dignity to our citizen workers. If you are a policymaker and you have read this, then you can no longer plead ignorance about these recommendations. Either you will shirk your duty to our citizens, or you will start to make these things happen. Time is one luxury that we no longer have, as our factors of production continue to deteriorate.
One question remains unanswered, however: do we even have any well-meaning policymakers left in our democracy, who are free to act against deep-pocketed, narrow special interests, whether in Albany or in Washington? Recent events suggest that we do not. Will anyone dissuade us of this belief?