Top four agenda items from New Deal 2.0

New Deal 2.0, a function of the Franklin and Eleanor Roosevelt Institute, recently posted 15 short pieces on the theme New Agenda for America in honor of the 80th anniversary of the Great Crash.  Here from Henry Liu, Jeff Madrick, Thomas Ferguson and Marshall Auerback are the four we found most useful.

New Agenda for America: Economic Lesson Unlearned
from New Deal 2.0
by Henry Liu

Milton Friedman thought the Fed could have prevented the Great Depression of the 1930s, if only it had engaged in monetary easing to counteract destructive market forces. Friedman’s counterfactual conjecture — though not provable — has been accepted by central bankers as monetary magic to rid capitalism of the curse of business cycles. Friedman held out the false hope that central bankers could negate debt-deflation instability with wholesale liquidity injections (the term “debt-deflation” was coined by Irving Fisher in 1933 to describe the way debt and deflation can destabilize each other).

The problem is that negating debt-deflation does not work. Unfortunately, Greenspan’s acceptance of the idea led to a series of increasingly-large debt bubbles. The final one burst in 2007.

The economist Hyman Minsky, famous for developing a psychological theory of financial crises, explained how debt-deflation really works by illuminating its effect on the asset market. He recognized that when panicked people start distress selling, asset prices drop. This causes losses to agents with maturing debts, which, in turn, reinforces more distress selling and reduces consumption and investment spending which deepens deflation. This spiral of debt came to be known as the “Minsky Moment.”

Alas, mainstream economists have largely ignored Minsky’s insight. Friedman’s counterfactual conclusions obscured the great lesson the world could have learned from the crash of 1929 and condemned the world to another disaster 80 years later.

It is time for a sea-change in economics in which the realities of instability and speculation are properly understood. Only then can we prevent another epic economic disaster.

Roosevelt Institute Braintruster Henry C.K. Liu is an independent commentator on culture, economics and politics.


New Agenda for America: Emergency Checklist
from New Deal 2.0
by Jeff Madrick

We have lost a generation in America to a simple ideology that government is at best a necessary evil whose influence is to be minimized. Going forward, there is much to do: reform healthcare; re-regulate finance; build a universal pre-k system; build a light rail and public transportation system; radically reduce carbon emissions, create a sensible Bretton Woods III.

Once we are well out of the woods of the crisis, here is where I would begin: raise income taxes. America’s government must lead us back to the path of excellence and global competitiveness. The nation must invest in its healthcare, education, and infrastructure. It must subsidize new industries, new technologies. It must reinvigorate manufacturing. It must expand radically its safety net to protect those who lose jobs and even careers. It must borrow less from overseas to do all this.

We can raise taxes by 3 to 5 percent of GDP, thus generating $450 billion to $750 billion of money to invest infest in the future. That is enough money to get the job done and it would still leave government spending in America at all levels below 40 percent of GDP-and below most of what the rest of the rich world spends. Would it impede growth? No way. Not if invested properly. It hasn’t overseas, and it won’t here.

If we do not find the will to do these things, growth will be impeded. Here is a cliché that is true: The nation’s future is at stake. This is an emergency. Sound the sirens.

New Agenda for America: Mirror, Mirror on the Wall…
from New Deal 2.0
by Thomas Ferguson

Those who gaze into Harry Potter’s Mirror of Erised see not their faces, but their deepest desires. The Great Crash and the even greater Depression that followed work the same way, except that their magic is pitch black: Viewers see their worst nightmares.

In the thirties, as New Deal programs ushered in the 40 hour week, Social Security, and unemployment compensation while regulating utilities, stock exchanges, banks, and labor markets, many otherwise sensible people saw Red. They became passionately convinced that America was only steps away from totalitarianism and that swelling public deficits implied a German-style Great Inflation. More recently, we have been told that a tariff bill that passed many months after the Crash was really responsible for the whole mess; that somehow, with all the banks closing as FDR took office, that just doing nothing would have been better than putting people back to work, and that forcing Wall Street to disclose basic information about the products it sells was either un-American or counterproductive or both.

The real lesson of the Crash, of course, was what happens when you fail to regulate markets, especially financial markets. And the lesson of the New Deal is how you fix this. You can safely disregard claims that regulating banks and stock exchanges destroys profits or the capitalist system or somehow threaten “freedom.” The caterwauling about “socialism” is extensively a smokescreen for private interest and avarice; and if banks are deleveraging - cutting back their lending - then vigorous state action to secure credit and mortgage markets is no threat to the future of anyone but loan sharks.

New Agenda for America: How to Start Anew Thursday
by Marshall Auerback
New Deal 2.0

Much like Herbert Hoover, who failed to respond adequately to the fallout from the Crash of 1929, Barack Obama cannot seem to cut himself free from conventional wisdom. The Administration is attempting to reform the unreformable — to revive a zombie economy full of insolvent banks, instead of shutting them down and restarting them anew as FDR did.

Obama and his advisors must free themselves from the discredited dogmas of neo-liberalism and channel the spirit of FDR’s bold experimentation. We need less deficit terrorism. Fiscal policy must be much more oriented to personal balance sheets, not bank balance sheets. We need to turn around the private sector and begin to produce more tax revenue, so that the large deficits would be short-lived.

If we continue down the current path, we slow recovery and court large budget deficits for many years to come. Far better to spend now to create jobs and get the private sector growing again.

We need to make loans truly affordable for households. We need large -cale employment programs that restore households’ capacity to pay. We need to deal with the over-supply of homes. And we need swift and cheap bankruptcy procedures that provide households a fresh start.

Most of all, we need to turn the financial system away from the trade-and-fee model and toward a system that focuses on carefully evaluating creditworthiness and on limiting the growth of Ponzi processes over an enduring period of economic growth.