2-5-08 Money Dropped from Helicopters

2-5-08 Money Dropped from Helicopters

"Dropping money from helicopters from sea to shining sea," is the cynical characterization of the $150 billion "tax rebate the president and Congress are now working on.

It is, of course, not a tax rebate but a straightforward giveaway of our grandchildren's money and is at best a palliative. While it probably does some good to alleviate the present downturn, it does nothing to address our deep-seated economic problems.

The president’s promise made him look proactive but it preempted any discussion of the structural faults in our economy, our dysfunctional financial system or the Federal Reserve bail out of the banks. These are the causes of the housing crisis, the subprime financial mess, the runaway $3 trillion budget and our looming recession.

First, the Federal Reserve’s panicky lowering of short-term interest rates is really a bailout of imprudent bankers. Money markets see the rate cuts as causing inflation and therefore raising long-term interest rates. Banks make their profits when they borrow short, at the low Fed rate, and lend long at the higher market rates. The Fed’s increase of the spread merely bulks up bank profits and bails out the banks, not the economy.

No one, especially the business media, is willing to admit that this financial crisis reflects an economy in crisis. The budget deficit was over $400 billion in both 2007 and 2008. Between 2000 and 2006 the annual trade deficit grew from $380 to $760 billion. The truth of these numbers is that America is living off of the production and savings of others. The time of reckoning is now.

The massive tax cuts for the wealthy in 2001 and 2003 did not trickle-down to the wage earners. Real wages fell as the benefits of productivity increase went entirely to owners of capital. The share of national income going to corporate profits is at the highest level in 50 years while that going to wages and salaries is at the lowest level.

Trickle-down is utter nonsense. The wealthy, by definition, do not worry about how much they are spending. But they do worry about investment.

Domestically, the wealthy use a tax cut to buy more US government bonds and, incidentally, to help fund the Iraq war. Internationally, they invest wherever they can get the highest return in stocks, bonds or the companies they manage. None of this has anything to do with stimulating the American economy. That is, in fact, our problem; no investment here.

The American economy, especially the financial sector, is in far worse shape than anyone is willing to admit. Lending channels are clogged with worthless paper and lending in many areas has come to a standstill. The panic among the bonds dealers, stock brokers and their bosses is so threatening that the press is afraid to tell us the truth.

America is suffering from an ideology that ignores common sense or consequences. The free-market ideology that we have been living under is particularly adept at creating private goods. Unfortunately, it fails miserably in the production of public goods. The resulting move to privatization of everything from the turnpikes to prisons to war itself has given us an economy of great private wealth and great public poverty.

Over the past 30 years, free-market, trickle-down economics has starved the public sector. There are no capturable profits from investment in our transportation infrastructure of roads, bridges, ports and tunnels; in our educational system of local schools, job training and human capital; in our healthcare system with its high infant mortality, low birth weight and low life expectancy; in our crumbling sewers, polluted water systems and warming globe.

Looking forward, we have to do some fundamental reorganization of our financial system. This has to recognize that innovative instruments have a place but that they have to be regulated if we are to garner the potential. Letting the finance sector police itself ends up with the top 25 hedge fund managers taking at least $650 million each in one year.

America is going to have to invest trillions of dollars. Much of this will have to be borrowed. We have to invest in all the new technologies that are raising our standard of living, polluting our atmosphere and forcing us into global competition. Now we are borrowing to consume, which is really dumb.

If we do not get off this private market kick and start saving and investing in a planned and efficient way, we are going to fall further behind. We need a dose of good old American pragmatism.