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Friday, April 24, 2015

The New Economy Will Be
                 Managed Democratically

                Stimulus Without Debt, A Novel Plan    

       Huge wealth gains while economy declines   
--- $26.4 trillion in added savings has been created during 6 years of a crippled economy, increasing total private wealth to over $83 trillion, or $675,000 per household on average.  
MoneyThe large American economy can serve everyone. That's the objective of this essay. In recent fact it has served just a minority who were already well-off. Stimulus Without Debt is a plan by professor L. Seidman to directly create money without debt or taxation to fund a stimulus, which I have put forth as a direct job creation program, similar to the Congressional Progressive Caucus plans of 2011 to 2015. The economy can employ all workers and create security for all households. It is not impossible. 

Since 2008 private household net worth has risen by $26.4 trillion, or $214,000 per family or household. (see here, page 2) This is a 47% increase in private wealth, or 30% adjusted for inflation and population growth. 
Now the average savings per household is over $675,000
The median savings in 2013 is $81,200. (Source, Fed Reserve Chartbook, see note below.) Median household savings has dropped by 40.2% since 2008, from $135,000 to $81,200. 
Real median household income according to the Fed has dropped by 8%.  The last six years has brought turmoil -- job loss, income loss, house loss and life savings loss --- for most families. 
With one exception ----
This enormous $26.4 trillion gain (or $214,000 more private savings for every household) went mostly to the wealthiest 5% who own 75% of all financial assets. 
Most people, 90%, were unaffected by the asset value increase, which reflected the rise of corporate stocks.
A few retirees with savings were rewarded to some extent, as were pension funds.
The source of this gain of $26.4 trillion is two-fold, increased corporate profits due mostly to lowered costs in labor expenses, stock buybacks and corporate dividends (see William Lazonick's article Profits Without Prosperity here), and a limited universe of places where the rich could put their money. The limited range of "investments" (or secure places to park money) meant that the existing finite selection increased their value, as in a bubble situation. The employment to population ratio is at a 31 year low, among age 25 to 54 the E/P ratio is at a 29 year low, and the labor force participation level is at a 37 year low. 

The Stimulus Without Debt Solution
Without creating more debt, Congress could fund a stimulus. As an  example of a stimulus, in 2008 George W. Bush issued tax rebates worth $152 billion that were mailed to all adults ($600) and children ($300) in most households. 
But rebates are scatter shot, not targeted. Better than a rebate, Congress could fund direct job creation. It would employ the one in four (25%) who are un-employed or under-employed, dropped out, or working full-time year round for less than poverty wage income. It would help those most in need of help. And this would also help everyone. 
Congress would authorize it. The Fed would determine how large to make it. This would establish a separation of power. 
This is the sensible plan, rather than the top-down method the Fed chose with the $2.5 trillion quantitative easing program. The Fed created money out of thin air, absolutely debt free. We can call it "bank rescue without debt". 
I'm proposing the plan, Stimulus Without Debt, of professor Lawrence Seidman, see here, and read it slowly,

Two Videos on Direct Money Creation Stimulus
On 16 October, 2015, the proposal of stimulus without debt and direct money creation, was presented on YouTube in the book launch for Between Debt and the Devil by Adair Turner. See the hour long program with Turner and economist Martin Wolff, here. And also watch an interview with Adair Turner and Rob Johnson, here on Institute for New Economic Thinking. 

Federal-State Coordination for Direct Job Creation
Another permanent plan for direct government job creation is the Federal Employment Reserve Authority proposed by Princeton University professor Martin Shubik. In each of the 50 states an agency would prioritize projects for emergency employment to avoid unnecessary levels of unemployment. See the proposal here and here (page 23) in a much longer report from the Levy Economics Institute. Sample quote: "(4) Once unemployment goes above a fixed level of, say, 6 or 7 percent (to be adjusted as circumstances warrant), the Authority would put out bids for projects in coordination with federal and state funding authorities involved in financing."

A Jobs Program Without Debt
Not mentioned in Seidman's direct money creation plan, is the corollary for the Fed to create out of nothing, out of thin air, and debt free, $300 billion each year (or 1.7% of GDP), and Congress could then create 10 million public jobs at $30,000 per job net cost. The only danger is inflation, and the Fed would monitor for that possible result. Inflation danger is thoroughly discussed in Seidman's paper. 

The cost per job would be $30,000, using the estimate of Philip Harvey’s plan, Back to Work. On page 11 he shows that a cost of $28.6 billion in government outlays would create 1,414,000 jobs. This indicates a net cost of $20,226 per job. "Net" is the key idea. Such a plan is affordable, perhaps indispensable. I am assuming his per job figures are too low. Experts will have to evaluate the costs. 

The Congressional Progressive Caucus promotes a direct job creation plan; it has promoted a variant of this plan for the last 5 years. It proposes $336 billion in direct job creation for the next three years. See the section "Renewed Fiscal Expansion . . ." in their budget. In all they propose $1.6 trillion over a 10 year period, most of it in the first three years. 
Their plan involves borrowing, going into debt. But the enlarged economic output translates into greater tax collection and a growing economy. Debt is a ratio, debt over income. Growing the denominator is the best, maybe only, way to exit a recession/depression. 
Additional debt or borrowing is politically problematic. Another method would be to increase taxes, also problematic. Direct money creation, Stimulus Without Debt, would neither increase debt or raise taxes, nor would it increase inflation which is the primary danger of such a plan. Inflation fears are fully dealt with in the proposal by Seidman.  
The Fed can create the money without borrowing or taxing — this would be a quantitative easing directed at the low-income sector that would enrich the entire society. 

Wage income has fallen badly since 1970 when non-supervisory employees earned 51.5% of the national income. Today they earn 41.9%, a loss or difference of over $1.3 trillion. 
This represents a loss of about $11,000 a year per employee (non-supervisory worker) among the lower-earning 80% who work. 
On a per household level, incomes would rise by $16,000 if the 20 year average (1950 to 1970) percentage of national income was restored to the level of 50%. See Fed graph:

The EPI states almost the same, "
  • By 2007, the growing wedge between economy-wide average income growth and income growth of the broad middle class (households between the 20th and 80th percentiles) reduced middle-class incomes by nearly $18,000 annually. In other words, if inequality had not risen between 1979 and 2007, middle-class incomes would have been nearly $18,000 higher in 2007.
The inflation adjusted, "real", weekly wage, and the annual wage, for 80% of workers has decreased by 4% over a 51 year period, 1964 to 2015, (see Fed graph here), while the disposable (after-tax) income per capita has increased by 196%. See the Federal Reserve graph demonstrating this Real Disposable Income Per Capita

                            The Big Picture     
I'm going to leave this essay incomplete. Later --- much later, many years later I'll get back to this --- I'll include topics such as 
    ~ converting to clean energy to combat climate change
NASA scientist comment on the new monthly high of over 400 parts per million of CO2 in the atmosphere. Read here.

Have you heard the news? "The last time there was this much carbon dioxide (CO2) in the Earth's atmosphere, modern 


didn't exist. Mega-toothed sharks prowled the oceans, the 

world's seas were up to 100 feet higher than they are today, 

and the global average surface temperature was up to 11°F 

warmer than it is now."  

And, "Atmospheric concentrations of 

the greenhouse gas [co2], which helps drive global warming, 

haven’t been this high in somewhere between 800,000 and 

15 million years."    Read some article here and here and 

here and here  Employment in energy system conversion 

can change this.

    ~ increasing the minimum wage together with the Earned Income Tax Credit to eliminate poverty. The median annual income for 155  million workers is $28,031, and it should be closer to the average workers' income, $73,000.  
    ~ imposing mandatory paid vacation rules on all corporations,   
    ~ funding Individual Development Accounts, or IDAs, to increase the typical and low-income household savings. The median household saving, $81,200, should be closer to the average, $675,000. (see Fed Chartbook here. It shows that the median household net worth fell by 40%, from $135,400 to $81,200 between 2007 and 2013. It's difficult to find this chart as the pages are not numbered. It's perhaps chart #40, if you wish to look.) Half of U.S. households own 1.1% of all wealth, see here. About 44% of U.S. households report that they could not survive longer than three months on their "liquid asset" savings, which for a family of four amounts to $5,763. About half the families in the U.S. have less than $6,000 in liquid assets, see here. Pew Trusts issued an excellent report in January, 2015, The Precarious State of Family Balance Sheets, that indicates similar levels of savings as reported by the Fed.  
    ~ democratizing the Federal Reserve Board
    ~ taxing personal savings above $50 million or variants such as the Financial Transaction Tax, FTT, which will effectively repress extreme capital formation and utilize the economy's surplus instead of wasting it in astronomical net worth accumulation, 
    ~ creating tax preferences to small corporations
    ~ establishing state banks and regional development and self-sufficiency programs, 
    ~ creating foreign trade agreements that include labor rights and environmental protections and protection against currency manipulation with penalties for violation against them, 
    ~ exploring direct job creation subsidies to corporations

The discussion will also include a reform of the parasitical sectors of the economy --- the financial system, the medical health system, and the military. Somewhere I'll also squeeze in childcare subsidies. And when I finish I'll have also mentioned that we need to take down the telephone poles -- really. Bury the telephone wires  in most neighborhoods. This is a direct jobs program waiting. After that we can paint the classrooms if needed. The American Society of Civil Engineers has a program for all states, see here
Their projects are more important than painting classrooms. But care programs should be mentioned as part of a Jobs Program (see Why Obama Should Care About Care). 

In all, the economy can serve humanity. 
Humanity can save the earth's ecology and still preserve a healthy level of freedom, personal savings and prosperity. Internationally we can create a high quality of life with environmental beauty and health.  

I wrote a comment on Robert Reich's article "The Political Roots of Widening Inequality", and you can read it here