The understatement of the 21st Century: No "garden variety" recession

THE QUESTION: Recession or Depression?

Comment: Instead of asking capitalist sooth-Sayers and economic forecasters if this is a depression or a recession, maybe the mainstream media should be asking unemployed workers, those living in poverty and working class families facing foreclosures and evictions for the answer to this question.

The real question is: Why did Barack Obama and the Democrats join Republicans in telling lies about the real state of the economy throughout most of the campaign until everything came tumbling down?


Forecasters: tough road ahead for the economy

http://apnews.myway.com//article/20081117/D94GM8G00.html

Nov 17, 7:27 AM (ET)

By JEANNINE AVERSA

WASHINGTON (AP) - The country is sinking deeper into the economic doldrums, and it's likely to stay there for a while.

That's part of the latest outlook from forecasters in a survey to be released Monday by the National Association for Business Economics, also known by its acronym, NABE.

Approximately 96 percent of the economists polled believe that a recession has started, and nearly three-fourths think it could persist beyond the first quarter of 2009.

Under one definition, a recession happens when the economy shrinks for two quarters in a row. The economy contracted 0.3 percent in the third quarter as battered consumers cut back sharply on spending, the government reported last month. It was the worst showing since 2001, when the country was last in a recession.

NABE economists, among other experts, predict activity will continue to shrink in both the final quarter of this year and the first quarter of next year as weary consumers hunker down further under the stresses of rising unemployment, shrinking nest eggs and falling home values.

"Business economists became decidedly more negative on the economic outlook for the next several quarters as a result of the intensification of credit market stresses and evidence of spillover to the real economy," said NABE president Chris Varvares, president of Macroeconomic Advisers.

NABE economists are now forecasting the economy to shrink at a 2.6 percent pace in the final quarter of this year and then at a 1.3 percent pace in the first three months of 2009. The new projections marked downgrades from the association's previous survey, which called for growth of just 0.1 percent in the final quarter of this year and a 1.3 percent growth rate in the following quarter.

For all of 2008, the association's economists are predicting the economy's growth will slow to 1.4 percent, down from 2 percent in 2007. If the new, lower projection proves correct, it would mark the weakest performance since the 2001.

The picture would turn worse in 2009. The NABE economists are projecting the economy will jolt into reverse, shrinking by 0.2 percent for all of next year. If that happens, it would mark the worst showing since 1991, when the country was starting to pull out of a recession.

With the economy losing traction, the nation's unemployment rate will climb to 7.5 percent by the end of next year, the economists predict. Other analysts think it could rise to 8 percent at that time, or even hit 10 percent or higher if a U.S. auto company were to go under.

The nation's unemployment rate bolted to 6.5 percent in October, a 14-year high, the government reported earlier this month.

To cushion the fallout, the Federal Reserve has slashed a key interest rate, dropping it to just 1 percent, a level seen only once before in the last half-century.

Fed Chairman Ben Bernanke has warned that the country's economic weakness could last for some time - even if the government's unprecedented $700 billion financial bailout package and other steps do succeed in getting financial and credit markets to operate more normally.

In a speech Friday, Bernanke left the door open to another rate reduction, warning that financial markets remain under "severe strain."

Wall Street investors and economists believe the Fed probably will lower interest rates again on Dec. 16, its last regularly scheduled meeting this year, by one-quarter or even one-half percentage point.

The NABE survey of 50 forecasters was taken Oct. 28 through Nov. 7.

The raft of grim economic news prompted Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, to say in a speech Friday that the data to date "tells me that the economy is now in a recession."

"At the moment, the signs point to a recession beyond just a 'garden variety' downturn," she said. "The length and severity of the recession will depend on how quickly credit markets return to normal."

Depression Economics Returns

A question: Based on your own circumstances do you think Krugman is correct in assuming there will be no replay of the Great Depression?

November 14, 2008

Op-Ed Columnist

Depression Economics Returns

http://www.nytimes.com/2008/11/14/opinion/14krugman.html?_r=1&oref=slogin&pagewanted=print

By PAUL KRUGMAN

The economic news, in case you haven’t noticed, keeps getting worse. Bad as it is, however, I don’t expect another Great Depression. In fact, we probably won’t see the unemployment rate match its post-Depression peak of 10.7 percent, reached in 1982 (although I wish I was sure about that).

We are already, however, well into the realm of what I call depression economics. By that I mean a state of affairs like that of the 1930s in which the usual tools of economic policy — above all, the Federal Reserve’s ability to pump up the economy by cutting interest rates — have lost all traction. When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly.

To see what I’m talking about, consider the implications of the latest piece of terrible economic news: Thursday’s report on new claims for unemployment insurance, which have now passed the half-million mark. Bad as this report was, viewed in isolation it might not seem catastrophic. After all, it was in the same ballpark as numbers reached during the 2001 recession and the 1990-1991 recession, both of which ended up being relatively mild by historical standards (although in each case it took a long time before the job market recovered).

But on both of these earlier occasions the standard policy response to a weak economy — a cut in the federal funds rate, the interest rate most directly affected by Fed policy — was still available. Today, it isn’t: the effective federal funds rate (as opposed to the official target, which for technical reasons has become meaningless) has averaged less than 0.3 percent in recent days. Basically, there’s nothing left to cut.

And with no possibility of further interest rate cuts, there’s nothing to stop the economy’s downward momentum. Rising unemployment will lead to further cuts in consumer spending, which Best Buy warned this week has already suffered a “seismic” decline. Weak consumer spending will lead to cutbacks in business investment plans. And the weakening economy will lead to more job cuts, provoking a further cycle of contraction.

To pull us out of this downward spiral, the federal government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress — and the stimulus plan won’t come soon enough or be strong enough unless politicians and economic officials are able to transcend several conventional prejudices.

One of these prejudices is the fear of red ink. In normal times, it’s good to worry about the budget deficit — and fiscal responsibility is a virtue we’ll need to relearn as soon as this crisis is past. When depression economics prevails, however, this virtue becomes a vice. F.D.R.’s premature attempt to balance the budget in 1937 almost destroyed the New Deal.

Another prejudice is the belief that policy should move cautiously. In normal times, this makes sense: you shouldn’t make big changes in policy until it’s clear they’re needed. Under current conditions, however, caution is risky, because big changes for the worse are already happening, and any delay in acting raises the chance of a deeper economic disaster. The policy response should be as well-crafted as possible, but time is of the essence.

Finally, in normal times modesty and prudence in policy goals are good things. Under current conditions, however, it’s much better to err on the side of doing too much than on the side of doing too little. The risk, if the stimulus plan turns out to be more than needed, is that the economy might overheat, leading to inflation — but the Federal Reserve can always head off that threat by raising interest rates. On the other hand, if the stimulus plan is too small there’s nothing the Fed can do to make up for the shortfall. So when depression economics prevails, prudence is folly.

What does all this say about economic policy in the near future? The Obama administration will almost certainly take office in the face of an economy looking even worse than it does now. Indeed, Goldman Sachs predicts that the unemployment rate, currently at 6.5 percent, will reach 8.5 percent by the end of next year.

All indications are that the new administration will offer a major stimulus package. My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion.

So the question becomes, will the Obama people dare to propose something on that scale?

Let’s hope that the answer to that question is yes, that the new administration will indeed be that daring. For we’re now in a situation where it would be very dangerous to give in to conventional notions of prudence.

INTERNATIONAL TRADE UNION CONFEDERATION (ITUC)

ITUC OnLine
192/131108

Economic Crisis: World's Trade Unions Put Recovery and Reform Plan to
G20

Brussels, 13 November (ITUC OnLine): Trade union leaders from the G20
countries will put forward a comprehensive plan to turn around the
global economy, in meetings with world leaders in Washington DC on the
eve of the financial crisis summit hosted by the US government on 15
November. The top level union delegation will discuss the plan with
IMF Managing Director Dominique Strauss-Kahn, World Bank President
Robert Zoellick and heads of government from the G20 countries.

The world's unions are calling for a series of urgent actions to stave
off the prospect of deep and long-lasting global recession, coupled with
major changes in the running of the global economy to turn back decades
of deregulation policies that have caused the current crisis. A fresh
push for development and decent work is needed, as well as a "Green New
Deal" to tackle climate change effectively. The detailed union
proposals are set out in a recovery and reform programme entitled the
"Washington Declaration"
http://www.ituc-csi.org/IMG/pdf/0811t_gf_G20.pdf

"Immediate action is needed to get the world economy moving and boost
employment. Governments need to be prepared to make further,
coordinated, cuts in interest rates and to front-load investment in
infrastructure, education and health to help stimulate demand growth and
reinforce public services. This needs to be accompanied by tax and
spending measures to support the purchasing power of low- and
middle-income earners, and concrete steps to launch investment in green
goods and services, to help address climate change", said John Evans,
General Secretary of the OECD-TUAC.
The ITUC and TUAC are co-organising the union summit which will be
hosted by the US trade union centre AFL-CIO at its Washington DC
Headquarters.

"The outcome of the US elections reflects a world-wide rejection of the
fundamentalist right-wing ideology that has made a small number of
people incredibly rich, while inequality and economic insecurity have
grown, development has stalled, and the world stands on the edge of
economic calamity. Tens of millions of workers are facing the loss of
their jobs and more and more people are falling into poverty, with women
frequently the worst affected" said ITUC General Secretary Guy Ryder.
"Now is the time for a complete change in direction, and we will be
putting the case for that change to governments, including the incoming
Obama Administration in the USA", he added.

Along with the immediate steps to stimulate the world economy, the trade
unions are putting forward a comprehensive regulatory package to ensure
global governance of the global economy with a strong role for the ILO
in line with the new ILO Social Justice Declaration. Key elements of
the package include:

* Better accountability of central banks
1 Regulation of hedge funds and private
equity
2 Proper supervision of banks and global
conglomerates
3 Reform and control of executive pay and
profit distribution
4 Taxation of international financial
transactions
5 Reform of the credit rating industry
6 Ending tax havens
7 Protection against predatory lending
8 Active policies for housing and for
community-based financial services.

The Washington Declaration also draws attention to the plight of the
world's poorest countries, where the impacts of global downturn will hit
hardest. It calls on richer countries to ensure that international
targets on development aid and the UN Millennium Development Goals are
met, and urges action to ensure that basic commodities, especially food,
become affordable for the poorest.
The Declaration sets out the global trade union movement's platform for
a new governance structure for the world economy. This must not be
limited only to financial markets and currency flows. The new structure
must overcome the major flaws in the current system, and ensure that
emerging economies and developing countries have their rightful place at
the centre of policy-making.

Decent Work must be a primary objective of the new approach, with job
creation, fundamental workers' rights, social protection and social
dialogue central to reversing the massive inequality which is at the
root of the present crisis. Trade unions have a major contribution to
make in charting the necessary international reform, and the statement
calls on governments to ensure their full involvement in the process.
"Governments have found it easy for the past three decades to withdraw
from their proper role in regulating markets and ensuring that
multinational companies meet global standards on workers' rights.
Getting good government policies back in the driving seat will be much
more difficult, as no government can achieve this alone. Now is the
time for coordinated action to restore proper regulation to put the
markets at the service of the people," said Ryder.


The ITUC represents 168 million workers in 155 countries and territories
and has 311 national affiliates. http://www.ituc-csi.org
http://www.youtube.com/ITUCCSI

For more information, please contact the ITUC Press Department on the
following numbers: +32 2 224 0204 or +32 476 621 018.

Greenspan "in a state of shocked disbelief" about deregulation

Professor Norman Markowitz trying to explain the need to "regulate" and provide "oversight" for the capitalist economy to students wondering how they are going to pay off their student loans...



This is a very typical middle class/liberal/Democratic Party perspective. Norman Markowitz is a Barack Obama booster who sees the salvation of capitalism in regulation and oversight.

Typical of this middle class/liberal/Democratic Party perspective is the absence of any concern for, or acknowledgment of, the day-to-day problems of working people. Also noticeable is the lack of concrete solutions.

Professor Markowitz has been known to flirt with Marxism from time-to-time but the Professor has obviously failed to grasp the fact that capitalists have made tremendous profits and left the working class with all the problems.

However, given these noted shortcomings of Alan Greenspan's ideas by this wannabe Marxist Professor, Markowitz does bring forward some very significant points regarding the limitations of Alan Greenspan's thinking and ideas which served his corporate clients so well--- until now.

Unfortunately, Professor Markowitz fails to bring forward what kind of thinking and ideas are needed to replace all this "free market" ideology of Alan Greenspan and his little Ayn Rand led "think tank" which met regularly in Rand's home.

Markowitz gloats with Congressman Waxman exposing the failure of Greenspan's ideology; but, the Professor never wonders why Waxman has refused to ask the all important question of Greenspan or any of the other capitalist sooth-Sayers:

Can capitalism escape a major depression?

Of course in answering this question one then has to ask the question:

Is the problem one of a failed ideology or a failure of the capitalist system?

Perhaps Professor Markowitz would like to answer these questions here.

Without answers to these two questions from middle-class/liberal/Democratic Party intellectuals we really can't say that Professor Norman Markowitz and the Obama crowd have any better ideas than Alan Greenspan when it comes to finding solutions to the problems of working people.

No wonder Karl Marx has become a best-selling author in spite of being buried numerous times in university classrooms and in the pages of the mainstream media, only to be resurrected as this capitalist economic crises deepens--- could there really be something to the Marxist idea that the capitalist economy operates in boom-bust cycles and the system is taking one hard belly-flop?

We are living in what is increasingly being referred to as a "Marx moment."

Professor Norman Markowitz might blow the dust off all those copies of Marx' "Capital" stored away in the Rutger's University Library and get his students reading because it doesn't look like this little blip in what George Bush describes as a "robust free market economy... the strongest in the world," is going to pass by the world of Ivory Towers... whether Oxford or Rutgers.

Alan L. Maki










Thursday, October 23, 2008

by Norman Markowitz, Professor, Rutgers University

Alan Greenspan told a House Committee investigating the deluge in finance today of his shock that banks could not regulate themselves. Greenspan then went on to say that he had "found a flaw" in his "free market" world view, adding "I don't know how significant or permanent it is. But I have been very distressed by that fact." When asked by committee chair Henry Waxman if "your ideology was not right, it was not working," Greenspan added Absolutely, precisely....the reason I have been shocked because I have been going for forty years with very considerable evidence that it was working exceptionally well."

Forty years? Exceptionally well? A flaw? Don't know how significant or permanent it is? These are the comments of the man who was Chair of the Federal Reserve, the the second most powerful executive position in the U.S., for eighteen years? And this ahistorical irrational and comical response to a disaster of this dimension is what he has to say?

First, Greenpan's statements make little historical sense because the deregulation that we are talking about didn't develop forty years ago during the Johnson administration but a generation ago in the Reagan administration, and not all at once. Maybe Greenspan forgot that because in the 1960s, he was a follower of Ayn Rand, whose Objectivist cult looked to free market Supermen,a sort of extreme right-wing individualist anarchism as far removed from reality as the extreme left collectivist underground of the Weathermen which Bill Ayers belonged to at the time. Of course, Randians were never connected to acts of violence against the government. Of course, But then again, Weathermen never served in cabinet positions, not to mention chair of the Federal Reserve.

The Savings and Loan collapse of that period which occurred when Paul Volcker, Greenspan's predecessor, was Chair of the Federal Reserve, might have suggested to Alan that there was a "flaw" in this kind of policy, but it apparently didn't. The decline in real wages, huge rise in income inequality, increase in human suffering that these policies visibly produced in the U.S. didn't factor into Greenspan's thinking either, since the great majority of the victims, particularly children, were either marginal or completely outside of a political process where less than half the eligible voters were voting and non voters were drawn overwhelmingly from lower-income groups whose living standards were deteriorating.

As I read Greenspan I see an interesting hybrid of man, someone who was smart on the specifics, know about the ins and outs of finance, but was totally out of it in terms of the larger picture, a "perfect fool" so to speak for those who would rob the system blind because he was completely blind to their abuses until they overwhelmed the economy--a bit like those in the 1920s Republican governments who didn't have to be bribed to hand over to corporations public property because they believed in a kind of divine right of business.

Perhaps if Greenspan had not gone from being a not so successful Jazz saxophonist to being a follower of Ayn Rand, he might have discovered that the "flaw" in his argument was discovered by capitalist economists in the late 19th century, those who didn't need Karl Marx to explain to them that the way real markets worked had little to do with the theory of the a "self regulating" rational "free market" governed by a "law of supply and demand" where rational "economic man" ate fish when the price of meat was to high and then the price of meat would come down, and bankers invested their capital prudently to seek both the highest and the safest investment and those who didn't would run out of money and collapse just as the economic man who continued to eat meat would run out of money and starve. That system, even without bailouts for the banks or food stamps for the economic man, never had any relationship to reality with the rise of mass production industrial capitalism

Alan Greenspan won't lose his home and I am sure can protect his pension. His distress will be very different from the millions who have for years faced the economic consequences of the policies that he championed, the "forgotten millions" of the 1980s and 1900s whose jobs and pensions were casualties of what some called "the Reagan revolution." Now, when those millions are on the brink of multiplying, when a greatly weakened and under supplied safety net is about to face a huge increase in demand for services, Alan Greenspan's economic theories and policies should be returned to the pre Ragtime nineteenth century world where they already considered relics by many.

Greenspan denies blame for crisis, admits 'flaw'

Oct 23, 9:16 PM (ET)

By MARTIN CRUTSINGER and MARCY GORDON


WASHINGTON (AP) - Badgered by lawmakers, former Federal Reserve Chairman Alan Greenspan denied the nation's economic crisis was his fault on Thursday but conceded the meltdown had revealed a flaw in a lifetime of economic thinking and left him in a "state of shocked disbelief."

Greenspan, who stepped down in 2006, called the banking and housing chaos a "once-in-a-century credit tsunami" that led to a breakdown in how the free market system functions. And he warned that things would get worse before they get better, with rising unemployment and no stabilization in housing prices for "many months."

Gloomy economic reports backed him up. New jobless claims soared to just under 500,000 for last week, and Goldman Sachs, Chrysler and Xerox all said they were cutting thousands more workers. On Wall Street, the Dow Jones industrials bounced erratically all day before finishing up 172 points - after a two-day drop of nearly 750.

The financial crisis even prompted the Republican Greenspan, a staunch believer in free markets, to propose that government consider tougher regulations, including requiring financial firms that package mortgages into securities to keep a portion as a check on quality.

He said other regulatory changes should be considered, too, in such areas as fraud.

Also looking for solutions, another banking regulator told Congress the government was working on a loan-guarantee plan that could help many homeowners escape foreclosure as part of the $700 billion bailout legislation. That plan is being discussed by the Treasury Department and the Federal Deposit Insurance Corp., said FDIC Chairman Sheila Bair, who is pushing the idea.

Greenspan's interrogation by the House Oversight Committee was a far cry from his 18 1/2 years as Fed chairman, when he presided over the longest economic boom in the country's history. He was viewed as a free-market icon on Wall Street and held in respect bordering on awe by most members of Congress.

Not now. At an often contentious four-hour hearing, Greenspan, former Treasury Secretary John Snow and Securities and Exchange Commission Chairman Christopher Cox were repeatedly accused by Democrats on the committee of pursuing an anti-regulation agenda that set the stage for the biggest financial crisis in 70 years.

"The list of regulatory mistakes and misjudgments is long," panel chairman Henry Waxman declared.


Greenspan, 82, acknowledged under questioning that he had made a "mistake" in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan called that "a flaw in the model ... that defines how the world works."

He acknowledged that he had also been wrong in rejecting fears that the five-year housing boom was turning into an unsustainable speculative bubble that could harm the economy when it burst. Greenspan maintained during that period that home prices were unlikely to post a significant decline nationally because housing was a local market.

He said Thursday that he held to that belief because until the current housing slump there had never been such a significant decline in prices nationwide. He said the current financial crisis had "turned out to be much broader than anything that I could have imagined."

Greenspan's much-anticipated appearance before the House panel came as the Senate Banking Committee held its own hearing on what the government is doing now to get out of the mess.

Assistant Treasury Secretary Neel Kashkari, who is overseeing the $700 billion financial rescue effort that passed Congress on Oct. 3, said the administration was not only working to get federal purchases of bank stock started quickly but also the program to mop up troubled mortgage-related assets. He also said the government was working to make sure that directives in the legislation to help struggling homeowners avoid foreclosure were being addressed.

Kashkari said the plan could include setting standards that banks should follow for reworking mortgages to make them more affordable. He said the administration was considering a recommendation to provide government loan guarantees to cover the reworked mortgages to make the program more attractive to banks.

"We are passionate about doing everything we can to avoid preventable foreclosures," Kashkari told the committee.

The FDIC's Bair told the same Senate panel that the government needs to do more to help tens of thousands of people avoid foreclosure.

She said the FDIC was working "closely and creatively" with the Treasury Department to come up with a plan.

Greenspan was asked to defend a variety of actions he took as Federal Reserve chairman - resisting recommendations to use the Fed's powers to crack down on subprime mortgages, for one. And opposing efforts to impose regulations on derivatives, the complex financial instruments that include credit default swaps, which have also figured prominently in the current crisis.

He said that outside of credit default swaps, the bulk of financial derivatives had not caused major problems. He said the boom in subprime lending occurred because of the huge demand for investment opportunities in a global economy, and he blamed the crash on a failure by investors to properly assess the risks from such mortgages, which went to borrowers with weak credit.

As for firms that package mortgages into securities, he said, "As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue."

On the billions of dollars of losses suffered by financial institutions because of their investments in subprime mortgages, Greenspan said he had been shocked by the failure of banking officials to protect their shareholders from their bad loan decisions.

"A critical pillar to market competition and free markets did break down," Greenspan said. "I still do not fully understand why it happened."

SEC Chairman Cox told the House panel that "somewhere in this terrible mess, laws were broken." And Snow said that lawmakers should have responded more quickly to his pleas for stronger regulation for mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), which were taken over by the government last month.

In the meantime, Kashkari, the Treasury official overseeing the bailout program, said there has been much progress, resulting in "numerous signs of improvement in our markets and in the confidence in our financial institutions." Still, he cautioned, "the markets remain fragile."

The Depression: A Long-Term View

Note: I have placed several things in bold.

Please do not reply to the listserv. To correspond with the author, write <immanuel.wallerstein@yale.edu>. To correspond with us about your e-mail address on the listserv, write <dunlop@binghamton.edu>. Thank you.


Commentary No. 243, Oct. 15, 2008

"The Depression: A Long-Term View"

By: Immanuel Wallerstein



The depression has started. Journalists are still coyly enquiring of economists whether or not we may be entering a mere recession. Don't believe it for a minute. We are already at the beginning of a full-blown worldwide depression with extensive unemployment almost everywhere. It may take the form of a classic nominal deflation, with all its negative consequences for ordinary people. Or it might take the form, a bit less likely, of a runaway inflation, which is simply another way in which values deflate, and which is even worse for ordinary people.

Of course everyone is asking what has triggered this depression. Is it the derivatives, which Warren Buffett called "financial weapons of mass destruction"? Or is it the subprime mortgages? Or is it oil speculators? This is a blame game, and of no real importance. This is to concentrate on the dust, as Fernand Braudel called it, of short-term events. If we want to understand what is going on, we need to look at two other temporalities, which are far more revealing. One is that of medium-term cyclical swings. And one is that of the long-term structural trends.

The capitalist world-economy has had, for several hundred years at least, two major forms of cyclical swings. One is the so-called Kondratieff cycles that historically were 50-60 years in length. And the other is the hegemonic cycles which are much longer.

In terms of the hegemonic cycles, the United States was a rising contender for hegemony as of 1873, achieved full hegemonic dominance in 1945, and has been slowly declining since the 1970s. George W. Bush's follies have transformed a slow decline into a precipitate one. And as of now, we are past any semblance of U.S. hegemony. We have entered, as normally happens, a multipolar world. The United States remains a strong power, perhaps still the strongest, but it will continue to decline relative to other powers in the decades to come. There is not much that anyone can do to change this.

The Kondratieff cycles have a different timing. The world came out of the last Kondratieff B-phase in 1945, and then had the strongest A-phase upturn in the history of the modern world-system. It reached its height circa 1967-73, and started on its downturn. This B-phase has gone on much longer than previous B-phases and we are still in it.

The characteristics of a Kondratieff B-phase are well-known and match what the world-economy has been experiencing since the 1970s. Profit rates from productive activities go down, especially in those types of production that have been most profitable. Consequently, capitalists who wish to make really high levels of profit turn to the financial arena, engaging in what is basically speculation. Productive activities, in order not to become too unprofitable, tend to move from core zones to other parts of the world-system, trading lower transactions costs for lower personnel costs. This is why jobs have been disappearing from Detroit, Essen, and Nagoya and factories have been expanding in China, India, and Brazil.

As for the speculative bubbles, some people always make a lot of money in them. But speculative bubbles always burst, sooner or later. If one asks why this Kondratieff B-phase has lasted so long, it is because the powers that be - the U.S. Treasury and Federal Reserve Bank, the International Monetary Fund, and their collaborators in western Europe and Japan - have intervened in the market regularly and importantly - 1987 (stock market plunge), 1989 (savings-and-loan collapse), 1997 (East Asian financial fall), 1998 (Long Term Capital Management mismanagement), 2001-2002 (Enron) - to shore up the world-economy. They learned the lessons of previous Kondratieff B-phases, and the powers that be thought they could beat the system. But there are intrinsic limits to doing this. And we have now reached them, as Henry Paulson and Ben Bernanke are learning to their chagrin and probably amazement. This time, it will not be so easy, probably impossible, to avert the worst.

In the past, once a depression wreaked its havoc, the world-economy picked up again, on the basis of innovations that could be quasi-monopolized for a while. So, when people say that the stock market will rise again, this is what they are thinking will happen, this time as in the past, after all the damage has been done to the world's populations. And maybe it will, in a few years or so.

There is however something new that may interfere with this nice cyclical pattern that has sustained the capitalist system for some 500 years. The structural trends may interfere with the cyclical patterns. The basic structural features of capitalism as a world-system operate by certain rules that can be drawn on a chart as a moving upward equilibrium. The problem, as with all structural equilibria of all systems, is that over time the curves tend to move far from equilibrium and it becomes impossible to bring them back to equilibrium.

What has made the system move so far from equilibrium? In very brief, it is because over 500 years the three basic costs of capitalist production - personnel, inputs, and taxation - have steadily risen as a percentage of possible sales price, such that today they make it impossible to obtain the large profits from quasi-monopolized production that have always been the basis of significant capital accumulation. It is not because capitalism is failing at what it does best. It is precisely because it has been doing it so well that it has finally undermined the basis of future accumulation.

What happens when we reach such a point is that the system bifurcates (in the language of complexity studies). The immediate consequence is high chaotic turbulence, which our world-system is experiencing at the moment and will continue to experience for perhaps another 20-50 years. As everyone pushes in whatever direction they think immediately best for each of them, a new order will emerge out of the chaos along one of two alternate and very different paths.

We can assert with confidence that the present system cannot survive. What we cannot predict is which new order will be chosen to replace it, because it will be the result of an infinity of individual pressures. But sooner or later, a new system will be installed. This will not be a capitalist system but it may be far worse (even more polarizing and hierarchical) or much better (relatively democratic and relatively egalitarian) than such a system. The choice of a new system is the major worldwide political struggle of our times.

As for our immediate short-run ad interim prospects, it is clear what is happening everywhere. We have been moving into a protectionist world (forget about so-called globalization). We have been moving into a much larger direct role of government in production. Even the United States and Great Britain are partially nationalizing the banks and the dying big industries. We are moving into populist government-led redistribution, which can take left-of-center social-democratic forms or far right authoritarian forms. And we are moving into acute social conflict within states, as everyone competes over the smaller pie. In the short-run, it is not, by and large, a pretty picture.

by Immanuel Wallerstein


[Copyright by Immanuel Wallerstein, distributed by Agence Global. For rights and permissions, including translations and posting to non-commercial sites, and contact: rights@agenceglobal.com, 1.336.686.9002 or 1.336.286.6606. Permission is granted to download, forward electronically, or e-mail to others, provided the essay remains intact and the copyright note is displayed. To contact author, write: immanuel.wallerstein@yale.edu.

These commentaries, published twice monthly, are intended to be reflections on the contemporary world scene, as seen from the perspective not of the immediate headlines but of the long term.]



Becky Dunlop, Secretary
Fernand Braudel Center
http://fbc.binghamton.edu/

Anti-democratic nature of US capitalism is being exposed

By: Noam Chomsky

Friday, October 10, 2008


Bretton Woods was the system of global financial management set up at the end of the second World War to ensure the interests of capital did not smother wider social concerns in post-war democracies. It was hated by the US neoliberals - the very people who created the banking crisis writes Noam Chomsky

THE SIMULTANEOUS unfolding of the US presidential campaign and unravelling of the financial markets presents one of those occasions where the political and economic systems starkly reveal their nature.

Passion about the campaign may not be universally shared but almost everybody can feel the anxiety from the foreclosure of a million homes, and concerns about jobs, savings and healthcare at risk.

The initial Bush proposals to deal with the crisis so reeked of totalitarianism that they were quickly modified. Under intense lobbyist pressure, they were reshaped as "a clear win for the largest institutions in the system . . . a way of dumping assets without having to fail or close", as described by James Rickards, who negotiated the federal bailout for the hedge fund Long Term Capital Management in 1998, reminding us that we are treading familiar turf. The immediate origins of the current meltdown lie in the collapse of the housing bubble supervised by Federal Reserve chairman Alan Greenspan, which sustained the struggling economy through the Bush years by debt-based consumer spending along with borrowing from abroad. But the roots are deeper. In part they lie in the triumph of financial liberalisation in the past 30 years - that is, freeing the markets as much as possible from government regulation.

These steps predictably increased the frequency and depth of severe reversals, which now threaten to bring about the worst crisis since the Great Depression.

Also predictably, the narrow sectors that reaped enormous profits from liberalisation are calling for massive state intervention to rescue collapsing financial institutions.

Such interventionism is a regular feature of state capitalism, though the scale today is unusual. A study by international economists Winfried Ruigrok and Rob van Tulder 15 years ago found that at least 20 companies in the Fortune 100 would not have survived if they had not been saved by their respective governments, and that many of the rest gained substantially by demanding that governments "socialise their losses," as in today's taxpayer-financed bailout. Such government intervention "has been the rule rather than the exception over the past two centuries", they conclude.

In a functioning democratic society, a political campaign would address such fundamental issues, looking into root causes and cures, and proposing the means by which people suffering the consequences can take effective control.

The financial market "underprices risk" and is "systematically inefficient", as economists John Eatwell and Lance Taylor wrote a decade ago, warning of the extreme dangers of financial liberalisation and reviewing the substantial costs already incurred - and proposing solutions, which have been ignored. One factor is failure to calculate the costs to those who do not participate in transactions. These "externalities" can be huge. Ignoring systemic risk leads to more risk-taking than would take place in an efficient economy, even by the narrowest measures.

The task of financial institutions is to take risks and, if well-managed, to ensure that potential losses to themselves will be covered. The emphasis is on "to themselves". Under state capitalist rules, it is not their business to consider the cost to others - the "externalities" of decent survival - if their practices lead to financial crisis, as they regularly do.

Financial liberalisation has effects well beyond the economy. It has long been understood that it is a powerful weapon against democracy. Free capital movement creates what some have called a "virtual parliament" of investors and lenders, who closely monitor government programmes and "vote" against them if they are considered irrational: for the benefit of people, rather than concentrated private power.

Investors and lenders can "vote" by capital flight, attacks on currencies and other devices offered by financial liberalisation. That is one reason why the Bretton Woods system established by the United States and Britain after the second World War instituted capital controls and regulated currencies.*

The Great Depression and the war had aroused powerful radical democratic currents, ranging from the anti-fascist resistance to working class organisation. These pressures made it necessary to permit social democratic policies. The Bretton Woods system was designed in part to create a space for government action responding to public will - for some measure of democracy.

John Maynard Keynes, the British negotiator, considered the most important achievement of Bretton Woods to be the establishment of the right of governments to restrict capital movement.

In dramatic contrast, in the neoliberal phase after the breakdown of the Bretton Woods system in the 1970s, the US treasury now regards free capital mobility as a "fundamental right", unlike such alleged "rights" as those guaranteed by the Universal Declaration of Human Rights: health, education, decent employment, security and other rights that the Reagan and Bush administrations have dismissed as "letters to Santa Claus", "preposterous", mere "myths".

In earlier years, the public had not been much of a problem. The reasons are reviewed by Barry Eichengreen in his standard scholarly history of the international monetary system. He explains that in the 19th century, governments had not yet been "politicised by universal male suffrage and the rise of trade unionism and parliamentary labour parties". Therefore, the severe costs imposed by the virtual parliament could be transferred to the general population.

But with the radicalisation of the general public during the Great Depression and the anti-fascist war, that luxury was no longer available to private power and wealth. Hence in the Bretton Woods system, "limits on capital mobility substituted for limits on democracy as a source of insulation from market pressures".

The obvious corollary is that after the dismantling of the postwar system, democracy is restricted. It has therefore become necessary to control and marginalise the public in some fashion, processes particularly evident in the more business-run societies like the United States. The management of electoral extravaganzas by the public relations industry is one illustration.

"Politics is the shadow cast on society by big business," concluded America's leading 20th century social philosopher John Dewey, and will remain so as long as power resides in "business for private profit through private control of banking, land, industry, reinforced by command of the press, press agents and other means of publicity and propaganda".

The United States effectively has a one-party system, the business party, with two factions, Republicans and Democrats. There are differences between them. In his study Unequal Democracy: The Political Economy of the New Gilded Age, Larry Bartels shows that during the past six decades "real incomes of middle-class families have grown twice as fast under Democrats as they have under Republicans, while the real incomes of working-poor families have grown six times as fast under Democrats as they have under Republicans".

Differences can be detected in the current election as well. Voters should consider them, but without illusions about the political parties, and with the recognition that consistently over the centuries, progressive legislation and social welfare have been won by popular struggles, not gifts from above.

Those struggles follow a cycle of success and setback. They must be waged every day, not just once every four years, always with the goal of creating a genuinely responsive democratic society, from the voting booth to the workplace.

* The Bretton Woods system of global financial management was created by 730 delegates from all 44 Allied second World War nations who attended a UN-hosted Monetary and Financial Conference at the Mount Washington Hotel in Bretton Woods in New Hampshire in 1944.

Bretton Woods, which collapsed in 1971, was the system of rules, institutions, and procedures that regulated the international monetary system, under which were set up the International Bank for Reconstruction and Development (IBRD) (now one of five institutions in the World Bank Group) and the International Monetary Fund (IMF), which came into effect in 1945.

The chief feature of Bretton Woods was an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value.

The system collapsed when the US suspended convertibility from dollars to gold. This created the unique situation whereby the US dollar became the "reserve currency" for the other countries within Bretton Woods.

Noam Chomsky is professor emeritus of linguistics at the Massachusetts Institute of Technology. This article appeared first in the New York Times

From: The Irish Times

A Legislative Agenda for the First 100 Days

Note: Bill Fletcher, Jr. is a co-author of the book: Solidarity Divided, the crisis in organized labor and a new path toward social justice. Fletcher is also the founder of "Progressives for Obama."

Like all social democrats, Fletcher has a lot of ideas but no way to put those ideas into practice.

Over three-hundred authors, professors, entertainers and labor bureaucrats comprise "Progressives for Obama" but none are engaged in grassroots/rank-and-file campaigns which would exert the kind of pressure required to coerce an Obama Administration down this road.

This is classic social democracy... all talk, no action.

Before reading Fletcher's fairy-tale, perhaps read today's Associated Press reports first:

Link: http://apnews.myway.com//article/20081012/D93P0I680.html

Efforts on global warming chilled by economic woes

Oct 12, 10:22 AM (ET)

By DINA CAPPIELLO

WASHINGTON (AP) - The economic free fall gripping the nation may bring down one of the main environmental objectives: capping the greenhouse gases that are blamed for global warming.

Democratic leaders in the House and the Senate, and both presidential candidates, continue to rank tackling global warming as a chief goal next year. But the focus on stabilizing the economy probably will make it more difficult to pass a law to reduce carbon dioxide and other greenhouse gases. At the very least, it will push back when the reductions would have to start.

As one Republican senator put it, the green bubble has burst.

"Clearly it is somewhere down the totem pole given the economic realities we are facing," said Tom Williams, a spokesman for Duke Energy Corp., an electricity producer that has supported federal mandates on greenhouse gases. Duke is a member of the U.S. Climate Action Partnership, an association of businesses and nonprofit groups that has lobbied Congress to act.

Just months ago, chances for legislation passing in the next Congress and becoming law looked promising. The presidential candidates support mandatory cuts and a Democratic majority is ready to act on the problem after years of the Bush administration's resisting federal controls.

But the most popular remedy for slowing global warming, a mechanism know as cap-and-trade, could put further stress on a teetering economy.

Under such a system, the government would establish a market for carbon dioxide by giving or selling credits to companies with operations that emit greenhouse gases. The companies can then choose whether to invest in technologies to reduce emissions to meet targets or instead buy credits from other companies who have already met them.

In an interview with The Associated Press, Rep. Rick Boucher, D-Va., said that in light of the economic downturn, a bill that would give polluters permits free of charge would be preferable.

"The first way we can control program costs is by not charging industrial emitters," said Boucher, who released a first draft of a bill this past week with the chairman of the House Energy and Commerce Committee, Rep. John Dingell, D-Mich. Giving away right-to-pollute permits was one of the options.

Other Democrats, however, see a cap-and-trade bill - and the government revenues it would generate from selling permits - as an engine for economic growth. Democratic presidential nominee Barack Obama supports auctioning off all permits, using the money to help fund alternative energy.

"If you see this as a job creation opportunity for the U.S. to develop the products that are then sold around the world, then you should be optimistic about what the impact of passage would mean for the American economy," said Rep. Edward Markey, D-Mass.

Conservative Republicans who were never fans of a law to curb greenhouse gases have used the economic downturn as a rallying cry.

Oklahoma Sen. James Inhofe, the senior Republican on the Senate Environment and Public Works Committee, in a blog entry this month criticized 152 House members for releasing a set of principles to tackle global warming in the midst of the economic turmoil.

"The current economic crisis only reinforces the public's wariness about any climate bill that attempts to increase the costs of energy and jeopardizes jobs," Inhofe said.

Rep. Joe Barton, R-Texas, took the argument a step further when he said the Boucher-Dingell bill could lead the country "off the economic cliff."

But even supporters of federal regulation of greenhouse gases acknowledge that something has to give given the state of the economy.

Sen. John Warner, R-Va., a lead sponsor of a Senate bill to curb greenhouse gases that failed this year, acknowledged that the economy could delay when reductions in carbon dioxide would start.

Warner told the AP that any bill should allow the president to decide.

"We must continue to think and devise a piece of legislation that will enable the president of the United States to control timing ... dependent on the president's analysis for the ability of the economy to assume the financial burdens," he said.

The U.S. is not alone. As the economic crisis has spread to markets across the globe, work to curb greenhouse gases elsewhere has stalled.

Earlier this past week, Rajendra Pachauri, head of the U.N. climate panel, said discussions about global warming solutions were "on the back burner." Pachauri shared the 2007 Nobel Peace Prize with former Vice President Al Gore for their work on climate change.

"I'm absolutely sure that climate change will be the last thing people will think about at this point in time," he said. "Sooner or later, they will come back to it."

The upside is that in hard economic times, and with high energy prices, the amount of pollution in the air tends to decline.

That will slow global warming somewhat, but there are already enough heat-trapping gases in the atmosphere to cause the temperature to rise.

"I really wish that the science of global warming would look at the newspaper, and say we have an economic crisis so the Earth will stop warming," said Dave Hamilton, director of the Sierra Club's global warming and energy program. "But that is not going to happen."

Alan L. Maki



By Bill Fletcher, Jr.

The following piece is from the fall 2008 issue of New Labor Forum.


Preface/The Setting

Two days after the November 2008 elections, Democrats
and their allies are still celebrating the decisive
defeat of Republican John McCain. With his defeat comes
the chance to render unto history the remnants of the
Bush/Cheney regime that so ruined the lives of the
bottom 80 percent of the U.S. population, and turned
most of the world against the U.S. Eight years of
Bush/Cheney have brought incompetence, jingoism, and
neoliberalism. The wars in Iraq and Afghanistan,
disasters such as Hurricane Katrina, and the deepening
economic crisis have served to discredit much of the
conservative agenda, even going so far as to generate
despair among the right-wing evangelical base.

Let's imagine that, after several months of drafting,
the final touches are being placed on what has come to
be known as The First 100 Days: A Working People's
Agenda for the First 100 Days of the Incoming Democratic
Administration. This project, initiated by members of
the AFL-CIO, Change To Win, as well as several
independent unions and other progressive working-class
organizations, has identified several key areas where
the new Democratic administration must take bold steps
within its first 100 days. Let's also imagine that the
drafting committee collected hundreds of ideas and
developed an extensive list of recommendations for an
even more comprehensive agenda; but the committee's
delicate task was to focus first and foremost on the
emergency steps required to rescue the country from the
potentially deep, and already devastating recession, and
two disastrous wars.

Within a week, the document will be presented to the
President-elect and his transition team. The atmosphere
in this final meeting is one of both excitement and
anxiety as everyone realizes that just as this document
is being drafted, several other documents are being
drafted by various forces representing constituencies
whose interests are antithetical to those of working
people. The responsiveness of the President-elect to
The First 100 Days will depend not only on the logic and
persuasiveness of the document itself, but also on the
capacity of the constituencies uniting behind this
document to back up each word with people power.



The Crisis

The U.S. has plunged into a significant economic crisis
which, at a minimum, is heading toward a conceivably
severe recession. Yet the crisis is not simply about
the immediate economic situation. A series of factors
have contributed to an economic unraveling that is
fueled by political uncertainty:

The living standard has declined for the average U.S.
worker since the mid-1970s. While productivity has
increased, workers' pay has decreased. Structural
unemployment has worsenend as sectors of the economy
have begun to reorganize, move, or disappear altogether.
In addition, the adoption of neoliberalism as the given
economic framework in the capitalist world generally and
the U.S. in particular, has meant an assault on the
public sector and public service, a factor that became
tragically apparent when Hurricane Katrina hit.
Meanwhile, the domino effects of a credit crisis (that
began as part of the speculative boom in housing prices
and values), continue to destroy the lives and savings
of millions of working people.

Neoliberal globalization, in both its military and
non-military forms, has brought unprecedented levels of
migration. In the U.S., as part of this global
migration, we have seen a steady increase in immigration
from the 1970s (particularly from Indochina), through
the 1980s (largely as a result of the Central American
wars), into the 1990s and today (stemming from the
collapse of the Soviet bloc, along with the passage of
the North American Free Trade Agreement (NAFTA) and the
migration of Mexicans into the U.S.).

Efforts at some form of national health care have been
undermined since World War II, largely by the political
Right. Renewed attention to the more than 44,000,000
people lacking any health insurance, along with the
legions of people who have inadequate healthcare
coverage, surfaced in the early 2000s.

An environmental crisis has enveloped planet Earth
sooner than many people, including many scientists,
expected.

Workers remain under attack, and not just as a result
of a problematic economy. The ability of workers to
join or form unions has worsened with each year.

The global community is becoming more unequal. In
terms of income and wealth, inequality has consistently
grown under the neoliberal order. In the U.S., the top
one percent controls more than 35 percent of the wealth.
At the global level, the richest 225 individuals have
more wealth than the bottom 47 percent of the world's
population. This dramatic wealth disparity, not seen in
the U.S. since the 1920s, is a major source of social
instability and resentment, undermining the entire
notion of democracy.

Inequality in the U.S. also has a racial and gendered
face to it, due to a regression from the victories of
the civil rights and women's movements, along with the
growing tendency to blame the setbacks of white men on
those who have been subjected to historic
discrimination.

War (in Iraq and Afghanistan) and the national
security/neoliberal authoritarian state have changed the
terms of domestic and international politics. In
addition to destroying the countries involved, these
wars are a tremendous drain on the U.S. budget (with a
cost of approximately $845 billion by the end of
2008).[1] Insecurity in the U.S. has also increased in
response to the rising global resentment toward.U.S.
policies abroad. The growth of the neoliberal
authoritarian state has brought a decrease in actual
democracy and civil liberties.

While the situation facing the U.S. and the rest of the
world could be described in greater detail, the
preceding depicts the key elements of the current
emergency. The Bush administration and its allies (as
well as the McCain campaign) have lived in denial,
perpetuated lies (such as those in connection with the
illegal U.S. invasion of Iraq, as well as the hostility
toward Iran), and promoted the interests of the rich.

The time has now come to fight for the bottom 80
percent.



The Federal Emergency Response

The new administration's first initiatives must be both
domestic and global in scope. There is little time to
engage in the politics of symbolism, playing to a
particular constituency, rallying troops to the 'flag,'
without speaking to the deep-seated nature of the
challenges that we face.

At the same time, it must be understood that the efforts
within the first 100 days cannot represent the totality
of the new administration's program. A mandate to bring
about more sweeping change must be organized and
mobilized over the coming months and years. This will
require a combination of movement-building and building
a broader social consensus in favor of significant
structural change.

With that in mind, let us itemize the agenda:

1. Immediate withdrawal of U.S. troops, bases, and
mercenaries from Iraq and Afghanistan.

This should involve the following:

Asking the United Nations (UN) and Arab League for
assistance in creating a multi-national, transitional
team to bring the various forces on the ground together,
along with regional powers, to negotiate a long-term
resolution of the conflict and the stabilization of
Iraq.

The elimination of any obligation on the part of the
Iraqi government to fulfill agreements imposed upon Iraq
during the reign of Paul Bremer.

Bilateral discussions with Iran regarding future
policies and relations with the U.S.

Multi-party discussions between the U.S., Pakistan, and
the various political forces in Afghanistan regarding a
permanent political settlement.

Reparations from the U.S. (and any other country or
group that interfered in the internal affairs of Iraq
and Afghanistan) placed into a reconstruction fund
established by the UN.

A renouncement of any U.S. intentions to have permanent
bases in Iraq or Afghanistan; a withdrawal of U.S. bases
from Saudi Arabia; a renouncement of U.S. intentions to
secure control over oil and/or natural gas reserves in
the region.

Immediate talks toward establishing a U.S./European
Union/Russian/Arab League/Israeli/Palestinian joint
committee on the resolution of the Israeli/Palestinian
conflict. Deployment of a special envoy to lay the
foundations for this project.

2. Economic Triage.

The ongoing economic meltdown, particularly the collapse
of the housing bubble and the lending/credit/foreclosure
calamity, calls for both immediate relief and long-term
management. This will require the sort of economic aid
that has been diverted to cover the Iraq/Afghan war
costs, and attention must ultimately be paid to
reversing the more than thirty years of attacks on
working people and their declining living standards. In
the short-term, however, several steps need to be taken,
including, but not limited to:

A moratorium on foreclosures and evictions. Immediate
steps must be taken to halt foreclosures and evictions,
while providing immediate assistance to those affected
by these actions to renegotiate the terms of their debt.
This may mean federal assistance to pull individuals out
of usurious loans, allowing them to more comfortably
rebuild their financial standing; this would be a step
just short of declaring personal bankruptcy. The
Republicans' efforts to restrict individuals' ability to
declare personal bankruptcy must be reversed. The new
administration must also re-establish the Home Owners'
Loan Corporation (HOLC). This would be a 21st century
version of the New Deal measure that statutorily
arranged a temporary corporation to stabilize uncertain
mortgage markets.[2] Upon any reinstitution of it
today, the HOLC would acquire defaulted loans from
mortgage lenders and offer sustainable refinancing
options for homeowners to prevent future
foreclosures.[3]

An extension of both unemployment and food stamp
benefits. The Bush administration has adamantly held the
line against such expansion. But greater numbers of the
working poor have come to depend on food stamps in order
to survive, and the current apportionment insufficiently
reflects today's cost of living. The U.S. Department of
Agriculture (USDA) estimates that the current food stamp
benefit averages about $1 per meal per individual.[4]
Benefit amounts are based on the USDA's "Thrifty Food
Plan"— a theoretical diet created in the 1930s to
provide a minimally adequate diet at a low cost —which
hasn't been updated since 2003.[5] Additionally,
according to the Bread for the World group, most food
stamp households spend 80 percent of their benefits by
the 14th of each month.[6] Thus, the food stamp system
must be retooled to meet the full nutritional needs of
its recepients.

Immediate public service job creation. The federal
government needs to infuse the economy with funds to
prevent further collapse. As part of a longer-term
initiative, the federal government must begin emergency
public sector reconstruction work, focusing on bridges,
tunnels, and levees. We need a program along the lines
of that proposed by Barack Obama, who suggested the
dedication of $210 billion to create construction and
environmental jobs: $60 billion would be directed to a
National Infrastructure Reinvestment Bank to rebuild
public projects such as highways, bridges, airports; and
$150 billion would be earmarked for the creation of five
million green-collar jobs to develop more
environmentally friendly energy sources.[7] This would
be funded through cuts in military spending.[8]

Federal intervention to halt the collapse of student
loan programs. A hidden crisis, that is part of the
larger credit crunch, has been the declining number of
banks that offer affordable student loans. This has
resulted in a higher demand for available loans and the
elimination of higher education opportunities for many
students. A federal intervention, therefore, is needed
to make sufficient funds available. This could take the
form of legislation proposed by Senator Kennedy in April
2008 to increase federal student aid. This proposal
would, among other things, reduce students' need to take
out costly private loans by increasing their access to
guaranteed low-interest federal loans.[9] The bill would
increase federal loan limits by $1000 a year for
dependent undergraduates, and by $2000 a year for
independent undergraduates and students whose parents'
credit score disqualifies them for federal parent
loans.[10] The new administration should also take
steps aimed to restrain predatory lending.

Elimination of Bush tax cuts. Bush's tax cuts, along
with the Iraq and Afghan wars, have been bleeding the
economy. Steps must be taken to reclaim the money that
has been disproportionately funneled to corporations and
the wealthy. Though longer-term tax reform will be
necessary, the first step is to stop the hemorrhaging.

Federal aid to the states. Despite growing constraints
on state budgets (particularly within the context of the
rising unemployment and foreclosure rates), the federal
government has increasingly meted out severe budget
cuts. Federal assistance should provide the states with
more of a safety net as they struggle to balance their
budgets.

3. A Marshall Plan for U.S. cities and depressed
regions.

The Hurricane Katrina disaster and the 2007 Minneapolis
bridge collapse exposed significant problems with our
political leadership, economic choices, and the basic
U.S. infrastructure (not to mention race, gender, and
class politics when it came to Katrina). Another
assortment of projects must be undertaken to make the
infrastructure address our environmental crisis. With
all of this in mind, the following initiatives should be
announced:

A national commitment to launch a domestic version of
the Marshall Plan. This program would involve a renewal
of the U.S. physical and social infrastructures. With
regard to the physical infrastructure, in 2005, the
American Society of Civil Engineers estimated that
rehabilitation should cost $1.6 trillion over five
years. The National Urban League, which has been a
strong proponent of a social Marshall Plan, has
identified ten areas that are integral to revamping the
socio-economic infrastructure.[11] We must combine the
elements of these two proposals in order to lift the
U.S. from the abyss. A successful modern-day Marshall
Plan would also build upon the work of groups such as
the National Jobs for All Coalition, which has proposed
a 21st-Century Public Investment Act, featuring: a
Public Works Authority that, while working with state
and local authorities to create permanent jobs, would
provide long-term funding for high priority public works
and infrastructure projects, ensuring that these
projects employ the unemployed and underemployed; a
Public Investment Fund that would fund a Public Service
Employment Program designed to close job gaps, while
continuing to encourage job creation; and a National
Employment Accounting Office that would evaluate
progress and assess ongoing needs for job creation and
public investment.[12]

The immediate establishment of a regional public agency
to oversee the reconstruction of the post-Katrina Gulf
Coast and the repatriation of its native population.

The establishment of a 21st century version of the Works
Progress Administration to oversee the
infrastructure-related work. Priority in employment
would go to the chronically and structurally unemployed.
Wages would be paid according to the Davis-Bacon
Act.[13] Building trades contractors and unions would
agree to 50 percent residential set-asides for entry
into apprenticeship programs and journeyman work in
connection with any of these efforts. At least 25
percent of such jobs should be staffed by people of
color, with at least another 25 percent staffed by
women.

Regional planning authorities should be established in
depressed regions bringing together the business
community, worker organizations including, but not
limited to, unions, academia, and governmental
representatives. Such authorities would explore
economic development strategies such as industrial
cooperatives, public/private partnerships, and
governmental incentives to encourage the creation of new
industries or the introduction of industries which had
been discouraged from emerging.

Emergency measures to provide more low-income housing.
This would include an Executive commitment to push
through: the National Affordable Housing Trust Fund
Act,[14] which would establish a federal housing trust
fund to ensure housing for the lowest income earners who
have the most serious housing problems; and the Housing
Assistance Tax Act which would, among other provisions,
provide tax credits to first-time homebuyers, while
improving access to low-income housing, allowing
families to deduct property taxes.[15]

4. Immediate signing of the Kyoto Protocol.

The U.S. is way behind the rest of the world on the
environment, and the Bush administration has flouted the
gravity of the matter. Our over-dependence on fossil
fuels has straightjacketed the global economy (making
the greater international community highly dependent on
oil), which has contributed to the rising global
temperature. The environmental crisis, however, is not
limited to global warming. The epidemic of bee colony
die-offs and the endangerment of various species paints
a disturbing picture of an unraveling ecology. Most
urgently, the new administration must:

Sign the Kyoto Protocol, while making a commitment to
launch international negotiations toward a new and
stronger pact.

Push through the Renewable Energy and Job Creation
Act[16] to promote renewable energy, green-collar jobs,
and tax benefits to middle-class families.

Establish a "Green Commission" that brings together
labor, business, environmental groups, community-based
organizations, and government representatives to
recommend technological, economic, and developmental
changes geared toward building a sustainable economy.

5. Pass and sign the Employee Free Choice Act (EFCA).

As a step toward jettisoning the one-sided class war
against workers, the new administration must:

Reaffirm the National Labor Relations Act (NLRA)'s
mandate that it is within U.S. public policy to promote
collective bargaining.

Sign the EFCA.

Draft legislation that proscribes any employer
involvement in their workers' choice of bargaining
representatives.

6. A universal health care initiative.

Universal, single-payer health care cannot take flight
within the first 100 days. The groundwork, however,
must be laid immediately. The new administration must:

Expand the State Children's Health Insurance Program
(SCHIP), as proposed by the Democratic Congressional
leadership in 2007.[17]

Establish a commission to draft legislation for
universal, single-payer coverage. Plan for a one year
drafting period, followed by national town meetings and
hearings. Aim for passage before the midterm elections.

7. Immigration reform.

Immediate steps must be taken to lay out an immigration
reform program that is coupled with changes in U.S.
foreign policy (therefore, points # 7 and # 8 are
integrally linked). This program must include:

Amnesty (in the form of permanent residency status) for
undocumented workers who have no criminal record.

Priority given to family reunification interests.

A revised application process that gives priority to
refugees from areas of political conflict where the U.S.
has been historically involved.

Elimination of guest worker programs. Investigation of
already existing guest worker programs' impact on both
domestic and foreign born workers.

Unionization rights for all workers within U.S. borders,
irrespective of their immigration status.

8. Forge global partnerships.

Changing U.S. foreign policy is an uphill, long-term
process. Nevertheless, certain immediate measures are
imperative. In addition to withdrawing from Iraq and
Afghanistan, the new administration must:

Create a 21st Century Partnership Program to develop
foreign aid and trade programs designed to promote more
self-reliance among nation-states, while responding to
the civilian needs in those areas.

Develop targeted programs of repair in areas where U.S.
involvement has distorted regional development (e.g.,
Southeast Asia, Angola, and Central America).

Promote trade relations that are based on fairness
rather than on corporate interests. Explore a
renegotiation of NAFTA.

Implement the Nuclear Non-Proliferation Treaty with
steps toward de-nuclearization.

Employ special envoys for peace and development who will
work with regional representatives to address matters
such as political conflict, economic underdevelopment,
and environmental devastation.



Conclusion/A Qualifying Thought

This agenda will be moot without a strong backing from
social forces that are prepared to press for its
implementation. Any demobilization of those who
successfully brought the Democratic candidate to victory
will buoy the political Right's leverage to assert its
own agenda. Right-wing forces will push for a
continuation of the Bush administration's
anti-progressive policies. Thus, if we are not prepared
to consistently place enough pressure on our "friend" in
the White House, we should expect a repeat of the Bill
Clinton years—an era in which there was (technically) a
high degree of access to the President and top cabinet
officials, but the progressive social movements were
afforded very little actual power.



The choice is ours, and we have precious little time to
decide how we want to proceed.


[1] See "Iraq war will cost $12 billion a month,"
Associated Press, March 9, 2008,
http://www.msnbc.msn.com/id/23551693/ (citing Joseph E.
Stiglitz and Linda J. Bilmes, The Three Trillion Dollar
War:The True Cost of the Iraq War,W.W. Norton, 2008).

[2] See HOLC_release.html>http://www.house.gov/apps/list/press/
il10_kirk/HOLC_release.html,

accessed July 7, 2008.

[3] See id.

[4] See www.
results.org/website/article.asp?id=358,

accessed July 7, 2008.

[5] See id.

[6] See id.

[7] See "Obama vows $210 billion for 'green,' building
jobs," The Los Angeles Times, February 14, 2008,
obama14>http://articles.latimes.com/2008/feb/14/nation/
na-obama14,

accessed July 7, 2008.

[8] See "Obama's Pocketbook Speech," Jason Horowitz, The
New York Observer, May 3, 2008,

http://www.observer.com/2008/obamas-pocketbook-speech,

accessed July 7, 2008.

[9] See
=C7BF90E6-D809-4274-900D-109ADC11ED76>http://kennedy.
senate.gov/newsroom/press_release.cfm?id=C7BF90E6-D809-
4274-900D-109ADC11ED76,

accessed July 7, 2008.

[10] See id.

[11] Their proposal, as of July 2007, included areas
such as mandatory early childhood education beginning at
age 3, universal healthcare, building economic
self-sufficiency for working people, and an urban
infrastructure bank. See

www.nul.org/PressReleases/2007/2007PR417.html,

accessed July 7, 2008.

[12] See the National Jobs for All Coalition's Shared
Prosperity and the Drive for Decent Work report,
www.njfac.org/
sharedpros/pdf.

[13] Under the Davis-Bacon Act, federal government
construction contracts are required to include
provisions for paying workers nothing less than the
prevailing
wages paid for similar projects in the geographical
area.

[14] This bill passed in the Senate in May 2008, after
an overwhelming passage in the House. See
http://www
.nlihc.org/template/page.cfm?id=40,

accessed July 7, 2008.

[15] In April 2008, Congressman Charles Rangel
introduced this bill in the House. See
index.php#hata>http://www.novoco.com/low_income_housing/
legislation/index.php#hata,

accessed July 7, 2008.

[16] See
GreenEnergyBill.shtml>http://moran.house.gov/apps/list/
press/va08_moran/GreenEnergyBill.shtml,

accessed July 7, 2008.

[17] See
http://www.schip-info.org/.

Reversal of Fortune

The Economy



The past as prologue? Lining up for food and water, Louisville, Kentucky, 1937. By Margaret Bourke-White/Time & Life Pictures/Getty Images.


Reversal of Fortune

Describing how ideology, special-interest pressure, populist politics, and sheer incompetence have left the U.S. economy on life support, the author puts forth a clear, commonsense plan to reverse the Bush-era follies and regain America’s economic sanity.

By: Joseph E. Stiglitz

From: Vanity Fair

November 2008

When the American economy enters a downturn, you often hear the experts debating whether it is likely to be V-shaped (short and sharp) or U-shaped (longer but milder). Today, the American economy may be entering a downturn that is best described as L-shaped. It is in a very low place indeed, and likely to remain there for some time to come.

Virtually all the indicators look grim. Inflation is running at an annual rate of nearly 6 percent, its highest level in 17 years. Unemployment stands at 6 percent; there has been no net job growth in the private sector for almost a year. Housing prices have fallen faster than at any time in memory—in Florida and California, by 30 percent or more. Banks are reporting record losses, only months after their executives walked off with record bonuses as their reward. President Bush inherited a $128 billion budget surplus from Bill Clinton; this year the federal government announced the second-largest budget deficit ever reported. During the eight years of the Bush administration, the national debt has increased by more than 65 percent, to nearly $10 trillion (to which the debts of Freddie Mac and Fannie Mae should now be added, according to the Congressional Budget Office). Meanwhile, we are saddled with the cost of two wars. The price tag for the one in Iraq alone will, by my estimate, ultimately exceed $3 trillion.

This tangled knot of problems will be difficult to unravel. Standard prescriptions call for raising interest rates when confronted with inflation, just as standard prescriptions call for lowering interest rates when confronted with an economic downturn. How do you do both at the same time? Not in the way that some politicians have proposed. With gasoline prices at all-time highs, John McCain has called for a rollback of gas taxes. But that would lead to more gas consumption, raise the price of gas further, increase our dependence on foreign oil, and expand our already massive trade deficit. The expanding deficit would in turn force the U.S. to continue borrowing gargantuan sums from abroad, making us even more indebted. At the same time, the higher imports of oil and petroleum-based products would lead to a weaker dollar, fueling inflationary pressures.

Millions of Americans are losing their homes. (Already, some 3.6 million have done so since the subprime-mortgage crisis began.) This social catastrophe has severe economic effects. The banks and other financial institutions that own these mortgages face stunning reverses; a few, such as Bear Stearns, have already gone belly-up. To prevent America’s $5.2 trillion home financiers, Fannie Mae and Freddie Mac, from following suit, Congress authorized a blank check to cover their losses, but even that generosity failed to do the trick. Now the administration has taken over the two entities completely, a stunning feat for a supposedly market-oriented regime. These bailouts contribute to growing deficits in the short run, and to perverse incentives in the long run. Market economies work only when there is a system of accountability, but C.E.O.’s, investors, and creditors are walking away with billions, while American taxpayers are being asked to pick up the tab. (Freddie Mac’s chairman, Richard Syron, earned $14.5 million in 2007. Fannie Mae’s C.E.O., Daniel Mudd, earned $14.2 million that same year.) We’re looking at a new form of public-private partnership, one in which the public shoulders all the risk, and the private sector gets all the profit. While the Bush administration preaches responsibility, the words are addressed only to the less well-off. The administration talks about the impact of “moral hazard” on the poor “speculator” who borrowed money and bought a house beyond his ability to pay. But moral hazard somehow isn’t an issue when it comes to the high-stakes speculators in corporate boardrooms.

How Did We Get into This Mess?

A unique combination of ideology, special-interest pressure, populist politics, bad economics, and sheer incompetence has brought us to our present condition.

Ideology proclaimed that markets were always good and government always bad. While George W. Bush has done as much as he can to ensure that government lives up to that reputation—it is the one area where he has overperformed—the fact is that key problems facing our society cannot be addressed without an effective government, whether it’s maintaining national security or protecting the environment. Our economy rests on public investments in technology, such as the Internet. While Bush’s ideology led him to underestimate the importance of government, it also led him to underestimate the limitations of markets. We learned from the Depression that markets are not self-adjusting—at least, not in a time frame that matters to living people. Today everyone—even the president—accepts the need for macro-economic policy, for government to try to maintain the economy at near-full employment. But in a sleight of hand, free-market economists promoted the idea that, once the economy was restored to full employment, markets would always allocate resources efficiently. The best regulation, in their view, was no regulation at all, and if that didn’t sell, then “self-regulation” was almost as good.

The underlying idea was, on the face of it, absurd: that market failures come only in macro doses, in the form of the recessions and depressions that have periodically plagued capitalist economies for the past several hundred years. Isn’t it more reasonable to assume that these failures are just the tip of the iceberg? That beneath the surface lie a myriad of smaller but harder-to-assess inefficiencies? Let me venture an analogy from biology: A patient arrives at a hospital in serious condition. Now, it may be that the patient has simply fallen victim to one of those debilitating ailments that go around from time to time and can be cured by a massive dose of antibiotics. In this case we have a macro problem with a macro solution. But it could instead be that the patient is suffering from a decade of serious abuse—smoking, drinking, overeating, lack of exercise, a fondness for crystal meth—and that it has not only taken a catastrophic toll but also left him open to opportunistic infections of every kind. In other words, a buildup of micro problems has led to a macro problem, and no cure is possible without addressing the underlying issues. The American economy today is a patient of the second kind.

We are in the midst of micro-economic failure on a grand scale. Financial markets receive generous compensation—in the form of more than 30 percent of all corporate profits—presumably for performing two critical tasks: allocating savings and managing risk. But the financial markets have failed laughably at both. Hundreds of billions of dollars were allocated to home loans beyond Americans’ ability to pay. And rather than managing risk, the financial markets created more risk. The failure of our financial system to do what it is supposed to do matches in destructive grandeur the macro-economic failures of the Great Depression.

Economic theory—and historical experience—long ago proved the need for regulation of financial markets. But ever since the Reagan presidency, deregulation has been the prevailing religion. Never mind that the few times “free banking” has been tried—most recently in Pinochet’s Chile, under the influence of the doctrinaire free-market theorist Milton Friedman—the experiment has ended in disaster. Chile is still paying back the debts from its misadventure. With massive problems in 1987 (remember Black Friday, when stock markets plunged almost 25 percent), 1989 (the savings-and-loan debacle), 1997 (the East Asia financial crisis), 1998 (the bailout of Long Term Capital Management), and 2001–02 (the collapses of Enron and WorldCom), one might think there would be more skepticism about the wisdom of leaving markets to themselves.

The new populist rhetoric of the right—persuading taxpayers that ordinary people always know how to spend money better than the government does, and promising a new world without budget constraints, where every tax cut generates more revenue—hasn’t helped matters. Special interests took advantage of this seductive mixture of populism and free-market ideology. They also bent the rules to suit themselves. Corporations and the wealthy argued that lowering their tax rates would lead to more savings; they got the tax breaks, but America’s household savings rate not only didn’t rise, it dropped to levels not seen in 75 years. The Bush administration extolled the power of the free market, but it was more than willing to provide generous subsidies to farmers and erect tariffs to protect steelmakers. Lately, as we have seen, it seems willing to write blank checks to bail out its friends on Wall Street. In each of these cases there are clear winners. And in each there are clear losers—including the country as a whole.

What Is to Be Done?
As America attempts to work its way out of the present crisis, the danger is that we will listen to the same people on Wall Street and in the economic establishment who got us into it. For them, our current predicament is another opportunity: if they can shape the government response appropriately, they stand to gain, or at least stand to lose less, and they may be willing to sacrifice the well-being of the economy for their own benefit—just as they did in the past.

There are a number of economic tools at the country’s disposal. As noted, they can yield contradictory results. The sad truth is that we have reached the limits of monetary policy. Lowering interest rates will not stimulate the economy much—banks are not going to be willing to lend to strapped consumers, and consumers are not going to be willing to borrow as they see housing prices continue to fall. And raising interest rates, to combat inflation, won’t have the desired impact either, because the prices that are the main sources of our inflation—for food and energy—are determined in international markets; the chief consequence will be distress for ordinary people. The quandaries that we face mean that careful balancing is required. There is no quick and easy fix. But if we take decisive action today, we can shorten the length of the downturn and reduce its magnitude. If at the same time we think about what would be good for the economy in the long run, we can build a durable foundation for economic health.

To go back to that patient in the emergency room: we need to address the underlying causes. Most of the treatment options entail painful choices, but there are a few easy ones. On energy: conservation and research into new technologies will make us less dependent on foreign oil, reduce our trade imbalance, and help the environment. Expanding drilling into environmentally fragile areas, as some propose, would have a negligible effect on the price we pay for oil. Moreover, a policy of “drain America first” will make us more dependent on foreigners in the future. It is shortsighted in every dimension.

Our ethanol policy is also bad for the taxpayer, bad for the environment, bad for the world and our relations with other countries, and bad in terms of inflation. It is good only for the ethanol producers and American corn farmers. It should be scrapped. We currently subsidize corn-based ethanol by almost $1 a gallon, while imposing a 54-cent-a-gallon tariff on Brazilian sugar-based ethanol. It would be hard to invent a worse policy. The ethanol industry tries to sell itself as an infant, needing help to get on its feet, but it has been an infant for more than two decades, refusing to grow up. Our misguided biofuel policy is taking land used for food production and diverting it to energy production for cars; it is the single most important factor contributing to higher grain prices.

Our tax policies need to be changed. There is something deeply peculiar about having rich individuals who make their money speculating on real estate or stocks paying lower taxes than middle-class Americans, whose income is derived from wages and salaries; something peculiar and indeed offensive about having those whose income is derived from inherited stocks paying lower taxes than those who put in a 50-hour workweek. Skewing the tax rates in the other direction would provide better incentives where they count and would more effectively stimulate the economy, with more revenues and lower deficits.

We can have a financial system that is more stable—and even more dynamic—with stronger regulation. Self-regulation is an oxymoron. Financial markets produced loans and other products that were so complex and insidious that even their creators did not fully understand them; these products were so irresponsible that analysts called them “toxic.” Yet financial markets failed to create products that would enable ordinary households to face the risks they confront and stay in their homes. We need a financial-products safety commission and a financial-systems stability commission. And they can’t be run by Wall Street. The Federal Reserve Board shares too much of the mind-set of those it is supposed to regulate. It could and should have known that something was wrong. It had instruments at its disposal to let the air out of the bubble—or at least ensure that the bubble didn’t over-expand. But it chose to do nothing.

Throwing the poor out of their homes because they can’t pay their mortgages is not only tragic—it is pointless. All that happens is that the property deteriorates and the evicted people move somewhere else. The most coldhearted banker ought to understand the basic economics: banks lose money when they foreclose—the vacant homes typically sell for far less than they would if they were lived in and cared for. If banks won’t renegotiate, we should have an expedited special bankruptcy procedure, akin to what we do for corporations in Chapter 11, allowing people to keep their homes and re-structure their finances.

If this sounds too much like coddling the irresponsible, remember that there are two sides to every mortgage—the lender and the borrower. Both enter freely into the deal. One might say that both are, accordingly, equally responsible. But one side—the lender—is supposed to be financially sophisticated. In contrast, the borrowers in the subprime market consist mainly of people who are financially unsophisticated. For many, their home is their only asset, and when they lose it, they lose their life savings. Remember, too, that we already give big homeowner subsidies, through the tax system, to affluent families. With tax deductions, the government is paying in some states almost half of all mortgage interest and real-estate taxes. But many lower-income people, whose deductions are meaningless because their tax bill is too small, get no help. It makes much more sense to convert these tax deductions into cashable tax credits, so that the fraction of housing costs borne by the government for the poor and the rich is the same.

About these matters there should be no debate—but there will be. Already, those on Wall Street are arguing that we have to be careful not to “over-react.” Over-reaction, we are told, might stifle “innovation.” Well, some innovations ought to be stifled. Those toxic mortgages were certainly innovative. Other innovations were simply devices to circumvent regulations—regulations intended to prevent the kinds of problems from which our economy now suffers. Some of the innovations were designed to tart up the bottom line, moving liabilities off the balance sheet—charades designed to blur the information available to investors and regulators. They succeeded: the full extent of the exposure was not clear, and still isn’t. But there is a reason we need reliable accounting. Without good information it is hard to make good economic decisions. In short, some innovations come with very high price tags. Some can actually cause instability.

The free-market fundamentalists—who believe in the miracles of markets—have not been averse to accepting government bailouts. Indeed, they have demanded them, warning that unless they get what they want the whole system may crash. What politician wants to be blamed for the next Great Depression, simply because he stood on principle? I have been critical of weak anti-trust policies that allowed certain institutions to become so dominant that they are “too big to fail.” The harsh reality is that, given how far we’ve come, we will see more bailouts in the days ahead. Now that Fannie Mae and Freddie Mac are in federal receivership, we must insist: not a dime of taxpayer money should be put at risk while shareholders and creditors, who failed to oversee management, are permitted to walk away with anything they please. To do otherwise would invite a recurrence. Moreover, while these institutions may be too big to fail, they’re not too big to be reorganized. And we need to remember why we’re bailing them out: in order to maintain a flow of money into mortgage markets. It’s outrageous that these institutions are responding to their near-monopoly position by raising fees and increasing the costs of mortgages, which will only worsen the housing crisis. They, and the financial markets, have shown little interest in measures that could help millions of existing and potential homeowners out of the bind they’re in.

The hardest puzzles will be in monetary policy (balancing the risks of inflation and the risk of a deeper downturn) and fiscal policy (balancing the risk of a deeper downturn and the risk of an exploding deficit). The standard analysis coming from financial markets these days is that inflation is the greatest threat, and therefore we need to raise interest rates and cut deficits, which will restore confidence and thereby restore the economy. This is the same bad economics that didn’t work in East Asia in 1997 and didn’t work in Russia and Brazil in 1998. Indeed, it is the same recipe prescribed by Herbert Hoover in 1929.

It is a recipe, moreover, that would be particularly hard on working people and the poor. Higher interest rates dampen inflation by cutting back so sharply on aggregate demand that the unemployment rate grows and wages fall. Eventually, prices fall, too. As noted, the cause of our inflation today is largely imported—it comes from global food and energy prices, which are hard to control. To curb inflation therefore means that the price of everything else needs to fall drastically to compensate, which means that unemployment would also have to rise drastically.

In addition, this is not the time to turn to the old-time fiscal religion. Confidence in the economy won’t be restored as long as growth is low, and growth will be low if investment is anemic, consumption weak, and public spending on the wane. Under these circumstances, to mindlessly cut taxes or reduce government expenditures would be folly.

But there are ways of thoughtfully shaping policy that can walk a fine line and help us get out of our current predicament. Spending money on needed investments—infrastructure, education, technology—will yield double dividends. It will increase incomes today while laying the foundations for future employment and economic growth. Investments in energy efficiency will pay triple dividends—yielding environmental benefits in addition to the short- and long-run economic benefits.

The federal government needs to give a hand to states and localities—their tax revenues are plummeting, and without help they will face costly cutbacks in investment and in basic human services. The poor will suffer today, and growth will suffer tomorrow. The big advantage of a program to make up for the shortfall in the revenues of states and localities is that it would provide money in the amounts needed: if the economy recovers quickly, the shortfall will be small; if the downturn is long, as I fear will be the case, the shortfall will be large.

These measures are the opposite of what the administration—along with the Republican presidential nominee, John McCain—has been urging. It has always believed that tax cuts, especially for the rich, are the solution to the economy’s ills. In fact, the tax cuts in 2001 and 2003 set the stage for the current crisis. They did virtually nothing to stimulate the economy, and they left the burden of keeping the economy on life support to monetary policy alone. America’s problem today is not that households consume too little; on the contrary, with a savings rate barely above zero, it is clear we consume too much. But the administration hopes to encourage our spendthrift ways.

What has happened to the American economy was avoidable. It was not just that those who were entrusted to maintain the economy’s safety and soundness failed to do their job. There were also many who benefited handsomely by ensuring that what needed to be done did not get done. Now we face a choice: whether to let our response to the nation’s woes be shaped by those who got us here, or to seize the opportunity for fundamental reforms, striking a new balance between the market and government.

Joseph E. Stiglitz, a Nobel Prize–winning economist, is a professor at Columbia University.