Reich writes: "With deficit hawks circling overhead, the responsibility for creating jobs has fallen by default to Ben Bernanke and the Federal Reserve."
Portrait, Robert Reich, 08/16/09. (photo: Perian Flaherty)
With Deficit Hawks Circling Overhead
16 September 12
ith deficit hawks circling overhead, the responsibility for creating jobs has fallen by default to Ben Bernanke and the Federal Reserve. Last week the Fed said it expected to keep interest rates near zero through mid 2015 in order to stimulate employment.
Two cheers.
The problem is, low interest rates alone won't do it. The Fed has held interest rates near zero for several years without that much to show for it. A smaller portion of American adults is now working than at any time in the last thirty years.
So far, the biggest beneficiaries of near-zero interest rates haven't been average Americans. They've been too weighed down with debt to borrow more, and their wages keep dropping. And because they won't and can't borrow more, businesses haven't had more customers. So there's been no reason for businesses to borrow to expand and hire more people, even at low interest rates.The biggest winners from the Fed's near-zero rates have been the big banks, which are now assured of two or more years of almost free money. The big banks haven't used the money to refinance mortgages – why should they when they can squeeze more money out of homeowners by keeping them at higher rates? Instead, they've used the almost free money to make big bets on derivatives. If the bets continue to go well, the bankers will continue to make a bundle. If the bets sour, well, you know what happens then. Watch your wallets.
The truth is, low interest rates won't boost the economy without an expansive fiscal policy that makes up for the timid spending of consumers and businesses. Until more Americans have more money in their pockets, government spending has to fill the gap.
On this score, the big news isn't the Fed's renewed determination to keep interest rates low. The big news is global lender's desperation to park their savings in Treasury bills. The euro is way too risky, the yen is still a basket case, China is slowing down and no one knows what will happen to its currency, and you'd have to be crazy to park your savings in Russia.
It's a match made in heaven – or should be. Because foreigners are so willing to buy T-bills, America can borrow money more cheaply than ever. We could use it to put Americans back to work rebuilding our crumbling highways and bridges and schools, cleaning up our national parks and city parks and playgrounds, and doing everything else that needs doing that we've neglected for too long.
This would put money in people's pockets and encourage them to take advantage of the Fed's low interest rates to borrow even more. And their spending, in turn, would induce businesses to expand and create more jobs. A virtuous cycle.
Yet for purely ideological reasons we're heading in the opposite direction. The federal government is cutting back spending. It's not even helping state and local governments - which continue to lay off teachers, fire fighters, social workers, and police officers.
Worst of all, we're facing a so-called "fiscal cliff" next year when $109 billion in federal spending cuts automatically go into effect. The Congressional Budget Office warns this may push us into recession – which will cause more joblessness and make the federal budget deficit even larger relative to the size of the economy. That's the austerity trap Europe has fallen into.
Mitt Romney has been criticizing the Obama administration for not doing more to avoid the cliff, but he seems to forget that congressional Republicans brought it on when they refused to raise the debt ceiling. They then created the cliff as a fall-back mechanism. Romney's vice-presidential pick Paul Ryan, chair of the House budget committee, voted for it.
It's a mindless gimmick that presumes our biggest problem is the deficit, when even the Fed understands our biggest problem right now is unemployment. Yet even the nation's credit-rating agencies have bought into the mindlessness. Last week Moody's said it would likely downgrade U.S. government bonds if Congress and the White House don't come up with a credible plan to reduce the federal budget deficit. (Standard & Poor's has already downgraded U.S. debt.)
Hello? Can we please stop obsessing about the federal budget deficit? Repeat after me: America's #1 economic problem is unemployment. Our #1 goal should be to restore job growth. Period.
The Federal Reserve Board understands this. And at least it's trying. But it can't succeed on its own. Global lenders are giving us a way out. Let's take advantage of the opportunity.
Robert B. Reich, Chancellor's Professor of Public Policy at the University of California at Berkeley, was Secretary of Labor in the Clinton administration. Time Magazine named him one of the ten most effective cabinet secretaries of the last century. He has written thirteen books, including the best sellers "Aftershock" and "The Work of Nations." His latest is an e-book, "Beyond Outrage." He is also a founding editor of the American Prospect magazine and chairman of Common Cause.
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Comments
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OBAMA/BIDEN 2012
The alternatives are liars, cheats, thieves and greed. Loss of Medicare, Medicaid, and Social Security, just to name a few.
You are blinded by your Bush hatred that you don't even make any sense!
You want Government stimulus to put more money in the public hands but you take it away from those with excess to spend...truly moronic!
If you think the public needs more money then stop taxing!
How much is ever going to be enough for the hoarders? They are paying only 3/7ths the rates people who earn similar amounts pay. Why is that? It certainly isn't because they even come close to the jobs their talking points deceive us on, and they are not even close to reinvesting much of it into real investments that enhance overall productivity that increase the value of our currency or our velocity of money, which would actually make lower tax rates possible.
Our entire problem was caused by tax cuts for the rich. We are the second lowest spending developed country in the world in % of GNP. Tax cuts for the rich never work if you care about your country. But Reagan, by far the most over rated president in history started this decline by drastically cutting taxes on the rich and stopping the resulting recession by increasing taxes on the poor and middle class.
I completely agree about the false deification of Reagan. It was under his watch that greed became a national value. His image has to be one of the most successful PR/marketing ploys ever. Yet even Reagan knew when it was time to negotiate for the benefit of the country, not just the paymasters.
truer words were never spoken. I remember when Reagan was alive, how many of us were infuriated with him.
He was a TERRIBLE president. A ROBIN HOOD IN REVERSE. The right wing also conveniently FORGOT that he did business with the Iranians, TWICE.....
First, when he persuaded them to hold on to the hostages until AFTER he was sworn in. (I wonder how the hostages felt about having been kept longer to make Reagan look good???)
The second time he did business with Iran,.....He went AGAINST the LAW, and sold weapons to them, in order to get money to give to the contras. in that nasty war in Nicaragua.
What do you think would have happened if a democratic president had done that?????
Taxing has nothing to do with it - offshore and shadow banking do.
The problem is that those "with excess to spend" aren't spending it. They're sinking it into luxuries and packing it away into foreign bank accounts so that it can't be taxed.
As for Barbara K's statement that you quoted, "We have the Rs to thank for the deficit in the first place" it makes perfect sense when you look back on the obstructionism and filibustering by Republicans in Congress, who have already been quoted as saying that their #1 priority is to make Obama a one-term president.
Stop taxing? Okay, but don't yell at us when that bridge you're crossing collapses or the potholes in the street you have to drive start swallowing buses. Well, maybe your buddies George and Mitt will come help you fill in the potholes, or hold the posts for you to cement in place to prop up that bridge.
Very sad - but very true.
Its not hatred for Bush...its called reality edge, you ought to pull your head out of Fox news long enough to try it sometime.
There's no downside. They didn't get their money by contributing to the social welfare by providing some good or service. They got it by what is referred to as rents, money that they received solely because of their position. So it isn't as if they are being "robbed" of their hard earned cash. It was money that should have gone to someone who worked for it, but because the actual producer had no say in how the corporate income was distributed, it went to some executive instead who then proceeded to stick it under his mattress. After all, what are you going spend it on when you already have more than you can use?
In my case, I didn't begin disliking Bush until after I voted for him.
Cheney's reversal of some of his initial instincts, such as allowing/causin g the Federal Energy Regulatory Commission to protect Enron set me against him almost immediately. The $600 "prepayment" on the next year's supposed tax cuts meant we had to send in $598 when that misused "credit" came due. His Administration squandered a $50 billion surplus, taking it $108 billion in the opposite direction by the end of September 2011, before the effects of 9/11 hit us.
Though we backed him after the attack, he squandered the good will of us, and much of the rest of the world, in misguided adventures we wouldn't tolerate from any other President. I was ready to help impeach him before 9/11, simply because of what he had screwed up (Enron) by then.
Makes me wonder why the Republican Convention had the guts to ask if people who voted for Obama would do so again. Though I'm unhappy with progress during this administration (hamstrung by rules that let anyone of 41 Senators stop progress), they won't like my answer about how unhappy I was with Bush after I voted in his favor (actually against Joe Lieberman's help in over riding the Clinton veto on the Private Securities Litigation "Reform" Act).
Are you surprised that Bush is despised??
He started 2 wars and didn't pay for them, a big medical program, also put on the credit card, and a big tax cut for the wealthiest few. In true right wing fashion, he destroyed the economy and left it to the democratic administration to do the clean up......
And the right wing has the nerve to give the President a VERY hard time for not cleaning up their horrendous mess fast enough.
Oh,.... there is also 9-11. Bush and CO could not be bothered to pay attention to all the warnings they got from the CIA. Bush spent the entire month of August clearing brush on his ranch!!!
If that had been a democratic president he would have been hounded and probably impeached.
You are right we do despise Bush.
If the banks haven't recovered by now - it's doubtful throwing more money at them will help. Taxing is not the issue - it's failure to do the math and look at real numbers instead of the percentage games we've been used to.
The next comment you'll hear is that the banks paid back the first stimulus - yeah, with the secret funding of over $16 Trillion the Fed gave them without public disclosure.
Your theory about 'falling off the cliff, which made a lot of sense to me, does not seem to have reached even the 'liberal' media, such as the folks at MSNBC. Please notify them that legislation can be passed the very next day after the cliff event, that will not only mitigate the effects, but improve the situation. Please speak up!!
Several decades ago, Margaret Thatcher claimed: "There is no alternative".
She was referring to capitalism. Today, this negative attitude still persists.
I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:
http://evans-experientialism.freewebspace.com/steinsvold.htm
John Steinsvold
“Insanity is doing the same thing over and over and expecting a different result."~ Albert Einstein
If you haven't read Barofsky's BAILOUT yet - please do. Specifically chapter 8 "Foaming the Runway."
“Geithner apparently looked at HAMP as an aid to the banks, keeping the full flush of foreclosures from hitting the financial system all at the same time. Though they could handle up to “10 million foreclosures” over time, any more than that, or if the foreclosures were too concentrated, and the losses that the banks might suffer on their first and second mortgages could push them into insolvency, requiring yet another round of TARP bailouts. So HAMP would “foam the runway” by stretching out the foreclosures, giving the banks more time to absorb losses while other parts of the bailouts juiced bank profits that could fill the capital holes created by housing losses,” Neil creatively details. See www.deadlyclear.com on Foaming the Runway and Bandit Bernanke.
We can't keep feeding the monster. The Fed has become the "Little Shop of Horrors" and the public is unwittingly aiding and abetting the criminals on Wall Street.
P.S. Geithner Must Go!
Do you hear anyone in the administration or any signifcant group of Dem politicians calling for implementation of "Reich's idea's"?
It's time the "people" wake up to the fact that there are some smart folks on Obama's Council of Economic Advisers who understand the seriousness of our debt relative to the bond market.
For Reich to blithely recommend more (much more btw) borrowing because interest rates are cheap, is to ignore completely what is going on in Europe as well as the rest of the globe. If bond holders take a bath on European bonds (a very distinct possibility) what do you think they will do with US bonds?
They, being of normal intelligence will simply refuse to hold them or at minimum demand higher interest rates. If the Bond market collapses history tells us we are in a world of hurt.
Then, Bingo! You are in default status.
As someone once replied when asked how they got into bankruptcy, "...gradually, then all at once."
To those who merrily say it can't happen here, there are thankfully, a few realists left in Washington who don't agree with you. That is one major reason for the resistance to Reich's pie in the sky proposals.
People who need money are already avoiding bonds precisely because they need income.
Seniors for example are forced into much riskier stocks and/or junk bonds because they can't get what they need out of higher rated bonds or CD's.
"...the people buying bonds have nowhere else to go...sic...beca use there's nothing left to spend it on."
Yeah,you go to the stores and showrooms and there's nothing there but empty shelves and floors, right.
People are not spending money because they fear the future i.e., no budget deal means no ability to plan. Give them an agreement and they will plan accordingly. There's plenty out there to spend it on. The world is awash in unsold products.
Even Reich, Krugman and Stiglitz know this.
"The bond market won't collapse until there isn't any money to put in it."
You would do well to study seriously the goings on in Greece, Spain, Portugal and Italy. After you do then I am hopeful you will understand how utterly foolish this statement is.
Hope springs eternal.
I think what Aggie means here is that people with money to spend have bought all the durable goods they need, and people without money have bought all the stuff they didn't need on credit.
The demand side of the economy is weak because our society is burdened with too much stuff.
We can't just shop our way out of a recession. We can begin to recover by rebuilding crumbling infrastructure, developing new technology for sustainable energy production and educating (not indoctrinating) our populace. Putting more toys on the credit card won't fix anything.
Supply side economics is bullshit. Saturating the market with goods of dubious usefulness, then enticing an ignorant public to buy them with manipulative advertising is a recipe for disaster (as must be apparent by now!).
A healthy economy provides for the real needs of the populace at a price they can afford without going into debt. We're a long way from that. Its going to take time to fix this mess. Getting those who have benefited most to carry their share of the burden would be a good place to start.
This theory has been debunked by any number of reputable studies.
Robert Higgs has done what is probably the best of the bunch. He has shown that it wasn't even the fallback position that WWII got us out of it. (Not that millions of dead along with untold economic suffering is any advertisement for ending a depression). It wasn't until we demobilized and cut government spending that the good times began.
But, even if your erroneous statement were to be believed, this isn't 1932 and we are not a relatively debt free society as we were then.
Since we aren't on a gold standard anymore, Obama doesn't even have the ability to raise the official price of gold as Roosevelt wisely did.
No one but dumb simplistic, Republicans and a few Dems for good measure, are saying you need to run a national economy on the same basis as a household budget.
That doesn't however assume that you can spend your way out of a depression when you run deficits approaching 90% of GDP and risk extreme currency devaluation along with credit default.
Thank God a least Obama's Council of Economic Advisers seem to be aware of the seriousness of default.
It's apparent on these boards most rank and file Dems have no more clue than the crazy Republicans.
If in correcting him I distracted you that was certainly not my intention.
As for "red herrings", you promote one as well with the assertion that WWII ended the depression. It didn't. It did end unemployment.
War with it's involuntary draft and the byproduct of forcing woman into the workplace to produce guns, bombs and other articles of war certainly does decrease unemployment. But at horrible cost and with no increase in anyone's standard if living.
During the war there was little demand because their was nothing to buy. As a matter of fact there were shortages of everything, rationing, with the average American living in an economy that was as bad as the 1930's. Soldiers freezing in pup tents, risking death and home front folks counting their ration stamp books.
It wasn't until after the war when government spending was slashed by 2/3 from 98B to 33B that the economy boomed.
As a matter of fact many Keynesians predicted an even worse depression after the war because there would be no jobs for the millions of returning GI's and the government would of necessity have to cut spending.
Funny thing, by 1947 with government spending slashed, unemployment was at 5% and good times were upon us.
That government spending ended the depression is Keynesian myth making.
"It's a mindless gimmick", so very true mindfully exploited to fool the gullible and Fox/Rove hypnotized. Simply lie, obfuscate, put forth a pleasant-lookin g spokesperson (Reagan, Romney, Ryan...) and chant three times: "Facts are Stupid Things".
Mindless gimmicks, empty rhetoric, tried & true buzzwords and scary stories about the opposition -- welcome to the official platform of the Rove/Romney/Ran d-Ryan campaign. What else do they have? Positions? Track record? Help for the selfish 1%? A pledge to never contribute another penny to the public good? Truth? Facts? Positions harmonious with We the People (of the non-corporate variety, those of us who live & breathe and pay taxes in America?
What else could possibly move anybody to actually vote for such an abomination as the new "3 R's" (Romney/Ryan and take your 3rd R choice: Rove, Rand, racism, revisionism, regressives, robber barons).
Thanks again Dr. Reich for clearly "telling it like it is"! Eyes open.
We the People must never allow ourselves to be sold to the highest bidder. Nor can we forget that facts are NOT 'stupid', but collectively form our history, and if we're lucky, we can learn from the past.
If you took the last six TRILLION and gave it to the 183 million consumers - isn't that about $33,000 each?
That would boost the economy-
We might also add to this discussion the interest rates of the banks and credit card companies to their borrowers. In previous years these rates would be considered usury. Is it any wonder that bankers are now considered no better than loan sharks?
The other major step is to de-mechanise the rich 1% owned production in favor of man employment & feeding rather than Machine employment and feeding, a total fuel waste on an employment reduiction policy. Relying on GATT's, WTO's now TPP's and FTZ's to rip off p[oorer nations by exporting more 1%'ers overproduction for underemployment profit growth and hoarding.
OK
Do note USA isn't the greatest in the World, Australia has som good ideas even if they are a decade younger.
Bernanke's QW III is just another rather transparent way to hand money to the biggest banks. They get to exchange their bad investment for US treasury bonds. The Obama administration gets money, banks get rid of bad debt for good debt (bonds) and the FED writes a few more billion or trillion dollars of debt on its books.
You just wonder how long this can go on. I suppose it can go on forever. When money is only a convention or a symbol, there is not end to the amount of it that a central banks can create. It does not cause inflation. Prices would go up whether or not the FED was printing money. The only thing that goes up is the stock and investment markets because there is so much money to play with.
The US economy is pretty much a balloon puffed up by the FED. You'd have to think the balloon would burst someday. Maybe it will.
As long as we keep making jobs that that place us behind computers in the service industry and we consume products made in Malaysia, VietNam, Korea, China and Japan we will continue shipping our dollars out of this great nation. The M1 money supply must be consistently refreshed because a significant portion of our dollars leave the shores of the US.
It all starts with Tax Law...and until the moneychangers (congress) is willing to change the code, nothing will change no matter how much you dump in the US.
Reich and the other Keynsians like Krugman and Stiglitz continue to be locked into a debt paradigm that essentially says that there is no other way when in fact there is.
Consequences of an Interventionist Foreign Policy
The attack on the US consulate in Libya and the killing of the US Ambassador and several aides is another tragic example of how our interventionist foreign policy undermines our national security. The more the US tries to control the rest of the world, either by democracy promotion, aid to foreign governments, or by bombs, the more events spin out of control into chaos, unintended consequences, and blowback.
Consider the outreach we have including the insertion of special forces around the world...don't you think, in terms of the "Butterfly Effect" you have major blowback developing?
Well, now we know.
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