Invest in capital partnerships

There is a simple reason for the federal government’s dismal financial outlook: its outlays are growing far faster than its revenues. Typical solutions for this problem involve some combination of slowing the rate of spending growth and increasing revenue collections.

It’s a sound strategy, but its implementation encounters major political problems. As that prolific author Anonymous said, “Watching the Republicans and Democrats argue over these issues is like watching two drunks fight over the bar bill on the Titanic.”

The problems associated with actually cutting spending and increasing revenues make major capital investments- the kind that can create new jobs, boost productivity and create tangible assets that can continue promoting economic activity long after the federal dollars have been spent- another option for solving our daunting problems.

Raising revenue usually means boosting tax rates or eliminating tax deductions, like the one for home mortgage interest. This is politically difficult to achieve, given the perception among many in Congress that voting for tax increases is tantamount to announcing your forthcoming retirement from elective politics.

Similarly, slowing spending growth probably means cutting Social Security, Medicare and Medicaid, all of which are bound to be opposed by retirees- a large and growing component of the nation’s voters.

How else can we boost gross domestic product (“GDP”) so the federal government can grow its way out of the economic crisis?

One option is to have the Federal Reserve work overtime to pump up the nation’s money supply. If this leads to a rise in prices, the same number of widgets sold tomorrow would produce more income for the widget firm and more tax revenue for the government.

Inflating the current dollar value of GDP will generate more revenue with no change in tax rates (which is why it’s been so popular throughout history among many national governments). However, raising prices will reduce the buying power of federal outlays. Total outlays will have to be increased to keep up with higher prices, leaving us right back where we started.

Increasing GDP without raising prices would progressively narrow the gap between the growth of total outlay dollars and the growth of total revenue dollars. This would be the macroeconomic equivalent of being home free. Major capital investment is a way to get there that has a proven track record.

A too-often forgotten legacy of President Roosevelt’s New Deal was massive federal capital investment in economic growth projects like rural electrification, the Tennessee Valley Authority and Boulder Dam, not to mention hundreds of commercial airports like LaGuardia and JFK in New York City, thousands of modern post offices, schools and local courthouses. Two decades later President Eisenhower, the Republican New Dealer, began building the 41,000-mile Interstate Highway System.

America has been living off these investments ever since. Their contribution to decades of job growth and increasing national prosperity has been so enormous that we’ve come to take them for granted.

Now is the time to again develop a series of major capital programs to create jobs and build a better, stronger, more prosperous nation.

Capital investment programs can generate the kind of near-term, non-inflationary economic growth needed to solve our looming financial problems without having to raise taxes or cut popular middle­ class benefit programs. They can, in fact, enable us to grow our way out of financial trouble.

But escalating federal budget deficits and skyrocketing debt, even at historically low interest rates, raise questions about government’s ability to come up with the start-up dollars. One solution is to recruit private firms as active partners to help start, fund, and run as many of these programs as possible.

If properly structured, such public-private partnerships could tap into the billions of dollars in private capital hungering for low-risk investment opportunities that offer decent rates of return. These New­ Deal style programs provide such an opportunity, greatly minimizing the need for scarce government dollars.

If the common-sense approach of cutting spending and raising revenue isn’t politically feasible, a partnership between the federal government and the private sector to embark on a program of major capital investments is the best route to growing our way out of a daunting fiscal mess.

originally published: September 29, 2012

Free trade’s ‘golden age’ is lacking in luster

“So, Tony, it sounds like you’re not a big fan of free trade”

“Oh, I think free trade’s great- so long as it doesn’t get in the way of anything really important, like putting Americans back to work.”

“What do you mean?”

“Look, Sean. Any economist will tell you free trade is even better than macaroni and cheese. But tell that to a tool and die maker whose unemployment insurance is about to run out.”

“I guess so.”

“Some people do have a way of making free trade work for them.”

“What do you mean? “

“Look at the CEO who’s just moved 17,000 jobs from Cleveland to Jakarta so he can announce record profits next quarter from lower labor costs. Wall Street runs his stock up five or 10 points”


“Think of it this way, Sean. We can’t trust the invisible hand of the market to allocate economic resources like capital and labor among nations if we all want to prosper.”

“What’s the alternative?” “Intelligent strategic management.” “Like trade agreements?”
“Right. Make deals; it’s a sacred free-market principle.”

“True. “

“Suppose a car is speeding down a twisting mountain road. Is any sane person going to argue that guiding this car around the inevitable sharp curves should be left entirely to the invisible hand?’

“What invisible hand? “

“You know, the subtle grooves in the road’s pavement; the way it’s banked on the turns.”

“I see what you mean. “

“Obviously, the car needs a driver to avoid running off a cliff.”

“And trade is no different?”

“Right. Trade needs the federal government to manage it intelligently on behalf of the American public.”

“Do you mean industrial policy, picking  winners?”

“Actually, the record shows that the feds have a pretty good history of picking winners. Look at World War II.”

World War II? “

“Sure. Who did President Roosevelt pick to manage the war? General Marshall, General Eisenhower, Admiral Nimitz- all-stars in any league. Germany and Japan couldn’t come close.”

“I guess you’re right. “

“And look at the big spending programs the Roosevelt administration picked to create a massive amount of armaments and superior technology in a flash. Like the Manhattan Project to produce nuclear bombs and the B-29 program.”


“For all Germany’s technological know-how, efficiency and discipline, Hitler’s government had a bad habit of picking losers and choosing managers who were forefathers of the people who drove General Motors off a cliff. So what’s wrong with having the federal government manage trade to benefit the American public?”

“But won’t the academics insist that isn’t free  trade at all? It seems to violate the hands-off principles supposedly espoused by Adam Smith and other big thinkers”

“So we’ll keep everybody happy by calling our approach something like ‘free trade with American characteristics,’ like Beijing describes its version of capitalism as ‘socialism with Chinese characteristics.”‘

“I should have known. “

“The patron saint of America as an industrial powerhouse was Alexander Hamilton. As George Washington’s treasury secretary, he pushed his vision of our nation growing into a land of urban-based industries that created widespread prosperity by making things. Hamilton persuaded Congress to pass a wide range of tariffs to protect and nurture home-grown industries that made things an increasing number of Americans wanted. He protected the prosperity of American workers by forcing our trading partners to play by sensible rules.

“Yeah. “

“Now fans of economic theorists who let logic run away with common sense may have trouble getting their minds around Hamilton’s unorthodox wisdom. But putting it into practice is what gave America the capacity to out-produce Germany and Japan combined during the 1940s.”

“I guess that makes sense. “

“The heroes of Hamilton’s America are people like those masterful tool and die makers, the Michelangelos of the machinist’s trade whose artful minds and skilled hands can sculpt metal into the jigs and tools of efficient mass production.”

Yeah, I knew of one of those guys. “

“But too many like him have been sacrificed at the altar of free trade and are trying to make ends meet by flipping burgers. But not to worry; the mainstream economists tell us everything will be fine. According to them, we are living in the golden age of free trade. Sadly, what really surrounds us are copper and lead.

originally published: September 15, 2012

Consider a national pension system

During most of our adult lives the value of the stock market and other traditional assets (including owner-occupied houses) followed a roughly upward trend. This instilled in most people an assumption that greatly influenced thinking about employer-sponsored pension plans.  But in recent years, this formula has come unwound. With no sign that conditions will return to the former status quo, it may be time to take a radically different approach.

Middle-class American employees traditionally saved a portion of their income during their working lives to build a personal retirement fund. They would leverage the savings by investing them in low-risk assets whose value would increase over time.

They could do roughly the same thing by selling their homes for a nice profit, then using a portion of the profits to buy smaller, cheaper houses in a low-cost retirement community.

Together with Social Security, these “lifetime annuities” from personal savings and employer-provided defined benefit pensions would enable middle-class retirees to enjoy something close to the same living standard they enjoyed during the later stages of their working careers.

But employers started to control their pension costs by piggy backing on the assumption that employees would save for retirement by squirreling away a portion of their salary and investing it in the growing value of assets like their homes.

This allowed employers to replace their defined benefit pensions with defined contribution pensions, under which they would contribute fixed sums to employees’ 401(k) plans.

And in recent years, several things have wreaked havoc with the traditional arrangement. Since 2008, the credibility of investing has been shattered for most middle-class employees. The stock market’s long-term upward trend has been replaced by chaos punctuated by periodic scandals. Now “safe” investments like treasury bonds, government guaranteed bank savings accounts and CDs, and money market funds pay such low interest as to be virtually meaningless as a means of leveraging personal savmgs.

So the basic mind-set of middle-class employees has returned to what it was in the 1940s and ’50s, when memories of the 1929 crash were still vivid enough to leave them with no confidence in pure financial assets. This helped fuel demand for employer-provided defined benefit pensions.

The collapse of house prices coupled with high vacancy and abandonment rates has wiped out the assumption that home ownership is a safe investment vehicle.

Over a somewhat longer period, purchasing power has stagnated, even as the prices of goods have risen. There is no longer any realistic chance that middle-class employees can offset the absence of personal savings leverage with investments or home ownership. More than likely, they will save even less in an effort to maintain their living standards.

With respect to retirement, middle-class employees face two disagreeable options: Work until you drop or accept forced retirement (from layoff or illness) and be prepared to survive on the lower living standards that employer pensions and Social Security provide.

Surely it’s only a matter of time before the AARP or another organization marshals senior citizens who vote at a high rate to tell members of Congress they must increase Social Security and Medicare benefits. If huge tides of senior citizens are directed to vote for challengers who promise to do right by seniors, is there any doubt about the electoral outcome?

Maybe it is time to create a national pension system that replaces all existing retirement plans and provides everyone with a defined benefit pension, which should be indexed to inflation. It should be fully funded by an initial debt issue and sufficient payments from working taxpayers.

This giant pool of money could then be invested in public and private projects that offer respectable returns and help rebuild America.

Many would view this as another step away from personal responsibility and toward socialism. But this Basic Income Concept was first proposed by no less of a wild-eyed socialist radical than economist Milton Friedman.

Separating employee pensions from the bottom-line pressures employers face by creating a national pension system can restore the fading promise of a comfortable retirement to millions of Americans. At the same time, money paid into the system can be invested to rebuild our country for future generations.

originally published: September 1, 2012