Infrastructure is a constructive idea
Perhaps the U.S. federal government needs to spread more money to the states and rebuild infrastructure to help fix the crisis. Bill Radke explores this idea with professor James Galbraith for our "What's the Fix?" series.
James Galbraith, professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas. (University of Texas)
More on America's Financial Crisis
TEXT OF INTERVIEW
Bill Radke: We've been telling you for weeks how the global economy is sliding, but what to do about it? Today, we launch an occasional series that looks at solutions. It's called "What's the Fix?" I asked economist James Galbraith for his fix. He told me the U.S. federal government should be spreading money out to the states.
James Galbraith: We need steps that will stabilize the underlying economy. It's going to be necessary to support state and local governments, whose revenue bases are deteriorating very rapidly because of the fall in property tax revenues particularly, and then also the decline in economic activity. To help them maintain services, maintain employment, would be a very important way to stabilize the overall economy.
Radke: FDIC chair Sheila Bair has proposed that the government back some mortgage loans to prevent foreclosures. What do you think of that?
Galbraith: I think it's a very constructive idea. It sets up an incentive for loan servicers to renegotiate the terms of a loan, to turn these unsustainble, toxic loans that should never have been made into something which has a better chance of keeping the homeowner in the home and keeping the home, you know, in reasonable repair.
Radke: So it's worth helping lenders and consumers who made bad decisions, bad loans?
Galbraith: In a situation like this, you have to help consumers first and foremost. If you have to help lenders to some degree to get the result you want, I'm not opposed to that.
Radke: You have proposed that the federal government help states invest in infrastructure. What are you imagining?
Galbraith: As credit markets have frozen up, states and localities have much greater difficulty financing public capital expenditure -- just at a time when the resources in construction are available because the housing sector is in a slump. So we ought to be taking advantage of the borrowing power of the federal government to pass funds to states and localities to rebuild an infrastructure that has been neglected for over 30 years.
Radke: What would all of this deficit spending do to our long-term health?
Galbraith: It would improve our long-term health. When the private sector is not able to take out loans and to have an expanding credit-based private economy, then the public sector must. If neither does, then you have a great depression. That's the disaster you want to avoid.
Radke: James Galbraith is a professor at the LBJ School of Public Affairs at the University of Texas at Austin. Professor, thank you.
Galbraith: Thank you.
Comments
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From Riverside, CA, 12/09/2008
I completely agree w/ Wade! What we need to get away from is the idea of growth. We have a finite planet and we need a sustainable economy that is static. The only growth we need is that of replacing products with those of higher quality and durability. Having everyone work fewer hours would allow us to get more out of life. Since lower-income people cannot afford to get by on fewer hours we need some income redistribution from those with higher incomes to those of lower incomes. And yes, I am in the upper middle class and would be willing to contribute to such a redistribution in order to provide a humane society for all working people and a sustainable natural environment. Of course the latter can only be achieved with zero population growth.
From bethesda, MD, 11/11/2008
Gov't spending on infrastructure, or any domestic job creation program generally decreases unemployment and gives consumers the mean to consumer. There is overhead associated with such a program and yes, some businesses will profit, but competitive bids should reduce profit-taking provided projects (unlike the DC Capitol Visitor Center) receive appropriate oversight and control costs. The feds should have let the banks fall where they may. Now we've got companies like Amex et al changing their structure to cash in. You know that's a giant republican feed-bag for Paulson's Wall-street buds when that sort of kickback starts. Bailouts are the new earmarks. Too bad politicians don't respect their electorates wishes and vote against them.
I think that the way out of this is equally as painful on the way down as the pleasure of profit was on the fanciful way up during the Bush years:
1. Deficit spend on government programs that help employ tax payers (i.e. not just Americans).
2. Replace the mortgage home interest tax deduction with an individual "residence" tax deduction to more equitably accommodate residential expenses of both owners and renters and regardless of the size of a person's real estate holdings.
3. Raise interest rates to prevent the recurrence of another debt-driven asset bubble.
4. Regulate bank practices at a federal level to protect consumers and foster industry consolidation by denying states the right to impose anti-competitive state-specific regulations. There are far too many banks in America and many remaining state regulations reflect the needs of an age old society from a bygone era that no longer exists in America.
5. Allow house prices to fall with market conditions. Eventually, when the asset bubble finally deflates in a few years, housing will become affordable again. The profits from the housing bubble were paid out in low-tax dividends and executive compensation. Identify the recipients of those dividends and payouts, then introduce legislation to claw them back and pay down the mortgages with the money.
6. As complicated as it may seem, unwinding the CDO mess is necessary. The current system incentivizes corporations to make bad loans and sell them at a profit to unsuspecting investors (a.k.a. patsies). It is imperative that the mortgage initiator remain responsible for mortgage risks and rewards. This will probably mean that mortgage brokers will be out of jobs but it will also help stabilize the housing market.
7. Regulate real estate agents so that they may only charge fixed fees for service and not commission. This should help take some of the sting out of selling properties at a loss to consumers and remind the agents that their constant denial that there was a housing bubble helped fuel this crisis.
8. Offer consumers tax rebates on their housing investment losses at the time of sale to incentivize them to accept and realize the losses on their real estate investments. This may help speed the housing price deflation that, once completed, should allow the economy to function normally again.
9. Identify real-estate profit-takers (and I might like to include real estate firms here, but generally look for people who made over about 8% annually on housing "investments"), over the past eight years and retroactively tax their profits and claw them back.
As an aside, I noticed that local governments reduced their tax rates on properties when the property values increased "too much" but now that the values are falling, the are complaining about a shortfall in revenue. Duh! They should raise the tax rates that they were foolish to drop in the first place. By keeping those rates as they were, the increased taxes would have incentivized people in houses they could no longer afford, to move to smaller dwellings. This would likely have had a nominal affect on consumers, but would have meant government could have run a surplus during a boom to accommodate future down-swings .. like now. If only politicians actually cared about the future of their citizenry.
Yes, some of these proposals are probably unrealistic, but they hopefully spur other ideas that could be enacted to accomplish holding the miscreants financially accountable and softening the blow to consumers who bought into the NAR's fantasy that the housing boom would never end.
From Oak Creek, WI, 11/04/2008
If families saved at levels they should be saving at then there would be less demand for consumption leading to a drop in business activity. This implies that our current infrastructure amouonts are excessive. We need to make sure that we don't waste money "rebuilding" infrastructure that a healthy and sustainable business activity level doesn't need. Our business leaders are licking there chops at this "rebuilding" opportunity and because they control government and the media, you can be sure that they will push the "rebuilding" to maximize their profits and this will surely lead to excessive "rebuilding" and will therefore lead to doing more harm than good in terms of the American family having disposable income to save and invest. I would suggest that there are other ways of employing people than to support unnecessary consumption with public and private spending. All we need to do is reduce the number of hours in the work week and that will free up hours for those workers becoming unemployed while the "economy" contracts to sustainable levels. this has the added benefit of increasing the amount of personal time that our families are in sore need of.
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