Why Reviving Revenue Sharing Would Be Good for America -- and Arizona

The number one issue of this campaign, and of the last couple of years of the Great Recession, is how to get our economy moving again. Right now, policy makers seem paralyzed by outdated notions, fear, and political dissent by those like Jeff Flake, who are wrong, wrong, wrong about everything.

Jeff Flake and the Republicans' solution to our economic crisis and terrible unemployment is their usual laissez-faire, trickle-down, supply-side, yada yada crap that started us on the path to extremes of wealth and poverty but mostly great gains for the very, very richest of Americans and bupkis or losses for the other ninety percent and more of us.

Their solution to everything is to cut government spending (which they certainly failed at spectacularly during their years of federal control in the Bush adminstration) and lower taxes: Grover Norquist's "Starve the Beast." Because Jeff Flake - although he's got his sinecure right in the middle of it - hates the federal government and thinks it can do nothing.

So when the Republicans take control of Congress, and if they gain the White House in two years, will drastically cut out needed spending just as they opposed the stimulus. Yesterday we reprinted a column by Laura Tyson explaining why the first stimulus did work but was too small to be effective in such a virulent Great Recession caused by a major financial catastrophe and why we need a second stimulus.

Today we post a column, from the Business section of yesterday's New York Times, by economist Robert J. Shiller on one form the stimulus can take, "The Case for Reviving Revenue Sharing." Revenue sharing is something that even conservative Republicans should like because it takes decision to the state and local level, but real fanatic extremists like Jeff Flake can never be satisfied in their irrational hatred of government at all levels. (We wonder if Jeff Flake's toilet training caused his psychological problems.) Herewith, Shiller's proposal:

PROTRACTED unemployment is eating away at millions of people. And the economy’s failure to create enough jobs for them is part of a vicious circle that could keep turning for years to come.

In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.

State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.

In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.

Support for the idea was not confined to Republicans. A leading Democrat, Senator Hubert H. Humphrey, supported it in 1972, saying that federal taxes were more progressive than state and local ones and that federal money could be spent more effectively by people with local knowledge than by “some agency head in Washington.”

General revenue sharing came under attack in the Reagan years, and Congress ended it in 1987, arguing that by breaking the link between taxation and local needs, it encouraged higher taxes.

We are in a different time now. State and local governments are in severe fiscal trouble, and their constitutions often prevent deficit spending. In these circumstances, the federal government, which does not face such constraints, needs to raise revenue for them.

Legislation providing the states with $26 billion, which President Obama signed into law this month, took an important step in this direction. It did not create true general revenue sharing, because it tied the funds to specific needs — mostly hiring teachers and paying for Medicaid. But it did free states to use other resources as they saw fit.
(Illustration by David G. Klein)

It is time to bring back true general revenue sharing — temporarily — to stimulate the economy. Hundreds of articles in political science and public policy journals have studied past efforts, and analyzed the concept of fiscal federalism, without establishing general revenue sharing as a fundamental pillar of Keynesian stabilization policies. This lapse is understandable: most of these articles were written before the current economic crisis, the most serious since the Great Depression.

The need for a Keynesian revenue-sharing program is clear. After Congress approved stimulus legislation in 2009, Lawrence H. Summers, head of the National Economic Council, said that “it’s harder to spend $300 billion within a year on quality projects than you might think.” And no wonder the task was tough: decision makers in Washington were removed from local needs.

Martin Shubik, a professor of mathematical institutional economics at Yale, has proposed creating a “Federal Employment Reserve Authority,” a permanent agency that would do extensive research and maintain a detailed list of ready-to-go public works projects should a recession come. That’s a great idea, but we do not have such an agency now, and, if we did, it might still suffer from a Washington bias.

Now, local governments are laying off a wide variety of employees, including teachers, police officers and social workers. So why don’t we embrace general revenue sharing? Unfortunately, when faced with a need for stimulus, members of Congress seem to prefer to start their own projects, for which they are likely to get more credit from voters. Local governments, meanwhile, which are more likely to know where spending is really needed, remain in deep trouble.

It’s time for the public to assert loftier expectations. We need to respect existing government bureaus and organizations for their ideas, and get down to the business of financing important jobs temporarily, and on a huge scale. This will avert more layoffs, and perhaps give cities and states time to recover to the point they can pay local employees from local revenue.

When the administration of Franklin D. Roosevelt began its vast job creation program in 1933, it had to accept certain practical realities, which limited the immediate stimulus that could be provided. Foremost among them was that the government had to work largely within the framework of existing organizations — whether state and local governments, the military or nonprofit groups — which provided much of the economy’s infrastructure.

Economic stimulus is not a matter of turning on the money spigot, as some economists are wont to describe it. It is about getting the widespread cooperation of dispersed organizations to provide jobs, at least for as long as the economy is weak.

When the Roosevelt administration and Congress created the Civilian Conservation Corps in 1933, it was done within the framework of the Army. There seemed to be no other organization that could move hundreds of thousands of young men into wilderness encampments where they could work on conservation efforts. But the Roosevelt C.C.C. placed no more than a half-million people in jobs. We need to reach further than that.

Labor unions, which represent workers who naturally fear displacement by people in new jobs, might seem to be an obstacle. But unions do have an idealistic base, and working union members have sons and daughters and friends and relatives who are unemployed. The unions need to be consulted if new jobs are to be created in a relatively nonthreatening way. In a savvy move, President Roosevelt made a union leader the head of the C.C.C.

The concept of general revenue sharing can also be extended to the nation’s nonprofits, including charities and foundations. The government has long given support to such organizations, but usually in the form of narrow grants. But broader general revenue grants could be made in times like these.

Millions of people need jobs, and there are organizations that could help put them to work. It’s time to move forward.

Why We Need a Second Stimulus - and Why Radical Laissez-Faire Conservatives Like Jeff Flake Were Wrong About the First One

Today we'd like to reprint today's New York Times op-ed by Laura Tyson, the Berkeley economics prof and former chairwoman of the Council of Economic Advisers and the National Economic Council. We agree with her totally as to "Why We Need a Second Stimulus" (emphasis ours):

OUR national debate about fiscal policy has become skewed, with far too much focus on the deficit and far too little on unemployment. There is too much worry about the size of government, and too little appreciation for how stimulus spending has helped stabilize the economy and how more of the right kind of government spending could boost job creation and economic growth. By focusing on the wrong things, we are in serious danger of failing to do the right things to help the economy recover from its worst labor market crisis since the Great Depression.

The primary cause of the labor market crisis is a collapse in private demand — the same problem that bedeviled the economy in the 1930s. In the wake of the financial shocks at the end of 2008, spending by American households and businesses plummeted, and companies responded by curbing production and shedding workers. By late 2009, in response to unprecedented fiscal and monetary stimulus, household and business spending began to recover. But by the second quarter of this year, economic growth had slowed to 1.6 percent, according to a government estimate issued Friday. Clearly, the pace of recovery is far slower than what is needed to restore the millions of jobs that have been lost.

Households and businesses are on a saving spree to rebuild their balance sheets. Their spending relative to income has fallen more than at any time since the end of World War II. So there is now a substantial gap between the supply of goods and services the economy is capable of producing and the demand for them. This gap is starkly reflected by the 23 million Americans who are looking for full-time jobs and the millions more who have left the labor force because they could not find one.

The situation would be even worse without the $787 billion fiscal stimulus package passed in 2009. The conventional wisdom about the stimulus package is wrong: it has not failed. It is working as intended. Its spending increases and tax cuts have boosted demand and added about three million more jobs than the economy otherwise would have. Without it, the unemployment rate would be about 11.5 percent. Because about 36 percent of the money remains to be spent, more jobs will be created — about 500,000 by the end of the year.

But by next year, the stimulus will end, and the flip from fiscal support to fiscal contraction could shave one to two percentage points off the growth rate at a time when the unemployment rate is still well above 9 percent. Under these circumstances, the economic case for additional government spending and tax relief is compelling. Sadly, polls indicate that the political case is not.

Two forms of spending with the biggest and quickest bang for the buck are unemployment benefits and aid to state governments. The federal government should pledge generous financing increases for both programs through 2011.

Federal aid to the states is especially important because they finance education. Although the jobs crisis is primarily a crisis of demand, it also reflects a mismatch between the education of the work force and the education required for jobs in today’s economy. Consider how the unemployment rate varies by education level: it’s more than 14 percent for those without a high school degree, under 10 percent for those with one, only about 5 percent for those with a college degree and even lower for those with advanced degrees. The supply of college graduates is not keeping pace with demand. Therefore, more investment in education could reduce both the cyclical unemployment rate, as more Americans stay in school, and the structural unemployment rate, as they graduate into the job market.

An increase in government investment in roads, airports and other kinds of public infrastructure would be cost-effective, too, as measured by the number of jobs created per dollar of spending. And it would help reduce the road congestion, airport delays and freight bottlenecks that reduce productivity and make the United States a less attractive place to do business. The American Society of Engineers has identified more than $2.2 trillion in public infrastructure needs nationwide, and a 2008 study by the Congressional Budget Office found that, on strict cost-benefit grounds, it would make sense to increase annual spending on transportation projects alone by 74 percent.

Over the next five years, the federal government should work with state and local governments and the private sector to finance $1 trillion worth of additional investment in infrastructure. It should extend the Build America Bonds stimulus program, which in the past year has helped states finance $120 billion in infrastructure improvement.

The federal government should also create and capitalize a National Infrastructure Bank that would provide greater certainty about the level of infrastructure financing over several years, select projects based on rigorous cost-benefit analysis, invest in things like interstate high-speed rail that require coordination among states and attract private co-investors in projects like toll roads and airports that generate dedicated future revenue streams.

But can the government afford this additional spending? The answer is yes. Despite the large federal deficit, global savers, including savings-hungry American households, are snapping up United States government securities at very low interest rates. And they will continue to do so as long as there is ample slack in the economy and inflation remains subdued. Over the next few years, there is little risk that federal deficits will crowd out private investment or precipitate a crisis of confidence in the American government, a spike in American interest rates or a sudden drop in the dollar.

On the other hand, as long as private demand remains weak, the risk is uncomfortably high that trying to reduce the deficit — by cutting spending or increasing taxes — will tip the economy back into recession or condemn it to years of faltering growth and debilitating unemployment. In fact, either outcome would depress tax revenue and could mean larger deficits.

Faced with these risks, as long as the economy is operating far below potential, policy makers should do two seemingly contradictory things. First, they should provide additional fiscal support for job creation and growth. And, second, they should enact a credible multiyear plan now to stabilize the ratio of federal debt to gross domestic product gradually as the economy recovers.

By easing capital market concerns about the government’s future borrowing needs, such a plan would permit larger deficits and slower debt reduction while unemployment is still high. The long-run debt problem — the result of imprudent fiscal decisions before the recession, escalating health care costs and an aging population — must be addressed once the economy has recovered. But for now the priorities of fiscal policy should be jobs and investment.

That's not going to happen with laissez-faire out-of-touch corporate lackeys like Jeff Flake controlling Congress.

But most of you in the East Valley - even if you're out of work or your house is underwater or in danger of being foreclosed - are just too stupid to realize it, and that's why you vote Republican against your own interests. East Valley voters are largely the stupidest people on the planet Earth. (They're ugly, too.)

Sensible, Politically Unfeasible Ideas for Financial Regulation

The current financial regulation bill that's scheduled to pass Congress this week - with free-market fanatic Rep. Jeff Flake voting no a thousand times if he could - is better than nothing, though an economist as shrewd as MIT's Simon Johnson has called it a failure. It does improve consumer protection a bit, restrict some speculative investment by banks with their own money and establish limited federal oversight of derivatives.

But, as Paul M. Barrett's New York Times Book Review critique of Crisis Economics: A Crash Course in the Future of Finance, the new book by the prescient Nouriel Roubini ("Dr. Doom") and Stephen Mihm indicates, this bill - however well-intentioned - is disgustingly inadequate, a mere halfway measure. Barrett says Roubini's proposals for real reform "aren't all politically feasible, but that doesn't make them any less sensible."

So, let's talk sense to the American people even if the voters in Arizona's Sixth Congressional District wouldn't recognize sense if it bit off their moronic heads. From Barrett's review of Roubini and Mihm (emphasis ours):

Roubini begins with an indisputable paradox. The government’s emergency rescue plan — the distasteful but necessary Wall Street bailouts and deficit-­enlarging stimulus spending — staved off global depression and brought about a dramatic stock market recovery. It also drained whatever fleeting political will existed to rein in Wall Street in a serious way. The surviving megabanks have brazenly paid out record bonuses, even though they owe their very survival to taxpayer largess.

Let’s start with those fingernails-on-the-blackboard bonuses. Roubini notes that the main problem isn’t their size, grating as that may be. The real trouble is that investment bank traders are paid huge bonuses for making reckless bets that yield short-term returns. They aren’t penalized when their gambling ultimately costs their employers money (or drives the firms out of business). This leads to a casino culture lacking common-sense caution. One potential remedy: put bonuses into a pool held in escrow for several years. If a trader’s record proves solid, he or she gets a payout. If not, the bonuses are nullified. Greater prudence would kick in, and, not coincidentally, overall compensation would shrink.

Only government could impose across-the-board pay reform. Since Wall Street would have collapsed without the ­taxpayer-financed rescue, Roubini says, Congress should have mandated a ­bonus-escrow system as a condition of the bailouts. Mesmerized by Wall Street campaign dollars and terrified of being branded “socialists,” lawmakers never seriously considered the idea. It didn’t help that President Obama surrounded himself with bank-friendly economic advisers like Lawrence Summers and Timothy ­Geithner.

The sorry performance of the three major private credit-rating agencies — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — played a critical role in the financial mess. Over and over, they stamped AAA ratings on the sausage-like securities made up of poisonous minced mortgages. Congress has debated imposing modest new requirements that the rating agencies make their operations more transparent. Roubini demands more drastic action. He would have government end the tradition of the sausage-making investment bankers paying the raters for their grades, a whopping conflict of interest if ever there was one. Roubini recommends that the agencies should be limited to accepting pay from investors in securities. Further, he urges a smart deregulatory move: removal of the agencies’ certification by the Securities and Exchange Commission as “nationally recognized statistical rating organizations.” This publicly blessed oligopoly, intended to maintain high standards, has only inhibited competition that would bring down the price of security-rating services.

Lawmakers have been debating provisions that would shed some additional light on the opaque market in derivatives. Those are the voluminous Wall Street deals that were supposed to dilute risk by spreading it but instead contributed to a risk epidemic. Heck, Roubini writes, let’s just identify the most dangerous ones and ban the suckers. He nominates credit default swaps, the quasi-insurance policies sold by American International Group, among others, which paid off when designated bonds went bad. Since we don’t allow people to insure their neighbors’ houses against fire, for fear of encouraging arson, why allow traders to bet on bonds blowing up? We shouldn’t.

Eliminating all bad loans will never happen. Since banks will always make mistakes, Roubini argues, they should be required to retain more capital and maintain higher levels of liquid assets (cash and securities that can be sold quickly). The legislation under consideration by Congress would authorize regulators to stiffen capital and liquidity rules. But the legislation would leave it to regulators to provide specific numbers. Roubini wouldn’t give the civil servants so much discretion.

Capital requirements are connected to Roubini’s most radical suggestion. He would force financial conglomerates to retain capital relative to all the risks posed by their various units. “This requirement would reduce leverage and, by extension, profits,” he writes. “Ideally, sending the message that bigger isn’t better would lead these firms to break themselves up.”

That’s right, break themselves up. Unfortunately, the implicit assumption that some banks have grown “too big to fail” has become explicit. Roubini maintains that we should pressure the biggest of them to contract, until they’re small enough that their demise wouldn’t bring down the rest of Wall Street.

With the federal safety net removed, an organization like Citigroup would act more prudently. Repeatedly rescued by the government since the Great Depression, Citigroup shouldn’t continue in its current unmanageable form, Roubini asserts. “Any bank that needs that much help doesn’t deserve to exist.” If Citigroup’s board of directors doesn’t share this view, the N.Y.U. economist advocates legislation that would authorize regulators “to break up banks and other financial institutions that are so large, leveraged and inter­connected that their collapse would pose a danger to the entire financial system.” The plutocrats might well perk up and do the job themselves.

Dr. Doom operates far beyond the horizon of what most experts consider plausible. Based on his track record, we would be wise to catch up to him.

Free-market fanatics like Jeff Flake and his even more moronic Republican primary opponent (at least Jeff Flake is smart about some things) can't abide any government regulation, even the halfway measures in the current legislation, and even liberals are loath to rein in the financial fat-cats who fund their campaigns (this means you, Senator Schumer). But as a Green Party campaign, we're free to support "politically unfeasible" ideas that actually would work.

Feckless Fanatic Congressman Jeff Flake Calls for "More Pain" for America; Entrenched Arizona Politician Wants New Great Depression to Balance Budget

Today at a Capitol Hill news conference, Arizona Republican Rep. Jeff Flake called on Americans to endure "more pain" and "a new Great Depression" in order to reach his goal of a balanced budget.

"Americans, and Arizonans, have not really suffered at all during this so-called recession," Flake told reporters. "Balancing the federal budget is something we have to do immediately. That's why I've voted twenty-three times against bills that would spend money to help those admittedly unfortunate Americans who've lost their jobs or are facing minor financial difficulties like not being able to afford probably uneccessary spending on items like junk food and needless medical care."

"I'm proud to have voted a total of seventeen times against increasing or extending unemployment benefits, which is a wasteful social spending scheme," Flake replied in answer to a reporter's question asking how the Congressman felt about Arizona's maximum weekly unemployment benefits, third lowest among the states, recently going down to $216 from $241. "The unemployed need to value the free market a bit more and pull in their belts."

"I had no problem surviving a week with no money at all on a desert island for a week," Rep. Flake said, "so I think everyone collecting unemployment benefits or other unnecessary government benefits like food stamps, Medicare or Medicaid need to be a little more self-reliant like me."

Flake derided commentators like Nobel Prize-winning Paul Krugman who've said that imposing financial austerity can cause a new Great Depression. "Maybe we need a new Great Depression," the Congressman told reporters. "It would help voters see that they've been living off the government teat for too long."