Why Obama’s Economic Plan Will Not Work—And a Better Plan

Original Link: http://www.commondreams.org/view/2010/01/17

By Robert Freeman

Obama's economic recovery plan will not work. It does not begin to address the profound structural problems that hobble the U.S. economy and that amount to a slow-motion death sentence for the American middle class. His policies are the equivalent of trying to re-float a sunken boat, nothing more. Once the government buoys are removed, the boat will promptly sink again, with the American people trapped inside.

If Obama wants to revive the American economy, he needs to adopt a much more aggressive program than has been contemplated to date. Specifically, he needs to address the chronic shortfall in workers' incomes and the recent collapse of middle class wealth which are the root causes of the crash. The most effective way to do that is with a Manhattan Project-like program to reconfigure the way the nation uses energy.

Such a program would be surprisingly inexpensive, especially when compared to the $14 trillion dollars handed to the banks in the recent bailout. It would not only resuscitate employment and incomes and, therefore, American living standards, it would revive American competitiveness in the world, reduce its dependency on Middle Eastern oil, and improve the economy's impact on the environment. In all of these ways, it would prove a huge boon the American people and the world.

Fortunately, there are many precedents for such an ambitious program. They include the U.S. itself in the 19th and early 20th centuries, 19th century Germany, and 20th century Japan, Korea, and China. These are the most impressive cases of economic transformation in the last 200 years. In each case, activist government intervention allowed the economy to exploit a new technology paradigm and catapult itself to new heights of prosperity and growth. A similar such opportunity is available to the U.S. today, but only if the Obama administration finds the courage to act.

The US economy is profoundly damaged. It is no longer intended to provide a stable and rising standard of living to the mass of American people. Rather, since 1980 and the election of Ronald Reagan, it has been operated with the goal of transferring income and wealth from the working and middle classes to those at the very highest reaches of the economy. And it's been extraordinarily successful at this.

Here is the executive summary of U.S. economic policy over the past 30 years:

Dramatically lower taxes on the wealthiest people in the country; meanwhile, undercut the working and middle classes by shipping their jobs overseas so corporations can profit by paying Chinese and Indian workers 5% of what they pay American workers; send the finished products back to the U.S. and sell them to former workers with now-downsized jobs by getting them to take on onerous levels of debt; when that is still not enough to keep the economy afloat, have the government increase its debt, in the process binding those former and downsized workers with government debts that they will carry for the rest of their lives; have the whole system laundered through big banks who create nothing, but take a piece of the action on every transaction; make sure these banks are "too big to fail" so that when they fail, the downsized, indebted workers can be made to disgorge the last of their remaining assets in order that the banks and their owners don't suffer any losses on their predatory investments that went bad.

Repeat this process until the working and middle classes have been milked of all of their assets and their wealth has been transferred into the hands of the richest people on earth.

It's working exactly as planned.

Between 1993 and 2007, 50% of all the growth in the U.S. economy went to the richest 1%. Between 2002 and 2006, it was even worse: an astounding three quarters of all the economy's growth was captured by the top 1%. In 2007, this top 1% captured 20% of all the income in the entire nation. The top 10% corralled fully half of all the income earned in the entire country, as much as the bottom 90% combined. Only one time since 1913 has so much of the nation's income been seized by such a small elite. That was 1928, the year before the stock market collapsed, ushering in the Great Depression.

The data on concentration of wealth are even more startling. The top 1% own more than 50% of all assets in the U.S. They own more than 70% of all financial assets. Meanwhile, the bottom 50% of wealth holders own a mere 3.5% of all the assets in the country. The bottom 40% own nothing. They have a combined net worth of zero. Middle class homeowners now own less of the equity in their homes, 45%, than at any time since World War II when the figure stood at 70%. They lost $13 trillion in the housing meltdown, even as the entire past decade produced zero net new jobs.

So where are we now?

Seven million high-paying manufacturing jobs have been shipped overseas in the past decade, one third of all those in the entire economy. Twenty per cent of the nation's labor force - thirty million people - are idle or underutilized. Thirty percent of the nation's factory capacity is idle. Three quarters of the nation's home building capacity is idle. More workers are out of work longer that at any time since such statistics started being collected, in 1948. The results are cataclysmic.

Ten thousand homes enter foreclosure every day. More than 39 million Americans - one out of eight - are on food stamps. Half of all American children will be on food stamps at some point in their lives! Seventy-seven million Baby Boomers stand on the threshold of retirement, expecting, hoping, praying that the nation will honor the promises it has made to them for the last 50 years. It will not, because it cannot.

The national debt that stood at $1 trillion in 1980 now stands at $12 trillion. And this was run up over a period of supposed economic prosperity! Personal debt has risen from 65% of income in 1980 to 125% today. The nation's unfunded liabilities - debts it has committed to pay but for which there is no identifiable source of funding - exceed $65 trillion. The U.S. economy must borrow more than $5 billion every day just to keep its lights on. Most of that comes from foreign creditors-China, Japan, Saudi Arabia and such. Interest payments on this debt will soon reach $1 trillion a year. Not since before the Civil War has the U.S. been so dependent on foreign capital.

When all the assets that are pledged as collateral against this borrowing have been exhausted, the lights will go out, as they must. The creditors will simply pull their capital out of the economy as they did from the Asian countries in the Asian financial crisis of the late 1990s. The U.S. has become a banana republic, ruled by a small, ultra-rich oligarchy who look after themselves, with everybody else living entirely at the mercy of their wealthy masters.

Despite Obama's cheesy rhetoric and faux-liberalism, his economic program is, in fact, little different than that of George W. Bush. More than $14 trillion have been committed to the banks in the bailout but only $135 billion have been committed to the automobile industry. That's $100 to the banks that wrecked the global economy for every $1 devoted to the "real" economy, where real people live and work. This ratio played out exactly in December when, on Christmas eve, Obama, with a wave of his magic pen, increased funding for Fannie Mae and Freddie Mac by $400 billion. Later, he begrudgingly relented on an additional $4.5 billion for GMAC. Once again, that's $100 to the banks for every $1 to the automobile companies and their workers.

This policy reaches its abusive extreme when the government allows banks to borrow unlimited amounts from the Federal Reserve at 0% and then re-loan the same money to maxed-out credit card holders at 27%. Or, with the same banks opening their own payday lending arms to milk truly desperate borrowers with interest rates of 400% or higher. If the front door of the looting operation was the $14 trillion hand-over during the bailout, this is the back door, out of sight but ever so effective because, with everybody hooked on debt, they have no alternative.

So what should we do instead?

What we need is a national program equivalent to the Manhattan Project that built the atomic bomb in only 4 years. It is a program to create high paying jobs that can restore lost middle class incomes and create the wealth to pay down the massive debts run up over the past three decades. We can have such a program for $1 trillion, less than one tenth of what we've wasted bailing out the banks for their destructive, larcenous, unrepentant, sociopathic greed.

Here's the program.

The federal government should commit $1 trillion to refitting the U.S. economy for dramatically more efficient energy usage and improved energy generation. This is less than one tenth the sum it has committed to bailing out the failed financial services industry. Half the money should go for transportation, one quarter for residences, and one quarter for energy generation.

In transportation, the government should commit $100 billion to development of the most energy efficient automobile in the world, one that can achieve 200 miles per gallon and be produced in volume and sold for $15,000 apiece. This is within reach of existing technology. All component manufacturing and assembly would be required to take place within the United States.

It should then spend $400 billion in incentives to spur Americans to buy the cars. If each automobile carried an incentive of $7,500 - half the price of the car - the $400 billion would make possible the purchase of 53 million such automobiles. The program would extend over five years for an average of 10.3 million cars a year. In 2008, GM sold 3 million cars in North America while Ford sold 2 million. Chrysler and foreign manufacturers could make up the difference, provided they manufactured in the U.S. The program would replace a sizable portion of the U.S. automobile fleet.

At the same time, the government should announce irrevocable, gradually escalating taxes on gasoline. For three years, the gas tax would increase by 5 cents per month or 60 cents per year. After that, it would increase by 10 cents a month. In five years, gasoline would cost $4.20 more per gallon than whatever the market price of gasoline was. This would provide consumers both the incentive and the planning horizon to make the move to the new cars.

Such an investment would employ millions of skilled workers in the design, manufacturing, assembly, and service of not only the cars and their parts, but of the vast infrastructure that would be needed for electrical recharging at homes, businesses, and shopping centers. The private investment for such infrastructure would readily emerge in response to such guaranteed massive demand.

The program would make the U.S. the highest volume, lowest cost producer of fuel-efficient transportation in the world. It would drastically reduce the $400 billion we spend each year importing oil from the Middle East. And with U.S.-based manufacturers licensed to export the cars to other countries, the trade deficit, which has averaged over $500 billion a year for the past decade, would be eliminated entirely.

A similar such program should be implemented for doubling the energy efficiency of the nation's homes. A $250 billion program would allow 25 million homes to be upgraded with a $10,000 federal subsidy for everything from insulation and windows to water heaters and electrical appliances. Additional impact would be achieved by tying the federal subsidy to an equal investment by the homeowner. The success of the recent $8,000 homebuyer's subsidy indicates the huge potential for such partnered investment. It would be all the more certain and powerful if the government announced an irrevocable, staged increase in energy taxes similar to that for gasoline.

As with the transportation program, such an investment would employ millions of skilled housing tradesmen who are now idle and have very few prospects of employment in the future, given the vast overhang of empty and foreclosed properties on the market. And again, with all the new materials manufactured in the U.S., additional stimulus would occur for American factory workers and the communities and services that support them.

Finally, the last $250 billion should be invested in energy generation. The government should undertake a program to provide a $5,000 subsidy for homes and businesses to install their own electrical energy generation capacity. That would create 50 million generators of diffuse, environmentally clean energy that was not subject to terrorism, centralized failure, or economic blackmail by monopoly producers. Households could sell their excess power back into the system to earn revenue for the life of the equipment.

As with the transportation and housing components discussed above, the monies would be provided as a matching subsidy so as to stimulate an equivalent or greater amount of private investment. They would occur in the context of guaranteed, gradually escalating energy costs for the economy as a whole. Such a program would generate millions of jobs for skilled tradesmen in the design, manufacturing, installation, and services industries and millions of more jobs in the industries that support them.

Once again, the full cost of the program would total $1 trillion, less than one tenth the $14 trillion sum the government has already committed to the failed banks, which are not generating new jobs and are not even loaning the bailout money back into the economy. The three investment programs would employ tens of millions of now out-of-work tradesmen in the collapsed manufacturing and home building and the new energy generation industries. Indirect employment, in adjacent support industries, would amount to millions more. The programs would stimulate hundreds of billions of dollars of ancillary private investment that would seek to capitalize on the newly redesigned national energy infrastructure.

In addition to substantial improvements to employment, incomes, and middle class wealth, the program's other benefits are many, significant, and broadly shared. It would:

Dramatically reduce the nation's dependence on imported oil, paying for itself in reduced trade deficits alone;
Reduce the need for the U.S. to occupy the Middle East, with all of the provocations to terror that are attendant on that occupation;

Save hundreds of billions of dollars a year that is now directed to the military in the effort to maintain control of the world's oil supply;

Enable pay-down of personal and national debts, freeing hundreds of billions of dollars a year in interest payments that go to the wealthiest people in the world;
Finally, the plan would dramatically reduce carbon consumption from the U.S. economy and, indeed, the entire world.

In all of these ways, the program would more than pay for itself many times over. Energy Reconfiguration would dramatically transform the very nature of the U.S. economy, and, indeed, U.S. society.

But would it work? Both history and economics suggest it would.

Every major growth phase of the U.S. economy over the past 200 years has been accompanied by three things: 1) a new generation of industrial technology-from railroads to automobiles to electronics; 2) government assistance to lay the foundations of growth; and 3) a build-out of the technology that employed tens of millions of working people. The results in every case were dramatic and successive increases in jobs, wages, and living standards. Consider the facts.

The railroads were built in the 1800s with massive government land grant subsidies. They catalyzed a vast array of adjacent technologies and industries, from engines, steel, and precision parts to machine tools, coal, lumber, and more. The still larger economic effect was to create the world's first continental-scale markets in everything from food and sundry goods to home appliances and industrial materials. This allowed American producers to become the highest volume, lowest cost producers in the world. The impacts were astounding, dwarfing anything the world had ever known.

In 1800, there were no railroads in the US. The US produced less than 1% of the global GDP and held 3% of its wealth. By 1900, there were more than 250,000 miles of railroads. The U.S. was producing 24% of the entire planet's GDP and held almost 50% of its wealth. U.S. workers were the highest paid, wealthiest workers in the world and formed the market for the next wave of industrial revolution, which the U.S. also dominated, the automobile.

It was the German engineer, Rudolph Diesel, who invented the internal combustion engine but it was Henry Ford who made it a mass phenomenon. The reason was not, as we're told in the conventional mythology, Ford's assembly line, but the fact that federal, state, and local governments built roads and highways, without which the automobile was worthless. As with railroads, cars set off an explosion of demand in adjacent industries, in steel, rubber, glass, paint, chemicals, asphalt, road-building equipment and more. They created entirely new markets that had never existed before: tire and repair shops, gas stations, malls, drive-through restaurants, and the whole panoply of culture we know as suburbia. Average real U.S. incomes rose 10X during the 1900s.

The final example is the computer industry. As with railroads and automobiles, the core technology was invented by private initiative-by William Shockley at Bell Labs in 1947. But it was the government's guarantee of demand through the defense department and space programs that gave private manufactures the assurance to truly ramp up production, driving down costs by factors of hundreds. Similarly, it was the government that underwrote the invention of the Internet, graphical user interfaces, and a dozen other advanced technologies that are ubiquitous today and that account for much of the improvement in national productivity we've experienced over recent decades.

Similar explosions in national economic power accompanied other nations' purposeful use of guided industrial investment. In 1850, Germany held 3% of the world's wealth, compared to 59% for the United Kingdom. Over the next 60 years, while the U.K. followed its ideological fetish for "free markets," Bismarck and Germany practiced intense national industrial targeting. By 1910, Germany had blown by the U.K., garnering 21% of the world's wealth to the U.K.'s 14%.

After World War II, the Japanese government carried out the most extensive program of national industrial strategy ever undertaken. They targeted the steel, shipbuilding, machine tools, automobile, consumer electronics, semiconductor, and other industries with the intent of becoming the highest volume, lowest cost producers in the world. They succeeded in every single case. In 1946, Japan produced a total of 50 automobiles. Last year, while General Motors went bankrupt, Toyota became the largest car manufacturer in the world.

We could go on and on. Taiwan, Korea, Singapore, and now China all use such targeted national investment strategies to accelerate industrial transformation and boost their own national industrial gladiators to the realms of the world's largest companies. In 1960 Korea had the same per capita GDP as Ghana. Today, as a result of its highly disciplined national industrial policies, its people enjoy one of the highest standards of living in the world. Its industrial gladiators dominate many of the world's leading industries, from ships to cell phones to semiconductor memories.

Some will protest that the government shouldn't be in the business of national industrial targeting, that it should leave investment decisions to the "free market." Such an argument is historically wrong, empirically naïve, and logically false.

The historically wrong argument is made above. The most dramatic instances of economic transformation in the modern world have all involved activist government policies. The charge of "empirically naïve" flows from the fact that the U.S.'s major industrial competitors practice aggressive industrial policy. China, in particular, manipulates its currency, subsidizes exports, extorts leading edge technology from foreign investors seeking access to its markets, and more. To imagine this is not happening and that the U.S. faces a level playing field is simply dishonest.

Most important is the logical fallacy of the free market argument. Our choice is not between free markets and industrial strategy; it is between different industrial strategies. The U.S. government already practices national industrial policy. It enacts a broad and reinforcing array of policies that favor banks, oil companies, insurance companies, weapons makers, and the oligarchs who own them at the expense of the rest of the economy, especially its workers.

The inescapable, damning fact is that the industrial strategy we currently practice benefits the few while destroying the environment. The one proposed here benefits the many while doing much to protect the environment. The political implications are perhaps even more stark. Supreme Court justice Louis Brandeis said, "We can have great concentrations of wealth, or we can have democracy. But we cannot have both." Our current set of industrial policies are already costing us both our economy and our democracy. Unless they are changed we will lose both.

At the heart of this vision lie three essential truths: 1) the era of cheap, plentiful energy is over; 2) the nations that adapt to this fact will prosper while those that do not will fail; and 3) continuing our present course is a consignment to economic and political suicide. We can choose an energy-efficient infrastructure and the policies to create it, ones that create broad-based prosperity and economic independence; or we can stay with a wasteful, obsolete energy infrastructure and a set of policies that are leading quickly and irreversibly to a modern feudalism, where very few own everything and everybody else lives at their mercy. We can dither and deny, wait and whine, but those are the choices.