The new president has hit the ground running and I wish him well. But I have my doubts. He is not at all like the stumble-bum he replaces, of course. Rather, he is a thoughtful and intelligent man. And on economic matters, “The audacity of hope” is backed up by an economic team of truly impressive credentials. Indeed, this may be the most highly qualified group of people ever to serve in government.
And that's the problem. All of them are super-competent to be sure, but they are competent in the very techniques that caused the problem in the first place. They will attempt to solve the problem at the level of thinking that created it. Their plan is for a massive stimulus, and it is easy to see why. They believe it will work for the simple reason that it has worked. Indeed, since at least the 30's, and certainly since the 40's, the economy has been dependent on massive government expenditures—a permanent stimulus economy. And in general, this approach worked for a long time; the economy was more or less stable and prosperous, and the periodic shocks were mild and short-lived by pre-war standards. Given that record, they may well be excused for believing that the Keynesian magic will work yet again.
But in truth, it will not work because, for some time now, it has not worked. No one since World War II has practiced fiscal stimulus as much as did George Bush. Think on this: In only eight years, Bush took all that debt accumulated from Andrew Jackson (the last time our debts were paid) through Bill Clinton, and doubled it. He added more than $5 trillion to the debt. Under such a tremendous stimulus package the economy should be booming; there should be labor shortages and resource scarcity and real—rather then merely monetary—inflation. But the economy is not booming, but bombing, and instead of inflation we have deflation, which is far more damaging. Instead of a real expansion, we got a mere credit bubble in housing. People thought they were richer because their homes cost them more, a strange kind of wealth.
In opposition to Obama's plan, the Republicans want more of the same. But the Republican stimulus plan differs only in the details. Stimulus by “tax cut” is still stimulus. And it really isn't cutting taxes because it doesn't really cut spending. It is not tax-cutting, but tax-shifting, from the current generation to the next; it is charging our children for benefits we receive. This is not only uneconomic, it is immoral at the deepest level.
The bubble did not make people richer (save for a few insiders), it just meant they were maxed out. Maxed on their mortgage payments, their credit cards, their car loans, their student loans. Their wages did not keep pace; in fact, the median wage declined and the economy was sustained by oceans of debt. The stimulus plans have introduced structural abnormalities into the economy such that it will no longer respond to stimulus. Reliance on the government as consumer of last resort has resulted in a structure that favored global production over national income, the FIRE economy (“finance, insurance, and real estate”) over the real economy (real production of goods), low wages over fair ones, and gargantuan size over human scale. It is this last point that is particularly troubling, since this gargantuan institutions have proclaimed themselves to be “too big to fail,” and exercise economic blackmail over the whole republic.
The problem with this claim is that it is correct. But the proper response is not to give into the blackmail, not to negotiate with crooks, but to make sure that the blackmailers are never in a position to control the whole economy, to demand trillions in ransom whenever they get themselves (and us) into trouble. Now, it would be mere carping by distributists to point out the problems if we could not offer solutions. But we do have solutions, and it is time to offer them, time to end the era of big business that depends on big government, on subsidies from the general public to private profits. I have nothing against profits—when they are earned; I have everything against profits that are the result of subsidies and privileges. The distributist solution to all of these problems can be summed-up in a few words: Buy it up! Break it up! Fund it right!
Too Big to Succeed
Citibank, the nation's largest bank, has received a $20 billion bailout, along with government guarantees for $300 billion of shaky assets; in addition to giving the bank an enormous amount of money, the public assumes all of the risks of being a banker, while Citibank gets to keep all the profits. That is to say, the profits are privatized but the risks are socialized, combining the worst features of capitalism and socialism in a toxic combination. Citibank is no ordinary bank. Together with JP Morgan/Chase, it owns the controlling interest in the New York Federal Reserve Bank, which in turn owns 53% of the Federal Reserve System. This makes the entire banking system sensitive to the needs of two New York banks. The President of the New York Fed has a permanent position on the board of the Federal Reserve. And who is that outgoing New York Fed President? It is none other than the new Secretary of the Treasury, Timothy Geithner.
But the banking system is more than New York and more than the Fed. Most of the regional banks did not engage in the risky behaviors of the New York banks. They made sensible loans. But Citi had no reason to be sensible; with their size and influence, they knew that they could not be allowed to fail. No matter what happens, they must be protected from the consequences of their own actions. Yet, their actions weakened the whole economy, which is weakening the books of even the most cautious banks; with the economy failing, even formerly reliable borrowers cannot repay their loans. The solution is not to bail out failure. Rather it is to ensure that no entity every again can be large enough to hold hostage the public purse. Don't bail it; that just reinforces a power structure that can no longer succeed. Rather buy it up and sell it piecemeal to the regional banks. The market capitalization of Citi was only $19B as of yesterday, or less than they received in the bailout. The toxic loans can be sold for whatever the market will bear; the healthy parts will make the remaining banks stronger, but none of them will be strong enough to dominate the banking business. Buy it up and break it up.
Of course, they may not want to be bought, and if they can find private investors to draw them out of this hole, that's fine too. But I doubt if they can find buyers without the government providing guarantees. In other words, everybody has found out what the distributists always knew: they are too big to succeed without the help of big government. They believe they can blackmail the public, but the truth is just the opposite: they are dependent on us and we may do as we wish.
The same plan holds true for other enterprises that need bailouts, such as the Big Three automakers. The obvious problem with these companies is that they are too big and there are only three of them. Japan, a much smaller nation, supports nine auto companies. The market price of GM was only $2.1B yesterday. If the public is taking their debts, then let us take possession as well. Buy them up, and then re-sell them to the workers in exchange for some of the long-term commitments. Break them up into the various sectors: engine companies, transmission companies, body works, etc. They could be converted over time into worker-owned companies.
Then, anybody who wanted to enter the automobile business could do so with a comparatively small investment; instead of manufacturing the whole car, they could purchase all the parts and assemble them according to their own designs and perceived market needs. Indeed, the auto companies have already laid the ground work for this by outsourcing so many of their parts and selling off so many of their plants. At some point, the central office losses any real power and its remaining functions can be duplicated by any number of start-ups for a relatively modest investment. At that point there is no reason we couldn't have nine automakers, or 19. Choices would go up, prices would go down, and local manufacturing would increase.
Fund it Right
In our industrial system, government is the consumer/employer of last resort. Government spending is $5 trillion of a $14 trillion economy, or more than one-third. Much of this spending constitutes a huge system of subsidies to large businesses, subsidies that are so in-grained that we no longer see them as such. For example, The “freeway” system is a huge subsidy to shippers and privileges global and national production over local and regional manufacturing. Indeed, without these subsidies, it would be difficult for global producers to compete with locally-made products, even with absurdly low-wages. But the transportation systems are the least in need of subsidies. It is easy to allocate these costs to the users through weight-based tolls. The “weight-based” portion is important because the greatest damage to the roadbeds comes from heavy trucks. With costs allocated to the cost-causers, subsidies disappear, and the dynamics of production change.
The most immediate result of tolls would not be a success, but a failure, namely the failure of the “big-box” retailers such as Wal-Mart. The distribution model of these companies depends on the current system of subsides and would not survive without them (see http://distributism.blogspot.com/2007/10/subsidizing-wal-mart.htm).
This huge system of subsidies also imposes high transaction costs on the economy. Even hiring a nanny requires a vast amount of paperwork and the payment of employment taxes. These transaction costs work against small businesses and in favor of giant ones. The transaction costs make it more difficult for start-ups to get started, but they are a mere nuisance to big corporations. The form an entry barrier which protect big businesses from competition. The greater part of the burden of taxation falls on labor and capital, when it should fall on the rentier (see http://distributism.blogspot.com/2009/01/chapter-xv-taxes-economic-rent-and.html)
But Will it Happen?
Clearly the Obama administration is not thinking along these lines, and are unlikely to adopt any of the solutions of distributism. Does this mean that the discussion is merely theoretical with no chance of implementation? Not at all. The current system has reached its limits, and the attempts to save it will only make it worse. Distributism, in one form or another, is the wave of the future. The only question is how long and by what means will we get there. Distributists need to organize now, and to join whenever possible with similar and allied movements like Mutualism, Georgism, coop movements, and the like.
The current system has no future, and attempts to “stimulate” it will only result in an economic monster even more unstable than what we have. The “bail-outs” will only subsidize failure, and cannot long endure. There will undoubtedly be a time of great turmoil, with all sorts of solutions proposed. In such times, nearly anything can happen, including many unpleasant things. But we need to be in a position to show the nation the way forward, the only way that will work.